<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 27, 1997
REGISTRATION NO. 333-25391
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
QWEST COMMUNICATIONS INTERNATIONAL INC.
----------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 4813 84-1339282
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NO.)
555 SEVENTEENTH STREET, SUITE 1000
DENVER, COLORADO 80202
(303) 291-1400
(ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
ROBERT S. WOODRUFF
EXECUTIVE VICE PRESIDENT--FINANCE
QWEST COMMUNICATIONS INTERNATIONAL INC.
555 SEVENTEENTH STREET, SUITE 1000
DENVER, COLORADO 80202
(303) 291-1400
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE FOR THE REGISTRANT)
COPIES TO:
MARTHA D. REHM, ESQ. DAVID J. BEVERIDGE, ESQ.
HOLME ROBERTS & OWEN LLP SHEARMAN & STERLING
1700 LINCOLN STREET, SUITE 4100 599 LEXINGTON AVENUE
DENVER, COLORADO 80203 NEW YORK, NEW YORK
(303) 861-7000 10022-6069
(212) 848-4000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO
TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. As soon as
practical after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]...............................................
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_].....................
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]......................................................
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_].............................................
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two prospectus cover pages; one to be
used for a prospectus in connection with a United States and Canadian offering
(the "U.S. Prospectus") and one to be used for a prospectus in connection with
a concurrent international offering (the "International Prospectus"). The
International Prospectus will be identical to the U.S. Prospectus except that
it will have a different front cover page and back cover page, a different
section entitled "Underwriting" and an added section entitled "Certain United
States Federal Tax Consequences to Non-United States Holders." The front cover
page, back cover page, "Underwriting" section and "Certain United States
Federal Tax Consequences to Non-United States Holders" section to be used in
the International Prospectus are located at the end of the U.S. Prospectus and
have been labeled "Alternate Page for International Prospectus."
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
MAY 27, 1997
PROSPECTUS
13,500,000 SHARES
QWEST COMMUNICATIONS INTERNATIONAL INC.
[LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE]
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock offered hereby (the "Shares") are being sold
by Qwest Communications International Inc. (the "Company" or "Qwest"). Of the
13,500,000 Shares being offered, 11,500,000 Shares are being offered by the
U.S. Underwriters (as defined herein) in the United States and Canada (the
"U.S. Offering") and 2,000,000 Shares are being offered by the International
Underwriters (as defined herein) in a concurrent international offering outside
the United States and Canada (the "International Offering" and, collectively
with the U.S. Offering, the "Offerings"), subject to transfers between the U.S.
Underwriters and the International Underwriters (collectively, the
"Underwriters"). The Price to Public and Underwriting Discount per Share will
be identical for the U.S. Offering and the International Offering. See
"Underwriting." The closing of the U.S. Offering and International Offering are
conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price of the Common
Stock will be between $17.00 and $20.00 per Share. See "Underwriting" for
factors to be considered in determining the Price to Public.
The Common Stock has been approved for listing on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "QWST," subject
to official notice of issuance.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
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<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(2).................................... $ $ $
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</TABLE>
(1) Before deducting expenses payable by the Company estimated to be
$1,148,000.
(2) The Company has granted to the U.S. Underwriters and the International
Underwriters 30-day options to purchase up to an aggregate of 2,025,000
additional shares of Common Stock at the Price to Public, less Underwriting
Discount, solely to cover over-allotments, if any. If the Underwriters
exercise such options in full, the total Price to Public, Underwriting
Discount and Proceeds to Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about June , 1997.
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
The date of this Prospectus is June , 1997.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE
COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE
OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the Consolidated Financial Statements and the notes
thereto, appearing elsewhere in this Prospectus. A glossary of relevant terms
used in the telecommunications business is included at the end of this
Prospectus. References to "Qwest" mean Qwest Communications International Inc.
and its predecessors, and references to the "Company" mean Qwest together with
its subsidiaries, including Qwest Corporation ("QC") and Qwest Communications
Corporation ("QCC").
THE COMPANY
The Company is a facilities-based provider of communications services to
interexchange carriers and other communications entities ("Carrier Services")
and to businesses and consumers ("Commercial Services"), and it constructs and
installs fiber optic communications systems for interexchange carriers and
other communications entities, as well as for its own use ("Network
Construction Services"). The Company is expanding its existing long distance
network into an approximately 13,000 route mile coast-to-coast, technologically
advanced, fiber optic telecommunications network (the "Qwest Network"). The
Company will employ, throughout substantially all of the Qwest Network, a self-
healing SONET four-fiber ring architecture equipped with the most advanced
commercially available fiber and transmission electronics manufactured by
Lucent Technologies ("Lucent") and Northern Telecom Inc. ("Nortel"),
respectively. The Qwest Network's advanced fiber and transmission electronics
are expected to provide the Company with lower installation, operating and
maintenance costs than older fiber systems generally in commercial use today.
In addition, the Company has entered into construction contracts for the sale
of dark fiber along the route of the Qwest Network, which will reduce the
Company's net cost per fiber mile with respect to the fiber it retains for its
own use. As a result of these cost advantages, the Company believes it will be
well-positioned to capture market share and take advantage of the rapidly
growing demand for data transmission, multimedia and long haul voice capacity.
Construction of the Qwest Network is scheduled to be completed by late 1998.
Under the Company's plans, the Qwest Network will extend approximately 13,000
route miles coast-to-coast and connect 92 metropolitan areas that represent
approximately 65% of the originating and terminating long distance traffic in
the United States. Through a combination of the Qwest Network and leased
facilities, the Company will continue to offer interstate services in all 48
contiguous states. The Qwest Network also will connect to international cable
heads for trans-Atlantic and trans-Pacific transmission and cross-border points
to Canada and Mexico.
The Company believes that demand from interexchange carriers and other
communications entities for advanced, high bandwidth voice, data and video
transmission capacity will increase over the next several years due to
regulatory and technical changes and other industry developments. These
anticipated changes and developments include: (i) continued growth in capacity
requirements for high speed data transmission, ATM and Frame Relay services,
Internet and multimedia services and other new technologies and applications;
(ii) continued growth in demand for existing long distance services; (iii)
entry into the market of new communications providers; (iv) requirements of the
four principal nationwide carriers (AT&T, MCI, Sprint and WorldCom) to replace
or augment portions of their older systems; and (v) reform in regulation of
domestic access charges and international settlement rates, which the Company
expects will lower long distance rates and fuel primary demand for long
distance services.
THE QWEST NETWORK
The Company's network infrastructure currently includes, among other assets:
(i) approximately 5,300 route miles of conduit in place, consisting of
approximately 900 route miles of lit fiber systems, one
3
<PAGE>
in California (the "Cal-Fiber" system) carrying traffic between Los Angeles and
Sacramento, and the other in Texas connecting Dallas and Houston, approximately
2,500 route miles of dark fiber installed in conduit, and approximately 1,900
route miles of vacant conduit; (ii) right-of-way agreements in place for
approximately 5,900 additional route miles of planned construction for the
Qwest Network; (iii) an approximately 3,500 mile operating digital microwave
system (the "Microwave System"); (iv) approximately 15,000 DS-3 miles of fiber
transmission capacity leased by the Company from other carriers, used primarily
to extend the Company's switched services for originating and terminating
traffic beyond the boundaries of the Company's lit fiber network; and (v) five
digital switches.
Upon completion, key characteristics of the Qwest Network will include:
. Technologically Advanced Platform. The Company is installing
technologically advanced fiber optic cable and electronic equipment in a
uniform configuration throughout the entire Qwest Network, which will
provide full coast-to-coast SONET four-fiber ring protection. The Company
is deploying an advanced network management system (Nortel's Integrated
Network Management Solutions) that will give the Company's Carrier
Services customers the ability to monitor and reconfigure their leased
capacity on an essentially real time basis from their own network
management centers and the ability to rapidly increase or reduce
bandwidth to better match their needs. This new technology also will
allow Qwest to provide bandwidth on demand for both its carrier and
commercial customers, significantly reducing the time typically
associated with installation of services. The Qwest Network's
technologies include Lucent's non-zero dispersion shifted fiber and
Nortel's dense wave division multiplexing, forward error correction
technology and SONET four-fiber ring technology at high optical carrier
("OC") levels that enable the highest commercially available capacity
transmission (OC-192) and data integrity level (10-/1//5/ Bit Error
Rate).
. High Security and Reliability. The Qwest Network is designed for superior
security and reliability, based on (i) bi-directional SONET four-fiber
ring architecture, a self-healing system that allows for instantaneous
rerouting and virtually eliminates downtime in the event of a fiber cut;
(ii) fiber cable installed in high density polyethylene conduit generally
buried 42^-56^ below the ground; and (iii) extensive use of railroad
rights-of-way, which typically offer greater protection of the fiber
system than other systems built over more public rights-of-way such as
highways, telephone poles or overhead power transmission lines.
. Additional Capacity and Flexibility. The Qwest Network will contain two
conduits along substantially all of its route. The first conduit will
contain a cable generally housing at least 96 fibers, and the second
conduit will serve as a spare. The spare conduit will allow for future
technology upgrades and expansion of capacity at costs significantly
below the cost of new construction. After existing and anticipated dark
fiber sales, the Company presently intends to retain ownership of at
least 48 fibers for its own use along substantially all of the route of
the Qwest Network. With the combined use of non-zero dispersion shifted
fiber, dense wave division multiplexing and high bit rate transmission
electronics, each of the fibers retained by the Company can achieve
substantially greater capacity per fiber than standard, single mode fiber
now in use.
STRATEGY
The Company's objective is to become a leading, coast-to-coast facilities-
based provider of communications services to other communications providers,
businesses and consumers. To achieve this objective, the Company intends to:
. Deploy a Technologically Advanced Network. The Company believes the
technical characteristics of the Qwest Network will enable it to provide
highly reliable services to interexchange carriers and other
communications entities at low per unit costs as it expands its customer
base and increases network traffic volume. For instance, the Qwest
Network's
4
<PAGE>
advanced fiber optic cable and electronic equipment permit high capacity
transmission over longer distances between regeneration/amplifier
facilities than older fiber systems. This translates into generally lower
installation and operating costs. These costs typically constitute a
significant portion of the overall cost of providing telecommunications
services.
. Build on Network Construction Expertise and Existing Network Assets. The
Company has built over 5,600 route miles of telecommunications conduit
systems over the last eight years for itself and major interexchange
carriers including AT&T, MCI, Sprint and WorldCom. Network Construction
Services currently employs over 530 experienced construction personnel
led by a six-member senior construction management team with combined
construction experience of over 140 years. The Company utilizes its own
fleet of railroad equipment and has in place railroad and other right-of-
way agreements covering over 87% of the Qwest Network and already has
installed approximately 42% of the route miles of conduit required for
the Qwest Network. In addition, the Company has fixed-price supply
agreements for the provision of all the fiber and transmission
electronics necessary to construct and activate the Qwest Network.
. Establish Low Cost Position. The Company has entered into three major
construction contracts for the sale of dark fiber in the Qwest Network
that will allow the Company to achieve a low net capital investment in
the Qwest Network and share future operating and maintenance costs.
Earnings from these agreements will reduce the Company's net cost per
fiber mile with respect to the fiber that it retains for its own use. The
Company believes that this network cost advantage, coupled with the
operating and maintenance cost advantages of owning an entirely new
network with advanced fiber and equipment uniformly deployed systemwide,
will enable it to establish a low cost position in the long distance
industry relative to its competitors.
. Build on Management Experience. The Company's management team and board
of directors include individuals with significant experience at major
telecommunications companies. Mr. Joseph Nacchio became the Company's
President and Chief Executive Officer in January 1997. Mr. Nacchio was
Executive Vice President of the Consumer and Small Business Division at
AT&T, where he was employed for 27 years prior to joining the Company.
Mr. Nacchio has extensive management experience in marketing, sales,
network operations and engineering, having served as Chief Engineer and a
Vice President of Network Operations at AT&T. Mr. Richard T. Liebhaber,
who was a Director and served as Executive Vice President and Chief
Strategy and Technology Officer of MCI until his retirement in 1995, is a
Director of Qwest. He is providing technical advisory services to the
Company under a consulting agreement. See "Management."
. Grow Carrier Revenue Base. The Company is currently focusing on expanding
Carrier Services to increase its revenue stream and reduce per unit
costs, targeting short-term capacity sales on a segment-by-segment basis
as the Qwest Network is deployed and activated, and is increasingly
seeking longer-term, high volume capacity agreements from major carriers.
In addition to traditional telecommunications carriers, the Company is
marketing to Internet service providers and other data service companies.
. Develop Commercial Services. The Company plans to build on its Carrier
Services experience to expand its presence in the Commercial Services
market by creating a distinctive brand identity for "Qwest" and
aggressively marketing its existing and planned voice, data and other
transmission products and services. The Company plans to build direct end
user relationships by developing strong distribution channels, providing
competitive pricing and superior network quality and offering enhanced,
market-driven services to businesses and consumers.
5
<PAGE>
DARK FIBER SALES
The Company entered into agreements in 1996 with both Frontier and WorldCom
and in 1997 with GTE whereby each is purchasing certain dark fiber along the
route of the Qwest Network. Proceeds from these dark fiber agreements will
provide cash for a significant portion of the total estimated costs to
construct the Qwest Network and complete construction relating to the dark
fiber sold to these purchasers and are expected to provide the Company with a
strategic network cost advantage on the fibers that the Company retains for the
Qwest Network. The Frontier and GTE agreements each provide for the purchase of
24 fibers along all of the route of the Qwest Network. The WorldCom agreement
provides for the purchase of 24 fibers along certain selected segments of the
Qwest Network and 36 fibers along other selected segments.
The Company believes that significant opportunities exist to sell additional
dark fiber throughout the Qwest Network, and management has identified, and is
in various stages of negotiations with, potential customers. However, the
Company does not expect to enter into additional agreements of the size and
scope of the Frontier and GTE contracts. The Company presently intends to
retain ownership of at least 48 fibers for its own use along substantially all
of the route of the Qwest Network.
BUILD-OUT PLAN FOR THE QWEST NETWORK
The Company estimates the total cost to construct and activate the Qwest
Network and complete construction of the dark fiber sold to Frontier, WorldCom
and GTE will be approximately $1.4 billion. Of this amount, the Company had
already expended approximately $300.0 million as of April 30, 1997. The Company
anticipates remaining total cash outlays for these purposes of approximately
$600.0 million in 1997 and $500.0 million in 1998. Estimated total expenditures
for 1997 include the Company's commitment to purchase a minimum quantity of
fiber for approximately $257.0 million (subject to quality and performance
specifications), of which approximately $80.0 million had been expended as of
April 30, 1997. Estimated total expenditures for 1997 and 1998 together also
include approximately $100.0 million for the purchase of electronic equipment.
In addition, the Company anticipates approximately $97.0 million of capital
expenditures in 1997 and 1998 to support growth in Carrier Services and
Commercial Services.
As of the date of this Prospectus, the Company has obtained the following
sources of funds to complete the build-out: (i) approximately $1.0 billion
under the Frontier, WorldCom and GTE contracts and additional smaller
construction contracts for sales of dark fiber, of which approximately $177.0
million had already been paid and $842.0 million remained to be paid at April
30, 1997; (ii) $90.0 million of vendor financing; and (iii) $117.8 million in
net proceeds from the sale on March 31, 1997 of $250.0 million in principal
amount of the Company's 10 7/8% Senior Notes Due 2007 (the "Notes") remaining
after repayment of certain existing debt.
The Company expects to finance the completion of construction of the Qwest
Network, as well as its debt service and working capital needs, primarily
through a combination of the funding sources identified above, proceeds from
the Offerings and future borrowings. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources."
With the completion of the 13,000 route mile network, Qwest will provide
services nationally to its customers primarily over its own facilities, using
leased facilities in those portions of the country not covered by the Qwest
Network. Qwest will continue to evaluate the economics of extending its core
network versus continuing to lease network capacity. In this regard, the
Company is considering extensions in the Southeast United States, the
California Valley and, perhaps, the Pacific Northwest. The Company has made no
final decisions in this regard, and any decisions would be dependent, among
other things, upon the Company's assessment of the potential for dark fiber
sales or long-term leases of high volume capacity and the availability of
additional capital on acceptable terms.
6
<PAGE>
THE OFFERINGS
<TABLE>
<C> <S>
Common Stock offered by the Company:
U.S. Offering............................................ 11,500,000 shares
International Offering................................... 2,000,000 shares
Total(1)............................................. 13,500,000 shares
Common Stock to be outstanding after the Offerings(1)(2).. 100,000,000 shares
$ million
($ million if the
Underwriters' over-
allotment options are
Net Proceeds.............................................. exercised in full).
Use of Proceeds........................................... Primarily to fund a
portion of the capital
expenditures required to
construct and activate
the Qwest Network and to
repay certain
indebtedness.
Nasdaq National Market symbol............................. QWST
</TABLE>
- --------
(1) Does not include: (i) up to an aggregate of 2,025,000 shares of Common
Stock subject to over-allotment options granted to the U.S. Underwriters
and International Underwriters (see "Underwriting"); (ii) 2,000,000 shares
of Common Stock reserved for issuance under the Growth Share Plan (see
"Management--Growth Share Plan"); (iii) 10,000,000 shares of Common Stock
reserved for issuance under the Equity Incentive Plan (see "Management--
Equity Incentive Plan"); and (iv) 4,300,000 shares reserved for issuance
under a warrant sold to an affiliate of the Company's parent (see "Certain
Transactions").
(2) Based on shares outstanding as of March 31, 1997, adjusted to account for
an increase in the authorized capital stock of Qwest and a stock dividend
effected prior to the Offerings.
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO AN
INVESTMENT IN THE SHARES. SEE "RISK FACTORS."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected data presented below under the captions "Statement of Operations
Data," "Other Financial Data" and "Balance Sheet Data" as of the end of and for
each of the years in the five-year period ended December 31, 1996 are derived
from the Consolidated Financial Statements of the Company, which financial
statements have been audited by KPMG Peat Marwick LLP, independent certified
public accountants. The financial data as of the end of and for the three
months ended March 31, 1997 and 1996 are derived from unaudited interim
financial statements. The unaudited interim financial statements include all
adjustments, consisting of normal recurring accruals, that management considers
necessary for a fair presentation of the financial position as of the end of
and results of operations for these interim periods. Results of operations for
the interim periods are not necessarily indicative of the results of operations
for a full year. Consolidated Financial Statements of the Company as of
December 31, 1996 and 1995 and for each of the years in the three-year period
ended December 31, 1996 and unaudited interim financial statements as of the
end of and for the three months ended March 31, 1997 and 1996 are included
elsewhere in this Prospectus. The information set forth below should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and the Consolidated
Financial Statements and unaudited interim financial statements of the Company
and the notes thereto, appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue:
Carrier
services(1)(2)(3)..... $ 41,561 $ 53,064 $ 50,240 $ 67,789 $ 57,573 $ 18,493 $ 11,199
Commercial services.... -- 969 8,712 20,412 34,265 7,013 9,411
--------- -------- -------- -------- -------- -------- --------
41,561 54,033 58,952 88,201 91,838 25,506 20,610
Network construction
services(4)........... 11,751 15,294 11,921 36,901 139,158 9,126 52,083
--------- -------- -------- -------- -------- -------- --------
Total revenue.......... 53,312 69,327 70,873 125,102 230,996 34,632 72,693
--------- -------- -------- -------- -------- -------- --------
Operating expenses:
Telecommunications
services.............. 31,557 41,240 48,239 81,215 80,368 23,862 18,063
Network construction
services.............. 9,730 15,515 9,369 32,754 87,542 6,847 36,265
Selling, general and
administrative(5)..... 10,270 15,622 21,516 37,195 45,755 14,527 13,947
Growth share plan(6)... 2,000 2,600 -- -- 13,100 -- 13,100
Depreciation and
amortization.......... 5,020 5,270 2,364 9,994 16,245 4,049 3,962
--------- -------- -------- -------- -------- -------- --------
Total operating
expenses.............. 58,577 80,247 81,488 161,158 243,010 49,285 85,337
--------- -------- -------- -------- -------- -------- --------
Loss from operations.... (5,265) (10,920) (10,615) (36,056) (12,014) (14,653) (12,644)
Gain on sale of contract
rights(7).............. -- -- -- -- -- -- 7,710
Gain on sale of
telecommunications
service agreements(2).. -- -- -- -- 6,126 -- --
Gain on sale of
network(1)............. -- 126,521 -- -- -- -- --
Interest income
(expense), net......... (2,687) (3,127) (28) (2,466) (4,373) (582) (304)
Other income (expense),
net.................... (610) (763) (42) 55 60 (54) (1,996)
--------- -------- -------- -------- -------- -------- --------
Earnings (loss) before
income taxes........... (8,562) 111,711 (10,685) (38,467) (10,201) (15,289) (7,234)
Income tax expense
(benefit).............. (1,988) 43,185 (3,787) (13,336) (3,234) (5,310) (2,458)
--------- -------- -------- -------- -------- -------- --------
Net earnings (loss)..... $ (6,574) $ 68,526 $ (6,898) $(25,131) $ (6,967) $ (9,979) $ (4,776)
========= ======== ======== ======== ======== ======== ========
Earnings (loss) per
share(8)............... $ (0.07) $ 0.78 $ (0.08) $ (0.29) $ (0.08) $ (0.11) $ (0.05)
Weighted average number
of shares
outstanding(8)......... 88,158 88,158 88,158 88,158 88,158 88,158 88,158
OTHER FINANCIAL DATA:
EBITDA(9)............... $ (855) $ (824) $ (6,338) $(26,007) $ 6,912 $ (9,059) $(10,678)
Net cash provided by
(used in) operating
activities............. $ 1,377 $ (7,125) $ 3,306 $(56,635) $ 32,524 $ (1,185) $ 33,359
Net cash provided by
(used in) investing
activities............. $ (11,202) $107,496 $(41,712) $(58,858) $(52,622) $(11,606) $(56,922)
Net cash provided by
(used in) financing
activities............. $ 11,549 $(95,659) $ 34,264 $113,940 $ 25,519 $ 15,904 $177,327
Capital
expenditures(10)....... $ 11,000 $ 3,794 $ 40,926 $ 48,732 $ 85,842 $ 12,021 $ 78,922
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996 AS OF MARCH 31, 1997
----------------------- --------------------
<S> <C> <C>
OPERATING DATA:
Route miles of conduit
installed............... 3,650 4,900
Route miles of dark fiber
installed............... 1,800 2,250
Route miles of lit fiber
installed............... 900 900
Switches................. 5 5
Minutes of Use(11)....... 382,000,000 107,000,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ $ 2,467 $ 7,179 $ 3,037 $ 1,484 $ 6,905 $ 4,597 $160,669
Property and equipment,
net.................... $34,628 $23,666 $63,009 $114,748 $186,535 $123,782 $231,228
Total assets............ $52,735 $60,754 $89,489 $184,178 $264,259 $189,238 $469,614
Long-term debt,
including current
portion................ $27,600 $ 2,141 $27,369 $ 90,063 $134,461 $ 84,032 $311,184
Total liabilities....... $51,482 $48,675 $64,908 $157,703 $254,817 $172,738 $464,948
Total stockholder's
equity................. $ 1,253 $12,079 $24,581 $ 26,475 $ 9,442 $ 16,500 $ 4,666
</TABLE>
(1) In November 1993, the Company sold substantially all of its then owned
fiber optic network capacity and related equipment and assets to a third-
party purchaser for $185.0 million (the "1993 Capacity Sale"). After
deducting the carrying value of the assets sold and direct costs associated
with the 1993 Capacity Sale, the Company recognized a gain of approximately
$126.5 million. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business."
(2) In July 1996, the Company sold the telecommunications service agreements of
its dedicated line customer business on leased capacity to an unrelated
third party for $5.5 million and had received $4.5 million of the purchase
price in cash as of December 31, 1996. As a result of the sale, the Company
recognized a gain of approximately $6.1 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) The Company acquired the Microwave System through its purchase of Qwest
Transmission Inc. in January 1995, and the acquired company contributed
$13.2 million to total revenue for the year ended December 31, 1995.
(4) In 1996, the Company entered into construction contracts for sales of dark
fiber with Frontier and WorldCom whereby the Company agreed to sell dark
fiber along the route of the Qwest Network for a purchase price of
approximately $545.0 million. As a result of the activity under these
agreements, the Company recorded Network Construction Services revenue of
approximately $121.0 million in 1996 and approximately $49.0 million in the
three months ended March 31, 1997. See "Business--The Qwest Network--Dark
Fiber and High Volume Capacity Sales."
(5) Selling, general and administrative expenses include the following
nonrecurring expenses incurred by the Company: (i) $5.6 million in 1993 to
provide for the transfer of customers to leased capacity as a result of the
1993 Capacity Sale; (ii) $2.0 million in 1994 to relocate its corporate
headquarters from San Francisco to Denver and consolidate its
administrative functions in Denver; and (iii) $2.6 million in 1996 to
restructure its operations, including the direct sales group.
(6) Growth Share Plan expenses reflect compensation expense related to the
estimated increase in the value of the growth shares outstanding. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Management--Growth Share Plan," and note 15 to the
Consolidated Financial Statements of the Company.
(7) In March 1997, the Company sold certain contract rights related to the 1993
Capacity Sale for $9.0 million. As of March 31, 1997, the Company has
received $7.0 million in consideration and has reduced its liability for
associated costs by approximately $0.7 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(8) Earnings (loss) per share and weighted average number of shares outstanding
are adjusted to reflect an increase in the authorized capital stock of
Qwest and a stock dividend of 86,490,000 shares effected prior to the
Offerings.
(9) EBITDA represents net earnings (loss) before interest, income taxes,
depreciation and amortization, certain nonrecurring expenses described in
note 5 above, gain on sale of contract rights in 1997, gain on sale of
telecommunications service agreements in 1996 and gain on the 1993 Capacity
Sale (which are nonrecurring). EBITDA includes earnings from the
construction contracts for the sale of dark fiber that the Company will use
to provide cash for the construction cost of the Qwest Network. EBITDA does
not represent cash flow for the periods presented and should not be
considered as an alternative to net earnings (loss) as an indicator of the
Company's operating performance or as an alternative to cash flows as a
source of liquidity and may not be comparable with EBITDA as defined by
other companies. The Company believes that EBITDA is commonly used by
financial analysts and others in the telecommunications industry. Without
the effect of Growth Share Plan expense, EBITDA would have been $20.0
million, $1.9 million and $1.1 million for the years ended December 31,
1996, 1993 and 1992, respectively, and $2.4 million for the three months
ended March 31, 1997.
(10) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures and initial obligations under capital leases.
(11) Represents total minutes of use for the year ended December 31, 1996 and
the three months ended March 31, 1997.
9
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Shares.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that include, among
others, statements concerning the Company's plans to complete the Qwest
Network, expectations as to funding its capital requirements, anticipated
expansion of carrier and commercial services and other statements of
expectations, beliefs, future plans and strategies, anticipated developments
and other matters that are not historical facts. Management cautions the
reader that these forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to differ materially
from those expressed or implied by the statements. The most important factors
that could prevent the Company from achieving its stated goals include, but
are not limited to, failure by the Company to (i) manage effectively and cost
efficiently the construction of the route segments, (ii) enter into additional
customer contracts to sell dark fiber or provide high volume capacity and
otherwise expand its telecommunications customer base on the Qwest Network and
(iii) obtain additional rights-of-way and maintain all necessary rights-of-
way.
RISKS RELATED TO COMPLETING THE QWEST NETWORK; INCREASING TRAFFIC VOLUME
The Company's ability to achieve its strategic objective will depend in
large part upon the successful, timely and cost-effective completion of the
Qwest Network, as well as on achieving substantial traffic volumes on the
Qwest Network. The construction of the Qwest Network will be affected by a
variety of factors, uncertainties and contingencies. Many of these factors are
beyond the Company's control. There can be no assurance that the entire Qwest
Network will be completed as planned for the costs and in the time frame
currently estimated or at all. Although the Company believes that its cost
estimates and the build-out schedule are reasonable, there can be no assurance
that the actual construction costs or time required to complete the Qwest
Network will not substantially exceed current estimates. In addition, the
Company must substantially increase its current traffic volume in order to
realize the anticipated cash flow, operating efficiencies and cost benefits of
the Qwest Network. There can be no assurance that the Company will be able to
achieve such increased traffic volume. See "--Competition" and "--Pricing
Pressures and Industry Capacity."
The successful and timely completion of the Qwest Network will depend, among
other things, upon the Company's ability to manage effectively and cost
efficiently the construction of the route segments and obtain additional
rights-of-way. Successful construction of the Qwest Network also will depend
upon the timely performance by third-party contractors of their obligations.
There can be no assurance that the Company will successfully manage
construction or acquire the remaining necessary rights-of-way.
Any of the foregoing may significantly delay or prevent completion of the
Qwest Network, which would have a material adverse effect on the Company's
financial condition and results of operations.
OPERATING LOSSES AND WORKING CAPITAL DEFICITS
The Company's operations have generated operating losses in recent years and
insufficient cash flow to enable it to meet its debt service requirements,
capital expenditures and other cash needs. The Company had net losses of $7.0
million, $25.1 million, $6.9 million and $6.6 million for each of the years
ended December 31, 1996, 1995, 1994 and 1992, and recognized net income of
$68.5 million
10
<PAGE>
for the year ended December 31, 1993. The Company's accumulated deficit
totaled $51.2 million as of March 31, 1997. Although the Company had positive
working capital of $58.6 million as of March 31, 1997, the Company had working
capital deficits of $69.4 million, $2.6 million, $11.9 million, $11.5 million
and $5.6 million as of December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. Working capital deficits limit the Company's cash resources,
resulting in reduced liquidity. There can be no assurance that the Company
will be able to achieve or sustain operating profitability. The Company will
require additional capital in order to offset operating losses and working
capital deficits and to support its strategic objective.
SUBSTANTIAL INDEBTEDNESS
The Company is highly leveraged. As of March 31, 1997, the Company had
approximately $311.2 million of long-term debt (including the current portion
thereof) and stockholder's equity of approximately $4.7 million. On a pro
forma basis, after giving effect to the Offerings at an assumed offering price
of $18.50 per Share and after giving effect to the application of net proceeds
from the sale of the Notes, the Company would have had approximately $265.2
million of long-term debt (including the current portion thereof),
approximately $238.3 million of stockholder's equity and a debt-to-equity
ratio of 1.1 to 1.0 at March 31, 1997. In addition, the Indenture relating to
the Notes (the "Indenture") and certain debt instruments to which Qwest's
subsidiaries are parties limit but do not prohibit the incurrence of
additional indebtedness by the Company, and the Company expects additional
indebtedness to be incurred by Qwest or its subsidiaries in the future.
However, there can be no assurance that the Company will be successful in
obtaining additional borrowings when required, or that the terms of such
indebtedness will not impair the ability of the Company to develop its
business.
The Company's significant debt burden could have several important
consequences to the Company, including, but not limited to the following: (i)
the cash received from operations may be insufficient to meet the principal
and interest on the Company's debt as the same become due; (ii) a significant
portion of the Company's cash flow from operations must be used to service its
debt instead of being used in the Company's business; and (iii) the Company's
flexibility to obtain additional financing in the future may be impaired by
the amount of debt outstanding and the restrictions imposed by the covenants
contained in the Indenture and other debt instruments of Qwest or its
subsidiaries. See "Description of Certain Indebtedness."
The ability of the Company to meet its obligations will be subject to
financial, business and other factors, including factors beyond its control,
such as prevailing economic conditions. In addition, the ability of Qwest's
operating subsidiaries to pay dividends or to make other payments to Qwest may
be restricted by the terms of various credit arrangements entered into by such
operating subsidiaries, as well as legal restrictions, and such payments may
have adverse tax consequences. The Indenture and other debt instruments
governing existing and future indebtedness contain, or may contain, covenants
that limit the operating and financial flexibility of Qwest and its
subsidiaries. Failure to generate sufficient cash flow may impair the
Company's ability to obtain additional equity or debt financing or to meet its
debt service requirements. In such circumstances, the Company may be required
to renegotiate the terms of the instruments relating to its long-term debt or
to refinance all or a portion thereof. There can be no assurance that the
Company would be able to renegotiate successfully such terms or refinance its
indebtedness when required or that the terms of any such refinancing would be
acceptable to management. If the Company were unable to refinance its
indebtedness or obtain new financing under these circumstances, it would have
to consider other options such as the sale of certain assets to meet its debt
service obligations, the sale of equity, negotiations with its lenders to
restructure applicable indebtedness or other options available to it under the
law. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
11
<PAGE>
COMPETITION
The telecommunications industry is highly competitive. Many of the Company's
existing and potential competitors in the Carrier Services, Commercial
Services and Network Construction Services markets have financial, personnel,
marketing and other resources significantly greater than those of the Company,
as well as other competitive advantages. Increased consolidation and strategic
alliances in the industry resulting from the Telecommunications Act of 1996
(the "Telecom Act of 1996") could give rise to significant new competitors to
the Company.
The success of the Company's business plan depends in large part on
significant increases in its share of the Carrier Services and Commercial
Services markets in the medium and long term. In the Carrier Services market,
the Company's primary competitors are other carrier service providers. Within
the Carrier Services market, the Company competes with large and small
facilities-based interexchange carriers. For high volume capacity services,
the Company competes primarily with other coast-to-coast and regional fiber
optic network providers. There are currently four principal facilities-based
long distance fiber optic networks (AT&T, MCI, Sprint and WorldCom). The
Company is aware that others are planning additional networks that, if
constructed, could employ similar advanced technology as the Qwest Network.
Upon completion of the Qwest Network, each of Frontier and GTE will have a
fiber network similar in geographic scope and potential operating capability
to that of the Company. Another competitor is constructing, and has already
obtained a significant portion of the financing for, a fiber optic network. As
publicly announced, the scope of that competitor's network is less than that
of the Company. Nevertheless it is expected to compete directly with the Qwest
Network for many of the same customers along a significant portion of the same
routes. The Company also sells switched services to both facilities-based
carriers and nonfacilities-based carriers (switchless resellers), competing
with facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain
regional carriers. The Company competes in the Carrier Services market on the
basis of price, transmission quality, network reliability, and customer
service and support. The ability of the Company to compete effectively in this
market will depend upon its ability to maintain high quality services at
prices equal to or below those charged by its competitors. In the Commercial
Services market, the Company's primary competitors include AT&T, MCI, Sprint
and WorldCom, all of whom have extensive experience in the long distance
market. In addition, the Telecom Act of 1996 will allow the RBOCs and others
to enter the long distance market. There can be no assurance that the Company
will be able to compete successfully with existing competitors or new entrants
in its Commercial Services markets. Failure by the Company to do so would have
a material adverse effect on the Company's business, financial condition and
results of operations.
DEPENDENCE ON SIGNIFICANT CUSTOMERS
The Company has substantial business relationships with a few large
customers. During 1996 and the first quarter of 1997, the Company's top 10
customers accounted for approximately 69.3% and 79.7%, respectively, of its
consolidated gross revenue. Frontier and WorldCom accounted for 26.3% and
27.8% of such revenue, respectively, in 1996 and 59.0% and 8.8% of such
revenue, respectively, in the first quarter of 1997, attributable primarily to
construction contracts for the sale of dark fiber to these customers that
extend through 1998. In May 1997, the Company entered into another substantial
construction contract for the sale of dark fiber to GTE. The Frontier and GTE
contracts provide for reduced payments and varying penalties for late delivery
of route segments, and allow the purchaser, after expiration of substantial
grace periods (ranging generally from 12 to 18 months depending on the reason
for late delivery and the segment affected), to delete such non-delivered
segment from the system route to be delivered. See "Business--The Qwest
Network--Dark Fiber Sales." A default by any of the Company's dark fiber
purchasers would require the Company to seek alternative funding sources for
capital expenditures. A significant reduction in the level of services the
Company provides for any of its large customers could have a material adverse
effect on the Company's results of operations or financial condition. In
addition, the Company's business plan assumes increased revenue from its
Carrier Services operations to fund the expansion of the Qwest Network. Many
of the Company's customer arrangements are subject to termination on short
notice and do not provide the
12
<PAGE>
Company with guarantees that service quantities will be maintained at current
levels. The Company is aware that certain interexchange carriers are
constructing or considering new networks. Accordingly, there can be no
assurance that any of the Company's Carrier Services customers will increase
their use of the Company's services, or will not reduce or cease their use of
the Company's services, which could have a material adverse effect on the
Company's ability to fund the expansion of the Qwest Network.
MANAGING RAPID GROWTH
Part of the Company's strategy is to achieve rapid growth by completing the
Qwest Network and using the Qwest Network to exploit opportunities expected to
arise from regulatory and technological changes and other industry
developments. As a result of its strategy, the Company is experiencing rapid
expansion that management expects will continue for the foreseeable future.
This growth has increased the operating complexity of the Company. The
Company's ability to manage its expansion effectively will depend on, among
other things: (i) expansion, training and management of its employee base,
including attracting and retaining highly skilled personnel; (ii) expansion and
improvement of the Company's customer interface systems and improvement or
cost-effective outsourcing of the Company's operational and financial systems;
(iii) development, introduction and marketing of new products, particularly in
Commercial Services; and (iv) control of the Company's expenses related to the
expansion of Carrier Services and Commercial Services. Failure of the Company
to satisfy these requirements, or otherwise manage its growth effectively,
would have a material adverse effect on the Company's business, financial
condition and results of operations.
PRICING PRESSURES AND INDUSTRY CAPACITY
The long distance transmission industry has generally been characterized as
having overcapacity and declining prices since shortly after the AT&T
divestiture in 1984. Although the Company believes that, in the last several
years, increasing demand has resulted in a shortage of capacity and slowed the
decline in prices, the Company anticipates that prices for Carrier Services and
Commercial Services will continue to decline over the next several years due
primarily to (i) installation by the Company and its competitors (certain of
whom are expanding capacity and constructing or considering new networks) of
fiber that provides substantially more transmission capacity than will be
needed over the short or medium term, since the cost of fiber is a relatively
small portion of construction cost, (ii) recent technological advances that
permit substantial increases in the transmission capacity of both new and
existing fiber, and (iii) strategic alliances or similar transactions, such as
long distance capacity purchasing alliances among certain RBOCs, that increase
the parties' purchasing power. Also, the Company's existing construction
contracts for the sale of dark fiber and other potential contracts or
arrangements with other carriers will increase supply and may lower prices for
traffic on the Qwest Network. Such pricing pressure could have a material
adverse effect on the business of the Company and on its financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
RAPID TECHNOLOGICAL CHANGES
The telecommunications industry is subject to rapid and significant changes
in technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those provided by
the Company. While the Company believes that for the foreseeable future
technology changes will neither materially affect the continued use of fiber
optic cable nor materially hinder the Company's ability to acquire necessary
technologies, the effect of technological changes on the Company's operations
cannot be predicted and could have a material adverse effect on the Company's
business, financial condition and results of operations.
13
<PAGE>
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY
Although the Company already has right-of-way agreements covering over 87%
of the Qwest Network, the Company must obtain additional rights-of-way and
other permits to install underground conduit from railroads, utilities, state
highway authorities, local governments and transit authorities. There can be
no assurance that the Company will be able to maintain all of its existing
rights and permits or to obtain and maintain the additional rights and permits
needed to implement its business plan on acceptable terms. Loss of substantial
rights and permits or the failure to enter into and maintain required
arrangements for the Qwest Network could have a material adverse effect on the
Company's business, financial condition and results of operations.
REGULATION RISKS
The Company's operations are subject to extensive federal and state
regulation. Carrier Services and Commercial Services (but not Network
Construction Services) are subject to the provisions of the Communications Act
of 1934, as amended, including the Telecom Act of 1996, and the FCC
regulations thereunder, as well as the applicable laws and regulations of the
various states, including regulation by Public Utility Commissions ("PUCs")
and other state agencies. Federal laws and FCC regulations apply to interstate
telecommunications (including international telecommunications that originate
or terminate in the United States), while state regulatory authorities have
jurisdiction over telecommunications both originating and terminating within a
state. Generally, the Company must obtain and maintain certificates of
authority from regulatory bodies in most states where it offers intrastate
services and must obtain prior regulatory approval of tariffs for its
intrastate services in most of these jurisdictions.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. Moreover, as
deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to the Company. All of
the Company's operations are also subject to a variety of environmental,
safety, health and other governmental regulations. There can be no assurance
that future regulatory, judicial or legislative activities will not have a
material adverse effect on the Company, or that domestic or international
regulators or third parties will not raise material issues with regard to the
Company's compliance or noncompliance with applicable regulations.
A recent federal legislative change, the Telecom Act of 1996, may have
potentially significant effects on the operations of the Company. The Telecom
Act of 1996, among other things, allows the RBOCs and the General Telephone
Operating Companies to enter the long distance business and enables other
entities, including entities affiliated with power utilities and ventures
between LECs and cable television companies, to provide an expanded range of
telecommunications services. Entry of such companies into the long distance
business would result in substantial additional competition in Commercial
Services and Carrier Services, affecting the Company and its customers, which
may have a material adverse effect on the Company and such customers. However,
the Company believes that entry by the RBOCs and other companies into the
market will create opportunities for the Company to sell fiber or lease long
distance high volume capacity.
The Company monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally
sensitive materials, including the emission of electromagnetic radiation.
Although the Company believes that it is in compliance with such regulations,
there can be no assurance that any such discharge, disposal or emission might
not expose the Company to claims or actions that could have a material adverse
effect on the Company. See "Regulation."
14
<PAGE>
RELIANCE ON KEY PERSONNEL
The Company's operations are managed by a small number of key executive
officers, the loss of any of whom could have a material adverse effect on the
Company. The Company believes that its growth and future success will depend
in large part on its continued ability to attract and retain highly skilled
and qualified personnel. The competition for qualified personnel in the
telecommunications industry is intense and, accordingly, there can be no
assurance that the Company will be able to hire or retain necessary personnel.
The loss of senior management or the failure to recruit additional qualified
personnel in the future could significantly impede attainment of the Company's
financial, expansion, marketing and other objectives. See "Management."
CONCENTRATION OF VOTING POWER; POTENTIAL CONFLICTS OF INTEREST
After completion of the Offerings, Philip F. Anschutz, a Director and
Chairman of the Company, will beneficially own 86.5% of the outstanding Common
Stock (assuming no exercise of the over-allotment options granted to the
Underwriters). As a result, Mr. Anschutz will have the power to elect all the
directors of the Company and to control the vote on all other matters,
including significant corporate actions. Also, Mr. Anschutz is a director and
holds approximately 5% of the stock of Union Pacific Railroad Company,
subsidiaries of which own railroad rights-of-way on which a significant
portion of the Qwest Network will be built. In recent years, the Company has
relied upon capital contributions, advances and guarantees from its parent and
affiliates. The Company intends to finance its own operations in the future
through internally and externally generated funds without financial support
from its parent. See "--Operating Losses and Working Capital Deficits."
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and By-laws (the "By-laws") include certain provisions that
may have the effect of delaying, deterring or preventing a future takeover or
change in control of the Company unless such takeover or change in control is
approved by the Company's Board of Directors. Such provisions also may render
the removal of directors and management more difficult. The Company's
Certificate of Incorporation places certain restrictions on who may call a
special meeting of stockholders. In addition, the Company's Board of Directors
has the authority to issue up to 25,000,000 shares of preferred stock (the
"Preferred Stock") and to determine the price, rights, preferences, and
privileges of those shares without any further vote or actions by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of such shares of
Preferred Stock, while potentially providing desirable flexibility in
connection with possible acquisitions and serving other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire, or may discourage a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company. The Company has no
present intention to issue such shares of Preferred Stock. In addition, the
Company is subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law (the "DGCL"), which will prohibit the Company
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder unless the business combination is approved
in a prescribed manner. The application of Section 203 also could have the
effect of delaying or preventing a change of control of the Company.
Furthermore, certain provisions of the Company's By-laws, including provisions
that provide that the exact number of directors shall be determined by a
majority of the Board of Directors and that vacancies on the Board of
Directors may be filled by a majority vote of the directors then in office
(though less than a quorum), may have the effect of delaying or preventing
changes in control or management of the Company, and could adversely affect
the market price of the Common Stock. Additionally, certain Federal
regulations require prior approval of certain transfers of control which could
also have the effect of delaying, deferring or preventing a change of control.
See "Regulation--Federal Regulation" and "Description of Capital Stock."
15
<PAGE>
DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. See "Dividend Policy." The Company's ability to pay dividends is
limited by the Indenture and other debt instruments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Certain Indebtedness."
DILUTION
The public offering price is substantially higher than the tangible book
value of the outstanding Common Stock. Purchasers of Shares in the Offerings
will therefore experience immediate and substantial dilution in tangible book
value per share, and the existing stockholder will receive a material increase
in the tangible book value per share of its shares of Common Stock. The
dilution to new investors will be $16.23 per Share (assuming an initial public
offering price of $18.50 per Share and no exercise of the over-allotment
options granted to the Underwriters).
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offerings, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or
be sustained. The offering price has been determined by negotiations between
the Company and the Underwriters and there can be no assurance that the prices
at which the Common Stock will sell in the public market after the Offerings
will not be lower than the price at which the Common Stock is sold in the
Offerings. See "Underwriting." Historically, the market prices for securities
of emerging companies in the telecommunications industry have been highly
volatile. The trading price of the Common Stock after the Offerings could be
subject to wide fluctuations in response to numerous factors, including, but
not limited to, quarterly variations in operating results, competition,
announcements of technological innovations or new products by the Company or
its competitors, product enhancements by the Company or its competitors,
regulatory changes, any differences in actual results and results expected by
investors and analysts, changes in financial estimates by securities analysts
and other events or factors. In addition, the stock market has experienced
volatility that has affected the market prices of equity securities of many
companies and that often has been unrelated to the operating performance of
such companies. These broad market fluctuations may adversely affect the
market price of the Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offerings (assuming no exercise of the over-allotment
options granted to the Underwriters), the Company will have 100,000,000 shares
of Common Stock outstanding, including 13,500,000 Shares of Common Stock
offered hereby and 86,500,000 "restricted" shares of Common Stock. The Shares
of Common Stock offered hereby will be freely tradeable without restriction or
further registration under the Securities Act of 1933, as amended (the
"Securities Act"), by persons other than "affiliates" of the Company within
the meaning of Rule 144 promulgated under the Securities Act. Holders of
restricted shares generally will be entitled to sell these shares in the
public securities market without registration under the Securities Act to the
extent permitted by Rule 144 (or Rule 145, as applicable) promulgated under
the Securities Act or any exemption under the Securities Act. The restricted
shares generally will be eligible for sale under Rule 144, as currently in
effect, beginning in February 1998.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Equity
Incentive Plan, thus permitting the resale of such shares by non-affiliates
upon issuance in the public market without restriction under the Securities
Act. Such registration statement will automatically become effective
immediately upon filing. See
16
<PAGE>
"Management--Equity Incentive Plan." Following completion of the Offerings, up
to 2,000,000 shares of Common Stock will be issuable in settlement of the
Company's obligations under the Growth Share Plan. To the extent such shares
are issued, they will be either freely tradeable or eligible for sale under
Rule 144; however, approximately 59% of the issuable shares will be subject to
the lock-up restrictions described under "Underwriting."
Subject to certain exceptions, the Company, its parent and certain directors
and officers of the Company have agreed not to offer, sell, contract to sell or
otherwise dispose of, directly or indirectly, or announce the offering of any
shares of Common Stock, including any such shares beneficially or indirectly
owned or controlled by the Company, or any securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, for 180 days from the
date of this Prospectus, without the prior written consent of Salomon Brothers
Inc.
Sales of a substantial amount of Common Stock in the public market, or the
perception that such sales may occur, could adversely affect the market price
of the Common Stock prevailing from time to time in the public market and could
impair the Company's ability to raise additional capital through the sale of
its equity securities. See "Shares Eligible for Future Sale."
17
<PAGE>
USE OF PROCEEDS
The net proceeds of the Offerings (assuming an initial public offering price
of $18.50 per Share and no exercise of the over-allotment options granted to
the Underwriters) are estimated to be approximately $233.6 million, after
deducting the estimated underwriting discount and expenses payable by the
Company. The Company intends to use (i) approximately $205.6 of such proceeds
to fund capital expenditures required to construct the Qwest Network and
purchase fiber cable and other materials, including electronic equipment
necessary to activate segments of the Qwest Network and (ii) approximately
$28.0 million of the proceeds to repay all outstanding borrowings under its
existing $100.0 million revolving credit facility, which bear interest at an
adjustable rate, currently 6.54% per annum. The amount being repaid under the
credit facility was used in May 1997 (following the receipt of proceeds under
the GTE agreement) to repay all outstanding advances from the Company's
parent, the proceeds of which were used to fund network construction, capital
expenditures and working capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." Pending the application of the net proceeds of the Offerings as
described above, the Company will invest such proceeds in short-term,
interest-bearing U.S. government securities and certain other short-term,
investment grade securities.
DIVIDEND POLICY
The Company does not anticipate paying dividends in the foreseeable future.
The terms of the Notes and the Indenture and certain debt instruments of
Qwest's subsidiaries also place limitations on the Company's ability to pay
dividends. Future dividends, if any, will be at the discretion of the Board
and will depend upon, among other things, the Company's operations, capital
requirements and surplus, general financial condition, contractual
restrictions and such other factors as the Board may deem relevant. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Certain Indebtedness."
18
<PAGE>
DILUTION
At March 31, 1997, the historical net tangible book deficit of the Company
was $(7.1) million or $(0.08) per share of Common Stock, as adjusted to
account for an increase in the authorized capital stock of the Company and a
stock dividend effected prior to the Offerings. "Historical net tangible book
deficit per share" represents the Company's net worth less intangible assets
of $11.8 million divided by 86,500,000 shares of Common Stock outstanding on
March 31, 1997, adjusted as stated above. After giving effect to the sale by
the Company of 13,500,000 Shares pursuant to the Offerings and after deducting
the underwriting discount and expenses of the Offerings, the pro forma net
tangible book value of the Company at March 31, 1997, would have been $226.5
million, or $2.27 per share of Common Stock. Such amount represents an
immediate increase in pro forma net tangible book value of $2.35 per share of
Common Stock to the existing stockholder and an immediate dilution to new
investors of $16.23 per share of Common Stock. The following table illustrates
the dilution in pro forma net tangible book value per share to new investors:
<TABLE>
<S> <C> <C>
Public offering price per Share.......................... $18.50
Historical net tangible book deficit per share at
March 31, 1997.......................................... $(0.08)
Increase in net tangible book value per share
attributable to net proceeds of the Offerings........... 2.35
-------
Pro forma net tangible book value per share after the
Offerings............................................... 2.27
------
Dilution to new investors................................ $16.23
======
</TABLE>
The foregoing table assumes no exercise of the Underwriters' over-allotment
options to purchase an additional 2,025,000 Shares. Following completion of
the Offerings, up to 2,000,000 shares of Common Stock will be issuable in
settlement of the Company's obligations under the Growth Share Plan. To the
extent that such shares are issued, there will be further dilution to new
investors. See "Management--Growth Share Plan."
19
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the historical
consolidated capitalization of the Company, (ii) the pro forma capitalization
of the Company reflecting the application of net proceeds from the sale of the
Notes to repay certain existing long-term debt, and borrowings under the
Company's revolving credit facility (after receipt of proceeds under the GTE
agreement) to repay all outstanding advances from the Company's parent and
(iii) the capitalization as adjusted to reflect the foregoing and the sale of
13,500,000 Shares offered hereby (assuming an initial public offering price of
$18.50 per Share and no exercise of the over-allotment options granted to the
Underwriters) and the application of the net proceeds therefrom, including
repayment of outstanding borrowings under the Company's revolving credit
facility. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and the notes thereto, appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
-------------------------------
PRO PRO FORMA
ACTUAL FORMA AS ADJUSTED
-------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Advances from parent........................... $ 27,952 $ -- $ --
Current portion of long-term debt.............. 24,859 15,080 15,080
-------- -------- --------
Total short-term debt...................... $ 52,811 $ 15,080 $ 15,080
======== ======== ========
Long-term debt................................. $ 36,325 $ 28,072 $ 120
Notes.......................................... 250,000 250,000 250,000
-------- -------- --------
Total long-term debt (excluding current
portion).................................. 286,325 278,072 250,120
-------- -------- --------
Stockholder's equity:
Preferred stock, $.01 par value; 25,000,000
shares authorized; no shares issued and
outstanding................................. -- -- --
Common stock, $.01 par value; 400,000,000
shares authorized; 86,500,000 shares issued
and outstanding after the Offerings(1)...... $ 865 $ 865 $ 1,000
Additional paid-in capital................... 55,027 55,027 288,515
Accumulated deficit.......................... (51,226) (51,226) (51,226)
-------- -------- --------
Total stockholder's equity................. 4,666 4,666 238,289
-------- -------- --------
Total capitalization..................... $290,991 $290,991 $488,409
======== ======== ========
</TABLE>
- --------
(1) 10,000,000 of the authorized shares of Common Stock are reserved for
issuance under the Equity Incentive Plan, 2,000,000 of the authorized
shares of Common Stock are reserved for issuance under the Growth Share
Plan and 4,300,000 of the authorized shares of Common Stock are reserved
for issuance under the warrant issued to Anschutz Family Investment Company
LLC. See "Management--Equity Incentive Plan," "Management--Growth Share
Plan" and "Certain Transactions."
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data," "Other Financial Data" and "Balance Sheet Data" as of the
end of and for each of the years in the five-year period ended December 31,
1996 are derived from the Consolidated Financial Statements of the Company,
which financial statements have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The financial data as of the end of
and for the three months ended March 31, 1997 and 1996 are derived from
unaudited interim financial statements. The unaudited interim financial
statements include all adjustments, consisting of normal recurring accruals,
that management considers necessary for a fair presentation of the financial
position as of the end of and results of operations for these interim periods.
Results of operations for the interim periods are not necessarily indicative
of the results of operations for a full year. Consolidated Financial
Statements of the Company as of December 31, 1996 and 1995 and for each of the
years in the three-year period ended December 31, 1996 and unaudited interim
financial statements as of the end of and for the three months ended March 31,
1997 and 1996 are included elsewhere in this Prospectus. The information set
forth below should be read in conjunction with the discussion under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and the Consolidated Financial Statements and
unaudited interim financial statements of the Company and the notes thereto,
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
--------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue:
Carrier services(1)(2)(3)............... $ 41,561 $ 53,064 $ 50,240 $ 67,789 $ 57,573 $ 18,493 $ 11,199
Commercial services..................... -- 969 8,712 20,412 34,265 7,013 9,411
--------- -------- -------- -------- -------- -------- --------
41,561 54,033 58,952 88,201 91,838 25,506 20,610
Network construction services(4)........ 11,751 15,294 11,921 36,901 139,158 9,126 52,083
--------- -------- -------- -------- -------- -------- --------
Total revenue......................... 53,312 69,327 70,873 125,102 230,996 34,632 72,693
--------- -------- -------- -------- -------- -------- --------
Operating expenses:
Telecommunications services............. 31,557 41,240 48,239 81,215 80,368 23,862 18,063
Network construction services........... 9,730 15,515 9,369 32,754 87,542 6,847 36,265
Selling, general and administrative(5).. 10,270 15,622 21,516 37,195 45,755 14,527 13,947
Growth share plan(6).................... 2,000 2,600 -- -- 13,100 -- 13,100
Depreciation and amortization........... 5,020 5,270 2,364 9,994 16,245 4,049 3,962
--------- -------- -------- -------- -------- -------- --------
Total operating expenses.............. 58,577 80,247 81,488 161,158 243,010 49,285 85,337
--------- -------- -------- -------- -------- -------- --------
Loss from operations...................... (5,265) (10,920) (10,615) (36,056) (12,014) (14,653) (12,644)
Gain on sale of contract rights(7)........ -- -- -- -- -- -- 7,710
Gain on sale of telecommunications service
agreements(2)............................ -- -- -- -- 6,126 -- --
Gain on sale of network(1)................ -- 126,521 -- -- -- -- --
Interest income (expense), net............ (2,687) (3,127) (28) (2,466) (4,373) (582) (304)
Other income (expense), net............... (610) (763) (42) 55 60 (54) (1,996)
--------- -------- -------- -------- -------- -------- --------
Earnings (loss) before income taxes....... (8,562) 111,711 (10,685) (38,467) (10,201) (15,289) (7,234)
Income tax expense (benefit).............. (1,988) 43,185 (3,787) (13,336) (3,234) (5,310) (2,458)
--------- -------- -------- -------- -------- -------- --------
Net earnings (loss)....................... $ (6,574) $ 68,526 $ (6,898) $(25,131) $ (6,967) $ (9,979) $ (4,776)
========= ======== ======== ======== ======== ======== ========
Earnings (loss) per share(8).............. $ (0.07) $ 0.78 $ (0.08) $(0.29) $ (0.08) $ (0.11) $ (0.05)
Weighted average number of shares
outstanding(8)........................... 88,158 88,158 88,158 88,158 88,158 88,158 88,158
OTHER FINANCIAL DATA:
EBITDA(9)................................. $ (855) $ (824) $ (6,338) $(26,007) $ 6,912 $ (9,059) $(10,678)
Net cash provided by (used in) operating
activities............................... $ 1,377 $ (7,125) $ 3,306 $(56,635) $ 32,524 $ (1,185) $ 33,359
Net cash provided by (used in) investing
activities............................... $ (11,202) $107,496 $(41,712) $(58,858) $(52,622) $(11,606) $(56,922)
Net cash provided by (used in) financing
activities............................... $ 11,549 $(95,659) $ 34,264 $113,940 $ 25,519 $ 15,904 $177,327
Capital expenditures(10).................. $ 11,000 $ 3,794 $ 40,926 $ 48,732 $ 85,842 $ 12,021 $ 78,922
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equiva-
lents.................. $ 2,467 $ 7,179 $ 3,037 $ 1,484 $ 6,905 $ 4,597 $160,669
Property and equipment,
net.................... $34,628 $23,666 $63,009 $114,748 $186,535 $123,782 $231,228
Total assets............ $52,735 $60,754 $89,489 $184,178 $264,259 $189,238 $469,614
Long-
term debt, including
current portion........ $27,600 $ 2,141 $27,369 $ 90,063 $134,461 $ 84,032 $311,184
Total liabilities....... $51,482 $48,675 $64,908 $157,703 $254,817 $172,738 $464,948
Stockholder's equity.... $ 1,253 $12,079 $24,581 $ 26,475 $ 9,442 $ 16,500 $ 4,666
</TABLE>
- --------
(1) After deducting the carrying value of the assets sold and direct costs
associated with the 1993 Capacity Sale, the Company recognized a gain of
approximately $126.5 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business."
(2) In July 1996, the Company sold the telecommunications service agreements
of its dedicated line customer business on leased capacity to an unrelated
third party for $5.5 million and had received $4.5 million of the purchase
price in cash as of December 31, 1996. As a result of the sale, the
Company recognized a gain of approximately $6.1 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) The Company acquired the Microwave System through its purchase of Qwest
Transmission Inc. in January 1995, and the acquired company contributed
$13.2 million to total revenue for the year ended December 31, 1995.
(4) In 1996, the Company entered into construction contracts for the sale of
dark fiber with Frontier and WorldCom whereby the Company agreed to sell
dark fiber along the route of the Qwest Network for a purchase price of
approximately $545.0 million. As a result of the activity under these
agreements, the Company recorded Network Construction Services revenue of
approximately $121.0 million in 1996 and approximately $49.0 million in
the three months ended March 31, 1997. See "Business--The Qwest Network--
Dark Fiber and High Volume Capacity Sales."
(5) Selling, general and administrative expenses include the following
nonrecurring expenses incurred by the Company: (i) $5.6 million in 1993 to
provide for the transfer of customers to leased capacity as a result of
the 1993 Capacity Sale; (ii) $2.0 million in 1994 to relocate its
corporate headquarters from San Francisco to Denver and consolidate its
administrative functions in Denver; and (iii) $2.6 million in 1996 to
restructure its operations, including the direct sales group.
(6) Growth Share Plan expenses reflect compensation expense related to the
estimated increase in the value of the growth shares outstanding. See
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," "Management--Growth Share Plan" and note 15 to the
Consolidated Financial Statements of the Company.
(7) In March 1997, the Company sold certain contract rights related to the
1993 Capacity Sale for $9.0 million. As of March 31, 1997, the Company has
received $7.0 million in consideration and has reduced its liability for
associated costs by approximately $0.7 million. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(8) Earnings (loss) per share and weighted average number of shares
outstanding are adjusted to reflect an increase in the authorized capital
stock of Qwest and a stock dividend of 86,490,000 shares effected prior to
the Offering.
(9) EBITDA represents net earnings (loss) before interest, income taxes,
depreciation and amortization, certain nonrecurring expenses described in
note 5 above, gain on sale of contract rights in 1997, gain on sale of
telecommunications service agreements in 1996 and gain on the 1993
Capacity Sale (which are nonrecurring). EBITDA includes earnings from the
construction contracts for the sale of dark fiber that the Company will
use to provide cash for the construction cost of the Qwest Network. EBITDA
does not represent cash flow for the periods presented and should not be
considered as an alternative to net earnings (loss) as an indicator of the
Company's operating performance or as an alternative to cash flows as a
source of liquidity and may not be comparable with EBITDA as defined by
other companies. The Company believes that EBITDA is commonly used by
financial analysts and others in the telecommunications industry. Without
the effect of Growth Share Plan expense, EBITDA would have been $20.0
million, $1.9 million and $1.1 million for the years ended December 31,
1996, 1993 and 1992, respectively, and $2.4 million for the three months
ended March 31, 1997.
(10) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures and initial obligations under capital
leases.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's audited Consolidated Financial Statements and unaudited interim
financial statements and the notes thereto, appearing elsewhere in this
Prospectus.
OVERVIEW
The Company provides communications services to interexchange carriers and
other telecommunications entities, businesses and consumers and constructs and
installs fiber optic communications systems for interexchange carriers and
other telecommunications entities, as well as for its own use. The Company is
expanding its existing long distance network into the Qwest Network, a coast-
to-coast, technologically advanced, fiber optic telecommunications network.
Management believes that the Qwest Network will position the Company to take
advantage of the rapidly growing demand for data transmission, multimedia and
long haul voice capacity.
Founded in 1988 as Southern Pacific Telecommunications Company, a subsidiary
of Southern Pacific Transportation Company ("Southern Pacific"), the Company
began operations by constructing fiber optic conduit systems along Southern
Pacific's railroad rights-of-way primarily for major long distance carriers in
exchange for cash and capacity rights. Since then, the Company has used its
construction operations as a platform to expand into the business of providing
telecommunications services. In 1995, the Company enhanced its ability to
provide telecommunications services by acquiring the Microwave System through
its purchase of Qwest Transmission Inc. for $18.8 million and by completing
and activating the Cal-Fiber system. The Company derives its revenue from
Carrier Services, Commercial Services and Network Construction Services.
Carrier Services. Carrier Services provide high volume and conventional
dedicated line services over the Company's owned capacity and switched
services over owned and leased capacity to interexchange carriers and other
telecommunications providers. The Company entered the Carrier Services market
in 1988 by marketing and providing dedicated line services to other carriers
using the long distance capacity that it had received under construction
contracts to build conduit systems principally for MCI. Through the
acquisition of a carrier's carrier in 1990, the Company increased its presence
in the Carrier Services market and expanded its geographic coverage of digital
dedicated line services to other long distance companies. The Company sold
substantially all of its owned capacity rights and related equipment in 1993
in exchange for $185.0 million and the right to use excess capacity free of
charge to provide service to its dedicated line customers for the twelve-month
period following the date of the sale (the "1993 Capacity Sale"). As a result
of this arrangement, the Company's cost of providing dedicated line services
to its carrier customers as a percentage of revenue was lower in 1994 than in
subsequent years. When this arrangement expired, the cost of providing
dedicated line services on a resale basis became substantially greater than
the cost of providing dedicated line services over the Company's owned
network. The Company sold its resale dedicated line services in July 1996 to
another long distance company, retaining primarily those dedicated line
customers it serviced on its owned network. As a result of this transaction,
the Company experienced a reduction in revenue in 1996 and the first three
months of 1997 compared with prior periods; however, the Company expects to
increase Carrier Services gross margins upon completion of segments of the
Qwest Network as additional owned capacity becomes available and the Company
expands its Carrier Services customer base through increased sales and
marketing efforts.
Revenues from Carrier Services are derived from high volume capacity
services, dedicated line services and switched services. The Company provides
high volume transmission capacity services through service agreements for
terms of one year or longer. Dedicated line services are generally offered
under service agreements for an initial term of one year. High volume capacity
service agreements and dedicated line service agreements generally provide for
"take or pay" monthly payments at fixed rates
23
<PAGE>
based on the capacity and length of circuit used. Customers are typically
billed on a monthly basis and also may incur an installation charge or certain
ancillary charges for equipment. After contract expiration, the contracts may
be renewed or the services may be provided on a month-to-month basis. Switched
services agreements are generally offered on a month-to-month basis and the
service is billed on a minutes-of-use basis. Revenues from carrier customers
that are billed on a minutes-of-use basis have the potential to fluctuate
significantly based on changes in usage that are highly dependent on
differences between the prices charged by the Company and its competitors. The
Company, however, has not experienced significant fluctuations to date. For
the three months ended March 31, 1997 and year ended December 31, 1996, the
Company's five largest carrier customers accounted for approximately 33.2% and
35.0% of Carrier Services revenue, respectively.
Commercial Services. Commercial Services provide long distance voice, data
and video services to businesses and consumers. The Company entered the
Commercial Services market in June 1993 by offering and selling switched
services principally to small- and medium-sized businesses using one switch
located in Dallas, Texas. The Company added switching capacity late in 1995
and during 1996 in Denver, Los Angeles, Tampa, and Indianapolis. The Company
anticipates adding more switching capacity to the Qwest Network as it becomes
operational and as minutes of traffic increase.
Revenue from Commercial Services is recognized primarily on a minutes-of-use
basis. The Commercial Services market is highly competitive and generally
subject to significant customer churn. The Company's churn rates vary by
product line and sales channel, and the Company typically has experienced an
average monthly churn rate ranging from 4% to 9%. The Company is implementing
various customer retention programs designed to reduce its churn rate, and
expects that such churn rate will decline as it builds brand identity and
increasingly targets high volume users. The average churn rate for the three
months ended March 31, 1997 has been consistent with historical rates. The
customer retention programs being implemented are not expected to have a
significant impact on operations prior to the fourth quarter of 1997.
Reductions in churn rates would lead to a reduction in selling expenses
related to account acquisition costs.
Network Construction Services. Network Construction Services consist of the
construction and installation of fiber optic communication systems for
interexchange carriers and other telecommunications providers, as well as for
the Company's own use. The Company began operations in 1988 constructing fiber
optic conduit systems primarily for major long distance carriers in exchange
for cash and capacity rights. In 1996, the Company entered into major
construction contracts for the sale of dark fiber to Frontier and WorldCom
whereby the Company has agreed to install and provide dark fiber to each along
the Qwest Network. The Company also entered into a substantial construction
contract with GTE in May 1997 for the sale of dark fiber. After completion of
the Qwest Network, the Company expects that revenues from Network Construction
Services will be less significant to the Company's operations. See "Business--
The Qwest Network--Dark Fiber Sales."
Revenues from Network Construction Services generally are recognized under
the percentage of completion method as performance milestones relating to the
contract are satisfactorily completed. Losses, if any, on uncompleted
contracts are expensed in the period in which they are identified and any
revisions to estimated profits on a contract are recognized in the period in
which they become known.
Pricing. The Company believes that prices in the telecommunication services
industry will continue to decline as a result of reforms prompted by the
Telecom Act of 1996 and reform of the rules governing access charges and
international settlement rates. The Company also believes that such decreases
in prices will be partially offset by increased demand for telecommunications
services, and that the low cost base of the Qwest Network will give it a
competitive advantage relative to its competitors.
24
<PAGE>
Operating Expenses. The Company's principal operating expenses consist of
expenses for network construction incurred by Network Construction Services,
telecommunications services, selling, general and administrative ("SG&A"),
compensation expenses associated with the Company's Growth Share Plan and
depreciation and amortization. Expenses for Network Construction Services
primarily consist of the costs attributable to conduit and dark fiber
construction contracts, including conduit, fiber cable, construction crews and
rights-of-way. These expenses have significantly increased since 1994
primarily due to activity associated with a major construction contract in
1995 and the Frontier and WorldCom construction contracts in 1996 and the
three months ended March 31, 1997. The Company expects these expenses will
continue to increase as the Company enters into additional construction
contracts for the sale of dark fiber along the Qwest Network. Costs
attributable to the construction of the Qwest Network for the Company's own
use are capitalized.
Expenses for telecommunications services primarily consist of the cost of
leased capacity, LEC access charges, engineering and operating costs. Since
the Company currently provides dedicated line services only over its own
network, the cost of providing these services generally does not include the
cost of leased capacity or LEC access charges. Expenses for switched services,
however, include these costs. The Company leases capacity from other carriers
to extend its switched services for originating and terminating traffic beyond
its own network boundaries. LEC access charges, which are variable, represent
a significant portion of the total cost for switched services. Due in part to
these costs, revenues from switched services have lower gross margins than
revenues from dedicated line services provided by the Company. When the Qwest
Network is completed and activated, the Company will be able to serve more
customer needs over its own capacity on the Qwest Network. Furthermore, with
additional switched traffic on the Qwest Network, the Company believes it will
realize economies of scale and thereby lower its cost of sales as a percentage
of revenue.
SG&A expenses include the cost of salaries, benefits, occupancy costs,
commissions, sales and marketing expenses and administrative expenses. In
March 1996, the Company changed the focus of its sales efforts for Commercial
Services from regional sales offices to agent and direct mail sales channels.
The Company redirected its sales efforts in order to reduce the fixed selling
expenses associated with having its own commercial sales offices and sales
employees and to concentrate on other sales channels that the Company believed
would be more cost effective in generating sales to the Company's target
market at that time. Notwithstanding the closure of its sales offices and
related cutbacks, SG&A expenses have continued to increase over the years,
which is consistent with the development of the network and the growth of the
Company's Carrier Services and Commercial Services.
The Company expects this trend to continue and that additional SG&A expenses
will be necessary to realize the anticipated growth in revenue for Carrier
Services and Commercial Services as the Company develops the Qwest Network.
The Company intends to open commercial sales offices in selected major
geographic markets to implement the Company's strategy, as segments of the
Qwest Network become operational. In addition, SG&A expenses will increase as
the Company continues to recruit experienced telecommunications industry
personnel to implement the Company's strategy. See "Management."
The Company has a Growth Share Plan for certain employees and directors of
Qwest. See "Management--Growth Share Plan." Growth Share Plan expenses reflect
the Company's estimate of compensation expense for the shares outstanding.
Growth shares granted under the Growth Share Plan vest at the rate of 20% for
each full year of service completed after the grant date subject to risk of
forfeiture. Participants receive their vested portion of the increase in value
of the growth shares upon a triggering event, as defined, which includes the
end of a growth share performance cycle. Upon completion of the Offerings,
certain growth shares will vest in full, which will result in substantial
compensation expense under the Growth Share Plan in the second quarter of
1997. Compensation relating to certain nonvested growth shares will be
amortized as expense over the remaining approximately four and one-half year
vesting period. See "Management--Growth Share Plan."
25
<PAGE>
RESULTS OF OPERATIONS
The table set forth below summarizes the Company's percentage of revenue by
source and operating expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------- ----------------
1992 1993 1994 1995 1996 1996 1997
----- ----- ----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Carrier services........ 78.0% 76.5% 70.9% 54.2% 24.9% 53.4% 15.4%
Commercial services..... -- 1.4 12.3 16.3 14.8 20.2 12.9
----- ----- ----- ----- ----- ------- -------
78.0 77.9 83.2 70.5 39.7 73.6 28.3
Network construction
services............... 22.0 22.1 16.8 29.5 60.3 26.4 71.7
----- ----- ----- ----- ----- ------- -------
Total revenue........... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Operating Expenses:
Telecommunications
services................ 59.2% 59.5% 68.1% 64.9% 34.8% 68.9% 24.8%
Network construction
services................ 18.3 22.4 13.2 26.2 37.9 19.8 49.9
Selling, general and
administrative.......... 19.2 22.5 30.4 29.7 19.8 41.9 19.2
Growth Share Plan........ 3.8 3.8 -- -- 5.7 -- 18.0
Depreciation and
amortization............ 9.4 7.6 3.3 8.0 7.0 11.7 5.5
----- ----- ----- ----- ----- ------- -------
Total operating
expenses................ 109.9% 115.8% 115.0% 128.8% 105.2% 142.3% 117.4%
</TABLE>
THREE MONTHS ENDED MARCH 31, 1997 COMPARED TO THREE MONTHS ENDED MARCH 31,
1996
The Company experienced a net loss of $4.8 million in the three months ended
March 31, 1997 compared to a net loss of $10.0 million in the three months
ended March 31, 1996. Excluding the effect of the compensation expense
relating to the Growth Share Plan, net of income tax, the Company's reported
net income would have been approximately $3.7 million for the three months
ended March 31, 1997 as compared to a net loss of $10.0 million for the three
months ended March 31, 1996.
Revenue. Total revenue increased $38.1 million, or 109.9%, to $72.7 million
in the three months ended March 31, 1997 from $34.6 million in the three
months ended March 31, 1996 due primarily to significantly higher revenue from
Network Construction Services, as well as increased revenue from Commercial
Services, offset in part by lower revenue from Carrier Services. Revenue from
Network Construction Services increased $43.0 million, or 470.7%, to $52.1
million in the three months ended March 31, 1997 from $9.1 million in the
three months ended March 31, 1996. The increase was due primarily to network
construction revenue from dark fiber sales of approximately $48.9 million to
WorldCom and Frontier, compared with $6.5 million in the three months ended
March 31, 1996. Commercial Services revenue increased $2.4 million, or 34.2%,
to $9.4 million in the three months ended March 31, 1997 from $7.0 million in
the three months ended March 31, 1996 due primarily to growth in switched
services provided to small- and medium-sized businesses and consumers as a
result of the expansion of the Company's agent, telemarketing and direct mail
sales channels. Carrier Services revenue decreased $7.3 million, or 39.4%, to
$11.2 million in the three months ended March 31, 1997 from $18.5 million in
the three months ended March 31, 1996. The decrease was due primarily to the
Company's sale of its resale dedicated line services on leased capacity on
July 1, 1996, which had generated revenues of $9.7 million for the three
months ended March 31, 1996. The decrease in Carrier Services revenue was
partially offset by an increase in revenue from carrier switched services,
which increased to $4.3 million in the three months ended March 31, 1997 from
$3.0 million in the three months ended March 31, 1996.
Operating Expenses. Total operating expenses increased $36.0 million, or
73.2%, to $85.3 million in the three months ended March 31, 1997 from $49.3
million for the three months ended March 31, 1996 due primarily to increases
in Network Construction Services and Growth Share Plan expense, partially
offset by lower telecommunications services expenses and SG&A expenses.
26
<PAGE>
Expenses for Network Construction Services increased $29.4 million, or
429.6%, to $36.3 million in the three months ended March 31, 1997 from $6.8
million in three months ended March 31, 1996 due to cost of construction
contracts relating to dark fiber sales. Expenses for telecommunications
services decreased $5.8 million, or 24.3%, to $18.1 million in the three
months ended March 31, 1997 from $23.9 million in the three months ended March
31, 1996. The sale on July 1, 1996 of the Company's dedicated line services on
leased capacity resulted in a reduction in expenses, which was partially
offset by telecommunications services expenses associated with the growth in
switched services and servicing the Qwest Network.
SG&A expenses decreased $0.6 million, or 4.0%, to $13.9 million in the three
months ended March 31, 1997 from $14.5 million in the three months ended March
31, 1996. The decrease was due primarily to restructuring expenses of $1.6
million incurred by the Company in March 1996 as a result of its decision to
close 13 sales offices and the termination of approximately 130 employees. As
a result of this restructuring, the Company experienced a reduction in
payroll, commissions, and rental expense. These costs were partially offset by
increased payroll attributable to the headcount growth in support of the
construction of the Qwest Network and to costs associated with the hiring of
senior management. See "Management." Costs for sales commissions on higher
commercial revenue and expenses for telemarketing and promotions also
increased from the three months ended March 31, 1996 to the three months ended
March 31, 1997. The Company anticipates that as it deploys the Qwest Network
and expands its Carrier Services and Commercial Services, SG&A expenses will
continue to increase.
Under the Growth Share Plan, the Company has estimated an increase in the
value of the growth shares at March 31, 1997 and has recorded approximately
$13.1 million of additional compensation expense in the three months ended
March 31, 1997, none of which has been paid. No expense was recognized in the
three months ended March 31, 1996, as there was no compensatory element in
that period.
The Company's depreciation and amortization expense remained substantially
unchanged in the three months ended March 31, 1997 as compared to the three
months ended March 31, 1996. The Company expects that depreciation and
amortization expense will increase in subsequent periods as the Company
continues to construct and activate the Qwest Network.
Interest and Other Income (Expense). Pursuant to the 1993 Capacity Sale, the
Company obtained certain rights of first refusal to re-acquire network
communications equipment and terminal locations including leasehold
improvements should the purchaser sell the network. In March 1997, the Company
sold certain of these rights in return for $9.0 million and the right to re-
acquire certain terminal facilities. As of March 31, 1997, the Company had
received $7.0 million in cash consideration and was released from an estimated
liability of $0.7 million, net of $0.1 million of other expenses, which
related to its agreement to relocate certain terminal facilities. The gain
recorded in the three months ended March 31, 1997 was $7.7 million. The
remaining cash consideration of $2.0 million was paid in May 1997 when the
Company completed delivery of certain telecommunications capacity to the
purchaser.
As previously discussed, the Company sold its resale dedicated line services
in July 1996. During the transition of the service agreements to the buyer,
the Company incurred certain facilities costs on behalf of the buyer, which
were to be reimbursed to the Company. A dispute arose in the three months
ended March 31, 1997 with respect to the reimbursement of such costs and in
connection therewith, the Company has made a provision of approximately $2.0
million.
The Company's net interest and other expenses increased $1.7 million, to
$2.3 million in the three months ended March 31, 1997 from $0.6 million in the
three months ended March 31, 1996. This increase was primarily attributable to
the provision for transition service costs described in the previous
paragraph.
27
<PAGE>
Income Taxes. The Company is included in the consolidated federal income tax
return of Anschutz Company, and a tax sharing agreement, as amended, provides
for allocation of tax liabilities and benefits to the Company, in general, as
though it filed a separate tax return. The Company's effective tax rate in the
three months ended March 31, 1997 and the three months ended March 31, 1996
approximated the statutory federal rate.
Net Loss. The Company experienced a net loss of $4.8 million in the three
months ended March 31, 1997 compared to a net loss of $10.0 million in the
three months ended March 31, 1996 as a result of the factors discussed above.
Excluding the effect of the compensation expense relating to the Growth Share
Plan, net of income tax, the Company's net income would have been
approximately $3.7 million for the three months ended March 31, 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue increased $105.9 million, or 84.7%, to $231.0 million
in 1996 from $125.1 million in 1995 due primarily to significantly higher
revenue from Network Construction Services, as well as increased revenue from
Commercial Services, offset in part by lower revenue from Carrier Services.
Revenue from Network Construction Services increased $102.3 million, or
277.1%, to $139.2 million in 1996 from $36.9 million in 1995 due to network
construction revenue from dark fiber sales of approximately $121.0 million to
WorldCom and Frontier. Commercial Services revenue increased $13.9 million, or
67.9%, to $34.3 million in 1996 from $20.4 million in 1995. This increase is
largely attributable to growth in switched services provided to small- and
medium-sized businesses and consumers as a result of the expansion of the
Company's agent, telemarketing and direct mail sales channels. Carrier
Services revenue decreased $10.2 million, or 15.1%, to $57.6 million in 1996
from $67.8 million in 1995 primarily due to decreases in revenue resulting
from the Company's sale of a portion of its dedicated line services on leased
capacity on July 1, 1996. The sold business generated revenues of $18.8
million for the six months ended June 30, 1996 and $39.7 million for the year
ended December 31, 1995. The decrease in Carrier Services revenue was
partially offset by an increase in revenue from carrier switched services,
which increased to $19.4 million in 1996 from $13.8 million in 1995.
Operating Expenses. Total operating expenses increased $81.9 million, or
50.8%, to $243.0 million in 1996 from $161.2 million in 1995 due primarily to
increases in Network Construction Services, SG&A and compensation expenses
associated with the Growth Share Plan. Expenses for telecommunications
services decreased $0.8 million, or 1.0%, to $80.4 million in 1996 from $81.2
million in 1995. The sale on July 1, 1996 of the Company's dedicated line
services on leased capacity generated a reduction in expenses, which was
partially offset by telecommunications services expenses associated with the
growth in switched services and servicing the Qwest Network. Expenses for
Network Construction Services increased $54.8 million, or 167.3%, to $87.5
million in 1996 from $32.8 million in 1995. This increase was due to cost of
construction contracts relating to dark fiber sales.
SG&A expenses increased $8.6 million, or 23.0%, to $45.8 million in 1996
from $37.2 million in 1995. The Company incurred additional SG&A expenses as a
result of growth in the Company's telecommunications services and the
construction of the Qwest Network, including additional sales commissions on
higher revenue, expenses incurred in the implementation of the Company's
direct mail sales channel and expenses for customer service personnel added to
support the Company's expansion of its commercial customer base. The SG&A
expenses in 1996 also included restructuring expenses of $1.6 million incurred
by the Company as a result of its decision to close 13 sales offices and the
termination of approximately 130 employees involved in sales, marketing and
administrative functions. As a result of this restructuring, the Company
experienced a reduction in payroll, commissions and rental expense. The
Company anticipates that as it deploys the Qwest Network and expands its
Carrier Services and Commercial Services, SG&A expenses will continue to
increase.
28
<PAGE>
Under the Growth Share Plan, the Company estimated a $13.1 million increase
in value of the growth shares at December 31, 1996, due to the Frontier dark
fiber sale. No expense was recognized for the year ended December 31, 1995, as
there were no significant compensatory elements in those periods.
The Company's depreciation and amortization expense increased $6.3 million,
or 62.5%, to $16.2 million in 1996 from $10.0 million in 1995. This increase
was primarily due to the Company's investment in the Qwest Network. The
Company expects that depreciation and amortization expense will continue to
increase in subsequent periods as the Company continues to invest in the Qwest
Network.
Interest and Other Income (Expense). The Company's net interest and other
expenses increased $1.9 million, or 78.9%, to $4.3 million in 1996 from $2.4
million in 1995. This increase was primarily attributable to additional debt
incurred in 1996 to finance capital expenditures and to provide working
capital.
Income Taxes. The Company is included in the consolidated federal income tax
return of Anschutz Company, and a tax sharing agreement provides for
allocation of tax liabilities and benefits to the Company, in general, as
though it filed a separate tax return. The Company's effective tax rate in
1996 and 1995 approximated the statutory federal rate. The difference between
the income tax benefit of $13.3 million in 1995 compared to $3.2 million
benefit in 1996 resulted from a $28.3 million decrease in loss before income
tax benefit from $38.5 million in 1995 to $10.2 million in 1996.
Net Loss. The Company experienced a net loss of $7.0 million in 1996
compared to a net loss of $25.1 million in 1995 as a result of the factors
discussed above.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenue. Total revenue increased $54.2 million, or 76.5%, to $125.1 million
in 1995 from $70.9 million in 1994 due to growth in revenue in each of the
three services provided by the Company. Revenue from Carrier Services
increased $17.5 million, or 34.9%, to $67.8 million in 1995 from $50.2 million
in 1994 primarily as a result of the Company's acquisition of the Microwave
System, which contributed $13.2 million in revenue in 1995. Commercial
Services revenue increased $11.7 million, or 134.3%, to $20.4 million in 1995
from $8.7 million in 1994 due to increased business arising from the Company's
marketing efforts. Revenue from Network Construction Services increased $25.0
million, or 209.5%, to $36.9 million in 1995 from $11.9 million in 1994,
primarily due to increased revenue under a contract with MCI for the
construction of fiber optic conduit routes.
Operating Expenses. Total operating expenses increased $79.7 million, or
97.8%, to $161.2 million in 1995 from $81.5 million in 1994. Expenses for
telecommunications services increased $33.0 million, or 68.4%, to $81.2
million in 1995 from $48.2 million in 1994 primarily due to increased costs of
providing long distance and dedicated line services associated with growth in
volume and the expiration of free leased capacity under the facility agreement
related to the 1993 Capacity Sale, partially offset by savings derived from
transferring dedicated line services customers from leased capacity to the
Cal-Fiber system. Expenses for Network Construction Services increased $23.4
million, or 249.6%, to $32.8 million in 1995 compared to $9.4 million in 1994.
The increase in operating expenses was due in large part to increased
construction activity under a contract with MCI for the construction of
conduit routes.
SG&A expenses increased $15.7 million, or 72.9%, to $37.2 million in 1995
from $21.5 million in 1994. This increase was primarily attributable to the
expansion in the Company's sales and marketing efforts and an increase in
administrative expenses due to the expansion of the Company's administrative
organization to support the growth in revenue.
29
<PAGE>
Depreciation and amortization expense increased $7.6 million, or 322.8%, to
$10.0 million in 1995 from $2.4 million in 1994 primarily due to the
investment in the Microwave System and the Cal-Fiber system becoming fully
operational in early 1995.
Interest and Other Income (Expense). The Company's net interest and other
expenses increased $2.3 million to $2.4 million in 1995 from $0.1 million in
1994 as a result of additional debt incurred in 1995 to finance the
acquisition of the Microwave System and the interest charges related to
financing the Cal-Fiber system. Interest charges related to the Cal-Fiber
system were capitalized during the construction period, which was completed in
February 1995.
Income Taxes. The Company is included in the consolidated federal income tax
return of Anschutz Company, and a tax sharing agreement provides for
allocation of tax liabilities and benefits to the Company, in general, as
though it filed a separate tax return. The Company's effective tax rate in
1995 and 1994 approximated the statutory federal rate.
Net Loss. The Company experienced a net loss of $25.1 million in 1995
compared to a net loss of $6.9 million in 1994 as a result of the factors
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
From 1994 through the three months ended March 31, 1997, the Company has
funded capital expenditures, debt service and cash used in operations through
a combination of stockholder advances, capital contributions and external
borrowings supported by collateral owned by its parent or affiliates, as well
as external borrowings collateralized by certain of the Company's assets. The
Company intends to finance its operations in the future through internally
generated and external funds without relying on cash advances, contributions
or guarantees from its parent.
The Company's operations generated insufficient cash flows from 1994 through
the three months ended March 31, 1997 to enable it to meet its capital
expenditures, debt service and other cash needs. Total cash expended from
January 1, 1994 to March 31, 1997 to fund capital expenditures, repayments of
long-term debt to third parties, and the acquisition of the Microwave System
was approximately $208.3 million, $117.1 million and $12.5 million,
respectively. Total cash provided by operations was approximately $12.6
million during the same period. Total cash provided during this same period by
loans secured by collateral owned by its parent or an affiliate and capital
contributions from its parent were approximately $80.0 million and $48.9
million, respectively. In addition, during this same period, the Company's net
cash provided by secured borrowings under long-term debt agreements with third
parties aggregated $93.0 million. As of March 31, 1997, the Company had
positive working capital of $58.6 million. At December 31, 1996, 1995 and
1994, the Company had working capital deficits of approximately $69.4 million,
$2.6 million and $11.9 million, respectively.
In March 1997, the Company issued and sold the Notes, the proceeds of which
were used, as indicated below, to repay certain indebtedness of the Company
and also to fund capital expenditures for the construction and activation of
the Qwest Network. Unamortized issuance costs totaling approximately $8.2
million are being amortized over the term of the Notes. Interest on the Notes
is payable semi-annually on April 1 and October 1 of each year, commencing on
October 1, 1997, and the principal amount of the Notes is due and payable in
full on April 1, 2007. The Indenture contains certain covenants that, among
other things, limit the ability of the Company and certain of its subsidiaries
(the "Restricted Subsidiaries") to incur additional indebtedness and issue
preferred stock, pay dividends or make other distributions, repurchase capital
stock or subordinated indebtedness, create certain liens, enter into certain
transactions with affiliates, sell assets of the Company or its Restricted
Subsidiaries, issue or sell capital stock of the Company's Restricted
Subsidiaries or enter into certain mergers and consolidations. In addition,
under certain limited circumstances, the Company will be required to offer to
purchase the Notes at a price equal to 100% of the principal amount thereof
30
<PAGE>
plus accrued and unpaid interest to the date of purchase with the excess
proceeds of certain asset sales. In the event of a Change of Control (as
defined in the Indenture), holders of the Notes will have the right to require
the Company to purchase all of their Notes at a price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest.
In connection with the sale of the Notes, the Company agreed to make an
offer to exchange new notes, registered under the Securities Act and with
terms identical in all material respects to the Notes (the "New Notes"), for
the Notes or, alternatively, to file a shelf registration statement under the
Securities Act with respect to the Notes. If the registration statement for
the exchange offer or the shelf registration statement, as applicable, are not
filed or declared effective within specified time periods or, after being
declared effective, cease to be effective or usable for resale of the Notes
during specified time periods (each a "Registration Default"), additional
interest will accrue at a rate per annum equal to 0.50% of the principal
amount of the Notes during the 90-day period immediately following the
occurrence of a Registration Default and increasing in increments of 0.25% per
annum, up to a maximum of 2.0% per annum, at the end of each subsequent 90-day
period until the Registration Default is cured. See "Description of Certain
Indebtedness--The Notes."
In June 1994, the Company entered into a $27.6 million network credit
facility to finance the construction of the Cal-Fiber system. The loan was
scheduled to mature on the last business day of July 2001. At March 31, 1997,
the outstanding principal balance of the facility was $26.0 million, which was
subsequently repaid in full with a portion of the proceeds of the sale of the
Notes.
In April 1995, the Company entered into a secured construction loan facility
with Bank of Nova Scotia used to fund certain conduit installation projects.
Borrowings under the facility are secured by certain construction contracts
and notes payable to the Company. The facility converted into term loans, with
$4.1 million maturing November 27, 1997 and $10.9 million maturing February
27, 1998. Borrowings bear interest at the Company's option at either: (i) the
higher of a floating base rate announced by the lender or the federal funds
rate plus one half of one percent plus an applicable margin; or (ii) LIBOR
plus an applicable margin. At March 31, 1997, the outstanding principal
balance was $15.0 million.
In 1992, 1995 and 1996, the Company entered into equipment loans totalling
$12.6 million, with final maturity dates ranging from September 2000 to
October 2001. At March 31, 1997, the aggregate principal amount outstanding
under these equipment loans was $9.3 million, all of which has been repaid
with a portion of the proceeds of the sale of the Notes.
In July 1995, the Company issued two term notes totaling $12.0 million,
which were scheduled to mature on September 30, 2000. At March 31, 1997, the
outstanding principal amount under these notes was $8.9 million, which was
subsequently repaid in full with a portion of the proceeds of the sale of the
Notes.
In April 1996, the Company entered into a $100.0 million three-year
revolving credit facility, as amended in September 1996, that converts to a
two-year term loan maturing on April 2, 2001. On March 31, 1997, the Company
paid down the $80.0 million balance under this facility with a portion of the
proceeds of the sale of the Notes. In February 1997, the Company entered into
a one-year $50.0 million line of credit from a commercial bank. At March 31,
1997, no amounts were outstanding under this credit line. These credit
facilities are collateralized by a pledge of publicly traded stock owned by an
affiliate of Anschutz Company. In May 1997 (following receipt of proceeds
under the GTE agreement), the Company borrowed $28.0 million under the $100.0
million facility and used this amount to repay all outstanding advances from
the Company's parent, the proceeds of which were used to fund network
construction, capital expenditures and working capital. The outstanding
balance under the facility will be repaid with a portion of the proceeds of
the Offerings. See "Use of Proceeds."
31
<PAGE>
The Company intends to terminate the latter two existing credit facilities
totalling $150.0 million as soon as practicable after completion of the
Offerings. The Company intends to obtain new bank credit facilities of lesser
amount, which may be secured or unsecured, as permitted under the Indenture.
The Company is in discussions with various potential lenders in this regard.
The Company also may issue other public or private debt. No credit support
will be provided by the Company's parent for any new credit facilities. No
assurance can be given as to when or whether the Company will be able to
obtain new credit facilities on acceptable terms.
In May 1997, the Company and Nortel, individually and as agent for itself
and other specified lenders, entered into a $90.0 million credit agreement to
finance the transmission electronics equipment to be purchased from Nortel
under a procurement agreement. Under and subject to the conditions contained
in the credit agreement, the Company may borrow funds as it purchases the
equipment to fund up to 75% of the purchase price of such equipment and
related engineering and installation services provided by Nortel, with the
purchased equipment and related items serving as the collateral for the loans.
Principal amounts outstanding under the credit agreement will be payable in
quarterly installments commencing on June 30, 2000, with repayment in full due
and payable on March 31, 2004. Borrowings will bear interest at the Company's
option at either (i) a floating base rate announced by a designated reference
bank plus an applicable margin or (ii) LIBOR plus an applicable margin.
Following the Offerings, the Company will remain highly leveraged. As of
March 31, 1997, the Company had, on a consolidated basis, approximately $339.1
million in principal amount of indebtedness outstanding. The Indenture and
certain debt instruments to which Qwest's subsidiaries are parties limit but
do not prohibit the incurrence of additional indebtedness by the Company, and
the Company expects that Qwest or its subsidiaries may incur additional
indebtedness in the future. See "Capitalization" and "Risk Factors--
Substantial Indebtedness."
During the three months ended March 31, 1997 and the years ended December
31, 1996, 1995 and 1994, capital expenditures, including accrued capital
expenditures and assets held under capital leases, of the Company totaled
$78.9 million, $85.8 million, $48.7 million and $40.9 million, respectively.
These expenditures were funded principally through project financing and other
external borrowings and, beginning in the fourth quarter of 1994, also through
advances and capital contributions from Anschutz Company and earnings from
contracts relating to dark fiber sales.
The Company estimates the total cost to construct and activate the Qwest
Network and complete construction of the dark fiber sold to Frontier, WorldCom
and GTE will be approximately $1.4 billion. Of this amount, the Company had
already expended approximately $300.0 million as of April 30, 1997. The
Company anticipates remaining total cash outlays for these purposes of
approximately $600.0 million in 1997 and $500.0 million in 1998. Estimated
total expenditures for 1997 include the Company's commitment to purchase a
minimum quantity of fiber for approximately $257.0 million (subject to quality
and performance specifications), of which approximately $80.0 million had been
expended as of April 30, 1997. Estimated total expenditures for 1997 and 1998
together also include $100.0 million for the purchase of electronic equipment.
In addition, the Company anticipates approximately $97.0 million of capital
expenditures in 1997 and 1998 to support growth in Carrier Services and
Commercial Services.
As of the date of this Prospectus, the Company has obtained the following
sources of funds to complete the build-out: (i) approximately $1.0 billion
under the Frontier, WorldCom and GTE contracts and additional smaller
construction contracts for sales of dark fiber, of which approximately $177.0
million had already been paid and $842.0 million remained to be paid at April
30, 1997; (ii) $90.0 million of vendor financing; and (iii) $117.8 million in
net proceeds from the sale on March 31, 1997 of
32
<PAGE>
$250.0 million in principal amount of the Notes remaining after repayment of
certain existing debt. The Company believes that these sources of cash,
together with the proceeds from the Offerings, will be sufficient to satisfy
its anticipated cash requirements at least through the end of 1997.
With the completion of the 13,000 route mile network, Qwest will provide
services nationally to its customers primarily over its own facilities, using
leased facilities in those portions of the country not covered by the Qwest
Network. Qwest will continue to evaluate the economics of extending its core
network versus continuing to lease network capacity. In this regard, the
Company is considering extensions in the Southeast United States, the
California Valley and, perhaps, the Pacific Northwest. The Company has made no
final decision in this regard, and any decisions would be dependent, among
other things, upon the Company's assesment of the potential for dark fiber
sales or long-term leases of high volume capacity and the availability of
additional capital on acceptable terms.
IMPACT OF INFLATION
Inflation has not significantly affected the Company's operations during the
past three years.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that include, among
others, statements concerning the Company's plans to complete the Qwest
Network, expectations as to funding its capital requirements, anticipated
expansion of carrier and commercial services and other statements of
expectations, beliefs, future plans and strategies, anticipated developments
and other matters that are not historical facts. Management cautions the
reader that these forward-looking statements are subject to risks and
uncertainties that could cause actual events or results to differ materially
from those expressed or implied by the statements. The most important factors
that could prevent the Company from achieving its stated goals include, but
are not limited to, failure by the Company to (i) manage effectively and cost
efficiently the construction of the route segments, (ii) enter into additional
customer contracts to sell dark fiber or provide high volume capacity and
otherwise expand its telecommunications customer base on the Qwest Network and
(iii) obtain additional rights-of-way and maintain all necessary rights-of-
way.
33
<PAGE>
INDUSTRY OVERVIEW
GENERAL
The telecommunications industry involves the transmission of voice, data and
video communications from the point of origination to the point of
termination. The industry has been undergoing rapid change due to
deregulation, the construction of additional infrastructure and the
introduction of new technologies, which has resulted in increased competition
and demand for telecommunications services.
United States Domestic Long Distance. The structure of the domestic long
distance telecommunications industry was strongly influenced by a 1982 court
decree that required the divestiture by AT&T of its seven RBOCs and divided
the country into approximately 200 LATAs that range in size from metropolitan
areas to entire states. The seven RBOCs were initially limited to providing
local telephone service, access to long distance carriers and "in-region" long
distance service (service within a LATA). The right to provide inter-LATA
service was initially ceded to AT&T and other long distance carriers, as well
as to LECs other than the RBOCs. However, under the Telecom Act of 1996, the
RBOCs may now provide inter-LATA long distance service, subject to certain
conditions. See "Regulation--General Regulatory Environment."
For each long distance call, the originating and terminating LECs charge the
long distance carrier an access fee to carry the call across their local
networks. The long distance carrier charges the customer a fee for its
transmission of the call, a portion of which consists of the access fees
charged by the originating and terminating LECs. To encourage the development
of competition in the long distance market, the LECs are required to provide
all long distance carriers with access to local exchange service that is
"equal in type, quality and price" to that provided to AT&T. These "equal
access" and related provisions were intended to prevent preferential treatment
of AT&T and to require that the LECs charge the same access fees to all long
distance carriers, regardless of their volume of traffic. These provisions,
along with the development and evolution of fiber optic technology with its
increased capacity and transmission quality, have helped smaller long distance
carriers emerge as alternatives to the largest companies for long distance
telecommunications services. See "Regulation--General Regulatory Environment."
United States International Long Distance. The United States international
long distance industry is large and growing. The onset of competition gave
rise to deregulation and a decrease in prices, which led to the initial growth
in the market and improvements in service offerings and customer service.
Subsequent growth has been largely attributable to the worldwide trend toward
deregulation and privatization, technological improvements, the expansion of
telecommunications infrastructure and the globalization of the world's
economies.
The profitability of the United States international long distance market is
principally driven by the difference between settlement rates (i.e., the rates
paid to other carriers to terminate an international call) and billed revenue.
The difference in cost between providing domestic long distance and
international service is minimal, and increased worldwide competition has
already brought about certain reductions in settlement rates and end user
prices, thereby reducing overseas termination costs for United States-based
carriers. However, it is believed that certain foreign countries use
settlement rates to subsidize their domestic call rates, contributing to
significantly higher rates for certain international calls compared to
domestic long distance calls. The FCC has proposed measures intended to
overhaul the system of international settlements, although such proposals have
not yet been enacted and remain subject to modification or appeal to the
courts or both. Additionally, recent worldwide trade negotiations may lead to
reduced settlement rates. See "Regulation--General Regulatory Environment."
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Multimedia. Continuing developments in multimedia applications are bringing
new entrants to the telecommunications market. Internet service providers and
cable television, entertainment and data transmission companies, for instance,
are potential customers for voice, data and video communications over high
bandwidth networks such as the Qwest Network.
LONG DISTANCE NETWORK SERVICES
Switched voice and data services originate and terminate with end users and
require varying amounts of bandwidth, depending on the nature of the
communication. Traditional telephony services such as "1 Plus" dialing require
only limited bandwidth (such as 64 Kbps). Emerging broadband services, such as
the Internet, private networks and multimedia applications, require higher
bandwidth for effective communication. Such services are increasingly
transmitted over SONET ring-protected Optical Carrier level paths (such as OC-
48 or OC-192) using advanced transmission protocols, such as Frame Relay and
ATM.
The following diagram illustrates the typical layout of a broadband services
network.
LOGO
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TELECOMMUNICATIONS TECHNOLOGY
The market for video, voice and data communications is served primarily
through fiber optic and coaxial copper cables, microwave systems and
satellites. Before the 1980s, telecommunications traffic generally was
transmitted through satellites, microwave radio or copper cable installed
undersea or buried in the ground. By 1990, copper cable had been largely
replaced by fiber optic systems that provided greater capacity at lower cost
with higher quality and reliability.
. Fiber Optic Systems. Fiber optic systems use laser-generated light to
transmit voice, data and video in digital format through ultra-thin
strands of glass. Fiber optic systems are characterized generally by
large circuit capacity, good sound quality, resistance to external signal
interference and direct interface to digital switching equipment or
digital microwave systems. A pair of modern fiber optic strands, using
the most advanced technology commercially available, is capable of
carrying OC-192 level capacity, equal to over 129,000 simultaneous
telephone calls. Because fiber optic signals disperse over distance, they
must be regenerated/amplified at sites located along the fiber optic
cable. Fiber optic systems using earlier generation fiber, as compared to
the more advanced fiber being installed in the Qwest Network, require
frequent intervals between regeneration/amplifier sites, typically
between 20 and 45 miles. The Company's advanced fiber allows for greater
distances between regeneration/amplifier sites, and the Qwest Network is
designed to use a maximum of 60-mile intervals. Greater distances between
regeneration/amplifier sites generally translate into substantially lower
installation and operating costs.
. Microwave Systems. Although limited in capacity compared with fiber optic
systems, digital microwave systems (such as the Company's Microwave
System) offer an effective and reliable means of transmitting lower
volume and narrower bandwidths of voice, data and video signals.
Generally no more than 21 DS-3s can be transmitted by microwave between
two antennae. Microwaves are very high frequency radio waves that can be
reflected, focused and beamed in a line-of-sight transmission path.
Because of their electro-physical properties, microwaves can be used to
transmit signals through the air, with relatively little power, in much
the same way that electrical signals are transmitted through a copper
wire. To create a communications circuit, microwave signals are
transmitted through a focusing antenna, received by an antenna at the
next station in the network, then amplified and retransmitted. Microwaves
disperse as they travel through the air, and as a result this
transmission process must be repeated at repeater stations, which consist
of radio equipment, antennae and back-up power sources, located on
average every 22 miles along the transmission network.
. Satellite Systems. Although satellites initially were used for point-to-
point long distance telephone and television transmissions, fiber optic
cables have proven to be a more cost effective delivery method for high
volume point-to-point applications. Currently, satellites are primarily
used for transmissions that must reach many locations over vast distances
simultaneously, such as the distribution of television programming, for
point-to-point traffic in developing countries lacking terrestrial
networks and for other point-to-point traffic that cannot be connected
efficiently or cost-effectively by terrestrial transmission systems.
TELECOMMUNICATIONS MARKETS
Companies in the domestic long distance market generated estimated total
revenue of $72 billion in 1995. AT&T is the dominant long distance carrier
with an estimated 53% of total market revenue in 1995, while MCI and Sprint
held the number two and three market positions with approximately 17.8% and
10% of 1995 market revenues, respectively. These three carriers, together with
WorldCom, constitute what are generally referred to as the "Tier 1" companies
in the long distance market.
Long distance companies may generally be categorized as "facilities-based"
carriers and "nonfacilities-based" carriers. The four Tier 1 companies are
facilities-based carriers because each
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operates a network principally using its own transmission facilities and
extensive geographically dispersed switching equipment. The completed Qwest
Network would enable the Company to become this type of facilities-based
carrier generally. All of the Tier 1 carriers, including AT&T, lease some of
their transmission facilities from other carriers to back up their service
routing, augment areas where they may have traffic bottlenecks or cover a
particular geographic area not covered by their own networks.
Medium-sized long distance companies, some with national capabilities,
constitute the "Tier 2" companies in the long distance market. Certain Tier 2
carriers are known as "partial facilities-based" carriers in that they own
some of their own transmission facilities but operate using mostly leased
facilities. However, most Tier 2 carriers are nonfacilities-based carriers in
that they lease all of their transmission facilities. Tier 2 carriers design,
manage and operate their own networks just as the Tier 1 carriers, but
generally on a smaller regional scale, focusing on selling traffic originating
in their target geographic area. These carriers are also generally referred to
as "switch-based" or "switched" because they typically operate their own
switches. Some of these carriers lease high volume DS-3 capacity and resell
lower volume DS-1 capacity to other carriers at higher unit prices. DS-3 level
capacity is generally only sold by carriers that own facilities on the route
on which the service is sold.
The "Tier 3" carriers, often called "switchless" resellers, neither operate
networks nor own facilities, but rather resell "minutes" of service which they
purchase from other carriers. These companies, which vary significantly in
size, are primarily sales and marketing companies that generate their margins
by buying in large volumes to obtain a low price per minute from switch-based
carriers and reselling at higher prices. These companies may receive an
invoice from their underlying carrier and bill the end user or, in some cases,
the underlying carrier may bill the end user directly. The barriers to entry
into this segment of the long distance market are minimal and there are
currently numerous Tier 3 companies providing long distance services. As its
business increases, a Tier 3 company may install its own switch and move into
the Tier 2 category.
According to data included in Long Distance Market Shares, Third Quarter
1996, an FCC report issued in January 1997, while long distance revenue grew
at a compound annual rate of approximately 6% during the period from 1989
through 1995, the revenue of all carriers other than the Tier 1 carriers grew
in the aggregate at a compound rate of approximately 17% during the same
period. This analysis also stated that the Tier 2 and Tier 3 carriers
increased their market share fivefold over an 11-year period, increasing from
less than 3% in 1984 to more than 14% in 1995. The Tier 2 and Tier 3 carriers
generated 1995 revenue of approximately $10.2 billion.
Operator services companies concentrate on providing operator services and
other communications services to long distance industry, private pay phone
operators, prisons and credit card companies. These carriers also manage their
own networks and switching networks and switching equipment while leasing
virtually all of their facilities.
Competition in the retail long distance industry is based upon pricing,
customer service, network quality and valued-added services, creating
opportunities for smaller long distance providers. Sales efforts of long
distance companies focus increasingly on telemarketing and the use of
independent contractors rather than full-time employees. This has created an
opportunity for smaller companies to compete in certain segments of the long
distance market, and many of them are quickly able to build sizable customer
bases on the strength of their marketing efforts and distribution channels.
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BUSINESS
The Company is a facilities-based provider of communications services to
interexchange carriers and other communications entities, businesses and
consumers, and it constructs and installs fiber optic communications systems
for interexchange carriers and other communications entities, as well as for
its own use. The Company is expanding its existing long distance network into
the Qwest Network, a coast-to-coast, technologically advanced, fiber optic
telecommunications network. The Company will employ, throughout substantially
all of the Qwest Network, a self-healing SONET four-fiber ring architecture
equipped with the most advanced commercially available fiber and transmission
electronics manufactured by Lucent and Nortel, respectively. The Qwest
Network's advanced fiber and transmission electronics are expected to provide
the Company with lower installation, operating and maintenance costs than
older fiber systems in commercial use today. In addition, the Company has
entered into construction contracts for the sale of dark fiber along the route
of the Qwest Network, which will reduce the Company's net cost per fiber mile
with respect to the fiber it retains for its own use. As a result of these
cost advantages, the Company believes it will be well-positioned to capture
market share and take advantage of the rapidly growing demand for long haul
voice and data transmission capacity.
The executive offices of Qwest Communications International Inc., a Delaware
corporation, are located at 555 Seventeenth Street, Suite 1000, Denver, CO
80202, and its telephone number is (303) 291-1400. The Company's web site is
http://www.qwest.net.
OPPORTUNITIES
The Company believes that demand from interexchange carriers and other
communications entities for advanced, high bandwidth voice, data and video
transmission capacity will increase over the next several years due to
regulatory and technical changes and other industry developments. These
anticipated changes and developments include: (i) continued growth in capacity
requirements for high speed data transmission, ATM and Frame Relay services,
Internet and multimedia services and other new technologies and applications;
(ii) continued growth in demand for existing long distance services; (iii)
entry into the market of new communications providers; (iv) requirements of
the four principal nationwide carriers (AT&T, MCI, Sprint and WorldCom) to
replace or augment portions of their older systems; and (v) reform in
regulation of domestic access charges and international settlement rates,
which the Company expects will lower long distance rates and fuel primary
demand for long distance services.
. Accommodation of the Internet and Other New Applications. The Company
believes that additional network transmission capacity and faster
response times will be required to accommodate multimedia (voice, data
and video) and other potential high-bandwidth applications, such as
increasing use of the Internet by commercial users, the deployment of
corporate intranets and the use of telecommunications infrastructure for
providing cable television and other entertainment services. The Company
believes this growth will result in increased demand for high-bandwidth
dedicated circuits and other network services provided by the Company
(such as Frame Relay and ATM).
. Base Growth of Existing Providers. The domestic long distance industry
generated approximately $72 billion in total revenue in 1995, according
to a report published by the FCC. The report states that total long
distance revenue grew at a compound annual rate of approximately 6%
during the period 1989 through 1995, while the revenue of all carriers
other than the four Tier 1 carriers, many of which lease network capacity
from facilities-based carriers such as the Company, grew in the aggregate
at a compound annual rate of over 17% during the same period. The carrier
wholesale services segment of the industry generated revenue of
approximately $4.4 billion in 1995 according to a report by the Yankee
Group, a leading market
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research firm, which represented an increase of 7% over 1994 revenue. The
revenue increases were achieved against a backdrop of declining unit
prices for most telecommunications services, which suggests that the
demand for telecommunications bandwidth has increased at an even higher
rate. The Company believes that these growth trends generally will
continue and that certain companies that do not own most of their networks
have potential needs to invest in network facilities or lease high
bandwidth network capacity in order to remain competitive. In addition,
the Company believes that the Qwest Network will allow the Company to
offer an attractive alternative for leased capacity simply to meet current
levels of demand for wholesale telecommunications services.
. Capacity Required by New Entrants. Competition and deregulation are
bringing new entrants into the telecommunications market. The Company
anticipates that this trend will accelerate as a result of the Telecom
Act of 1996. The Telecom Act of 1996 allows the RBOCs and the General
Telephone Operating Companies to enter the long distance business and
enables other entities, including entities affiliated with power
utilities and ventures between LECs and cable television companies, to
provide an expanded range of telecommunications services. As these
entities emerge as long distance competitors, the Company believes they
will need their own facilities and additional high-bandwidth capacity to
compete effectively with facilities-based providers.
. Augmentation of Older Systems. The coast-to-coast fiber systems currently
operated by the Tier 1 carriers were constructed for the most part prior
to 1990, using standard, single mode fiber. Most of these systems were
buried directly in the ground without protective conduit. The conversion
of these older systems to the use of SONET ring architecture requires
increasingly more bandwidth over additional route miles. Accordingly, the
Company believes that the Tier 1 carriers will generally need to replace
or augment parts of their networks to add more capacity, route diversity
and redundancy to their systems and to lower their overall operating
costs. The Company believes that the older, legacy systems operated by
certain of the Tier 1 carriers generally face certain other disadvantages
when compared to the Qwest Network, such as: (i) lower transmission
speeds, lower overall capacity and shorter distances between
regeneration/amplifier facilities; (ii) more costly maintenance
requirements; (iii) greater susceptibility to system interruption from
physical damage to the network infrastructure; and (iv) greater
difficulty in upgrading to more advanced fiber due to lack of a spare
conduit.
. Access Charge and International Settlement Rate Reform. The Company
anticipates that primary demand for long distance services will be
stimulated by reforms of domestic access charges and international
settlement rates and recent international trade negotiations. As long
distance prices decline, the Company expects that overall demand for its
services by carriers, businesses and consumers will increase.
STRATEGY
The Company's objective is to become a leading, coast-to-coast facilities-
based provider of communications services to other communications providers,
businesses and consumers. To achieve this objective, the Company intends to:
. Deploy a Technologically Advanced Network. The Company believes the
technical characteristics of the Qwest Network will enable it to provide
highly reliable services to interexchange carriers and other
communications entities at low per unit costs as it expands its customer
base and increases network traffic volume. For instance, the Qwest
Network's advanced fiber optic cable and electronic equipment permit high
capacity transmission over longer distances between
regeneration/amplifier facilities than older fiber systems. This
translates into generally lower installation and operating costs. These
costs typically constitute a significant portion of the overall cost of
providing telecommunications services.
. Build on Network Construction Expertise and Existing Network Assets. The
Company has built over 5,600 route miles of telecommunications conduit
systems over the last eight years for itself
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and major interexchange carriers including AT&T, MCI, Sprint and WorldCom.
Network Construction Services currently employs over 530 experienced
construction personnel led by a six-member senior construction management
team with combined construction experience of over 140 years. The Company
utilizes its own fleet of railroad equipment and has in place railroad and
other right-of-way agreements covering over 87% of the Qwest Network and
already has installed approximately 42% of the route miles of conduit
required for the Qwest Network. In addition, the Company has fixed-price
supply agreements for the provision of all the fiber and transmission
electronics necessary to construct and activate the Qwest Network.
. Establish Low Cost Position. The Company has entered into three major
construction contracts for the sale of dark fiber in the Qwest Network
that will allow the Company to achieve a low net capital investment in
the Qwest Network and share future operating and maintenance costs.
Earnings from these agreements will reduce the Company's net cost per
fiber mile with respect to the fiber that it retains for its own use. The
Company believes that this network cost advantage, coupled with the
operating and maintenance cost advantages of owning an entirely new
network with advanced fiber and equipment uniformly deployed systemwide,
will enable it to establish a low cost position in the long distance
industry relative to its competitors.
. Build on Management Experience. The Company's management team and board
of directors include individuals with significant experience at major
telecommunications companies. Mr. Joseph Nacchio became the Company's
President and Chief Executive Officer in January 1997. Mr. Nacchio was
Executive Vice President of the Consumer and Small Business Division at
AT&T, where he was employed for 27 years prior to joining the Company.
Mr. Nacchio has extensive management experience in marketing, sales,
network operations and engineering, having served as Chief Engineer and a
Vice President of Network Operations at AT&T. Mr. Richard T. Liebhaber,
who was a Director and served as Executive Vice President and Chief
Strategy and Technology Officer of MCI until his retirement in 1995, is a
Director of Qwest. He is providing technical advisory services to the
Company under a consulting agreement. See "Management."
. Grow Carrier Revenue Base. The Company is currently focusing on expanding
Carrier Services to increase its revenue stream and reduce per unit
costs, targeting short-term capacity sales on a segment-by-segment basis
as the Qwest Network is deployed and activated, and is increasingly
seeking longer-term, high volume capacity agreements from major carriers.
In addition to traditional telecommunications carriers, the Company is
marketing to Internet service providers and other data service companies.
. Develop Commercial Services. The Company plans to build on its Carrier
Services experience to expand its presence in the Commercial Services
market by creating a distinctive brand identity for "Qwest" and
aggressively marketing its existing and planned voice, data and other
transmission products and services. The Company plans to build direct end
user relationships by developing strong distribution channels, providing
competitive pricing and superior network quality and offering enhanced,
market-driven services to businesses and consumers.
THE QWEST NETWORK
The Company's network infrastructure currently includes, among other assets:
(i) approximately 5,300 route miles of conduit in place, consisting of
approximately 900 route miles of lit fiber systems, one in California, the Cal-
Fiber system, carrying traffic between Los Angeles and Sacramento, and the
other in Texas connecting Dallas and Houston, approximately 2,500 route miles
of dark fiber installed in conduit, and approximately 1,900 route miles of
vacant conduit; (ii) right-of-way agreements in place for approximately 5,900
additional route miles of planned construction for the Qwest Network; (iii) an
approximately 3,500 mile operating digital microwave system (the "Microwave
System"); (iv) approximately 15,000 DS-3 miles of fiber transmission capacity
leased by the Company from other carriers, used primarily to extend the
Company's switched services for originating and terminating traffic beyond the
boundaries of the Company's lit fiber network; and (v) five digital switches.
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Construction of the Qwest Network is scheduled to be completed by late 1998.
Under the Company's current plans, the Qwest Network will extend approximately
13,000 route miles coast-to-coast and connect 92 metropolitan areas that
represent approximately 65% of the originating and terminating long distance
traffic in the United States. Through a combination of the Qwest Network and
leased facilities, the Company will continue to offer interstate services in
all 48 contiguous states. The Qwest Network also will connect to three trans-
Atlantic cable heads and two trans-Pacific cable heads, as well as cross-
border points to Canada and Mexico. These connections will allow Qwest to
participate in the anticipated growth in demand for international long
distance data and voice services.
The Company plans to transfer carrier and retail switched services provided
on leased facilities onto the Qwest Network as the Company activates its own
facilities. As the Qwest Network is completed, the Company may use the
Microwave System to serve certain smaller markets contiguous to the Qwest
Network and to feed traffic onto the Qwest Network.
The physical components of the Qwest Network are: (i) high density
polyethylene conduit, which is hollow tubing 1 1/2^ to 2^ in diameter; (ii)
fiber optic cable, which consists of fiber strands placed inside a plastic
sheath and strengthened by metal; (iii) electronic equipment necessary to
activate the fiber for transmission; (iv) switches that enable the Company to
provide switched services to carrier and commercial customers; and (v) 92
points of presence, which allow the Company to concentrate customers' traffic
at locations where the Company does not have switches and carry the traffic to
switching centers over the Qwest Network.
Advanced Technology. The Company is installing technologically advanced
fiber optic cable and electronic equipment in a uniform configuration
throughout the Qwest Network, using an advanced network management system. The
Qwest Network's technologies include Lucent's non-zero dispersion shifted
fiber and Nortel's dense wave division multiplexing, forward error correction
technology and SONET four-fiber ring technology that enable the highest
commercially available capacity transmission (OC-192 level) and data integrity
level (10-/1//5/ Bit Error Rate).
The Qwest Network is designed for superior security and reliability, based
on (i) bi-directional SONET four-fiber ring architecture, a self-healing
system that allows for instantaneous rerouting and virtually eliminates
downtime in the event of a fiber cut; (ii) fiber cable installed in high
density polyethylene conduit generally buried 42^-56^ below the ground; and
(iii) extensive use of railroad rights-of-way, which typically offer greater
protection of the fiber system than other systems built over more public
rights-of-way such as highways, telephone poles or overhead power transmission
lines.
The Qwest Network is designed for expandability and flexibility and will
contain two conduits along substantially all of its route. The first conduit
will contain a cable generally housing at least 96 fibers, and the second
conduit will serve as a spare. The spare conduit will allow for future
technology upgrades and expansion of capacity at costs significantly below the
cost of new construction. After existing and anticipated dark fiber sales, the
Company generally plans to retain a minimum of 48 fibers for its own use in
the Qwest Network. With the combined use of non-zero dispersion shifted fiber,
dense wave division multiplexing and high bit rate transmission electronics,
each of the fibers retained by the Company can achieve substantially greater
capacity per fiber than standard, single mode fiber now in use.
The Company monitors its current network, and will monitor the Qwest
Network, 24 hours a day, seven days a week from its Network Management Center
in Denver, Colorado. This facility provides centralized network surveillance,
troubleshooting and customer service, using technology that enables the
Company to reduce service costs and customer downtime. The system currently
allows the Company's technicians to detect a component malfunction in the
Qwest Network, quickly reroute the customer to an available alternate path and
effect an expedited repair. Upon completion of the Qwest Network with its
SONET four-fiber ring architecture, the rerouting function will be fully
automated. In addition, the Company is deploying new management tools,
including Nortel's Integrated Network
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Management Solutions, that will give the Company's Carrier Services customers
the ability to monitor and reconfigure their leased capacity on an essentially
real time basis from their own network management centers and the ability to
rapidly increase or reduce bandwidth to better match their needs. The
available software features equipment inventory management, bandwidth
inventory management, configuration management, fault isolation management,
"point-and-click" provisioning on partitioned network and alarm monitoring.
The Company also has a facility in Dallas that monitors the Microwave System.
The Company currently maintains a staff of approximately 170 technicians and
other related personnel across the system to provide maintenance and technical
support services.
Railroad Rights-of-Way. The Company has right-of-way agreements in place
that provide it with access to over 30,000 track miles. The Company believes
that use of railroad rights-of-way, along with the protective conduit, give
the Company inherent advantages over other systems built over more public
rights-of-way, such as highways, telephone poles or overhead power
transmission lines. These advantages include higher security for the Qwest
Network and greater protection of the fiber system.
Railroad rights-of-way also provide the Qwest Network generally with a
direct, continuous route between cities. This eliminates the potential need,
and the associated time and costs, to piece together rights-of-way using a
combination of agreements with private owners and state or municipal agencies.
In addition, railroad rights-of-way typically extend into downtown areas of
cities that are strategically important to the Company. The Company's right-
of-way agreements provide for continuing or lump-sum cash payments, exchanges
of rights-of-way for network capacity or a combination of both. The Company
has other right-of-way agreements in place, where necessary or economically
preferable, with highway commissions, utilities, political subdivisions and
others.
Between 70% and 80% of the Qwest Network will be installed on railroad
rights-of-way. The Company has in place agreements for over 87% of the rights-
of-way needed for completion of the Qwest Network. The remaining rights-of-way
needed for completion of the Qwest Network consist of approximately 1,600
route miles located primarily in the Midwest and Mid-Atlantic regions. The
Company has identified alternative rights-of-way for these route miles and is
currently in negotiations with respect to all of them.
Network Installation. The Company's network installation process along
railroad rights-of-way combines traditional railroad activities and modern
engineering and building techniques. The Company employs over 530 experienced
construction personnel and uses its own fleet of railroad equipment. The
Company supplements these personnel with independent contractors.
The Company generally installs conduit on railroad rights-of-way with a
"plow train." Plow trains consist of locomotives, plow cars and several supply
cars. The locomotives are used in a traditional manner to pull the plow train
along the railroad track. The plow cars are engineered to accommodate a large
plow that extends from the side of the car. The plow is lowered into the
ground and digs a trench as the locomotives pull the plow train forward. The
supply cars carry the supply of conduit and other construction materials
needed to construct the fiber route and are designed to continuously feed
supplies to the plow cars.
A plow car travels along the railroad track and simultaneously plows a
trench approximately 42^-56^ deep and approximately eight feet from the
nearest rail, feeds multiple conduits into the trench, buries a warning tape
approximately a foot from the surface, and backfills the land to its original
contour. A plow can cover up to four miles a day, depending on the
availability of track time and the severity of the terrain.
In situations where the conduit must be laid across a bridge or through a
tunnel, the Company typically places the conduit in a galvanized steel pipe,
and the pipe is attached to the side of the bridge or along the tunnel floor
or wall. When the conduit must be run under rivers or other obstructions, the
Company's installation personnel use directional boring techniques to bore
small tunnels underneath the rivers or obstructions and feed the conduit
through the completed tunnels.
After the conduit has been buried along the railroad track (or attached to a
bridge or tunnel), the fiber optic cable is installed or "pulled" through the
conduit. The Company accomplishes this through
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the use of access boxes that are installed along the Qwest Network at
approximately one mile intervals. These access boxes also allow Company
employees to make repairs or replace or install additional fiber. The access
boxes typically contain an additional loop of the fiber cable to provide slack
in the system to accommodate displacement, disruption or movement of the
conduit as a result of digging or excavation activities, floods, earthquakes
or other events. The presence of the additional fiber cable reduces the risk
that the cable will be cut or broken.
For routes not using railroad rights-of-way, the Company uses "tractor
plows." Tractor plows are tractor pulled plow vehicles equipped to plow
trenches and install conduit. Tractor plows also may be used in certain places
along railroad rights-of-way depending on space, availability of track time
and other factors. These tractor plows generally perform the same functions in
a similar manner as the rail plows.
Railroad rights-of-way, which are usually less accessible to the public than
highways and less vulnerable to physical damage than aerial systems installed
along telephone poles or overhead power transmission lines, reduce the risk of
outside interference or damage to the Company's conduit. The Company has also
implemented a "Call Before U Dig" ("CBUD") program, backed up by its 24-hour
Network Management Center to reduce the risk of damage to the conduit or fiber
system. Additionally, above ground markers are placed at frequent intervals
along the route of the Qwest Network.
Dark Fiber Sales. The Company has entered into agreements with Frontier,
WorldCom and GTE whereby each is purchasing dark fiber along the Qwest
Network. The proceeds from construction contracts for the sale of dark fiber
will provide cash for a significant portion of the total estimated costs to
construct the Qwest Network and complete construction relating to the dark
fiber sold to Frontier, WorldCom and GTE, and are expected to provide the
Company with a strategic network cost advantage on the fibers that the Company
retains for the Qwest Network. The Frontier and GTE agreements each provide
for the purchase of 24 fibers along all of the route of the Qwest Network. The
WorldCom agreement provides for the purchase of 24 fibers along certain
selected segments of the Qwest Network and 36 fibers along other selected
segments. Frontier had an option to purchase an additional 24 fibers along the
entire route of the Qwest Network, which option expired in April 1997. The
Company subsequently entered into the GTE agreement, under which GTE purchased
these 24 fibers. Each contract requires the purchaser to pay an aggregate
price consisting of an initial payment followed by installments during the
construction period based on the Company's achievement of certain milestones
(e.g., conduit installation and fiber splicing), with final payment for each
segment made at the time of acceptance. Each agreement contains provisions
establishing construction specifications and fiber splicing, testing and
acceptance procedures and requiring the Company to maintain rights-of-way with
respect to the system route for the economically useful life of the fibers
sold. Each agreement also provides for the sharing of certain maintenance
costs. The Frontier and GTE contracts also provide for sharing of certain
operating costs. The agreements establish anticipated delivery dates for
construction and delivery of segments along the route of the Qwest Network.
Delivery may be extended under each contract for force majeure events. The
Frontier and GTE contracts provide for reduced payments in the event of delay
or non-delivery of segments and, in certain circumstances, penalties of
varying amounts depending upon the reason for the delay or non-delivery, and
allow Frontier and GTE to delete any non-delivered segment from the system
route to be delivered. The Company has executed performance bonds in favor of
Frontier. In addition, if Frontier or GTE fails to make payment with respect
to any segment, the Company may terminate Frontier's or GTE's rights relating
to all remaining undelivered segments. Frontier's parent company, Frontier
Corporation, has guaranteed payment of Frontier's payment obligations under
the contract.
The Company believes that significant opportunities exist to sell additional
dark fiber throughout the Qwest Network and management has identified and is
in various stages of negotiations with potential customers. However, the
Company does not expect to enter into additional agreements of the size and
scope of the Frontier and GTE contracts. These potential customers include
other
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interexchange carriers, cable, entertainment and data transmission companies,
RBOCs, ISPs, LECs and CLECs. The Company believes that these potential
customers will view the Company, with its construction capabilities and
emphasis on being a "carrier's carrier," as an attractive source for certain
of their long distance transmission needs. In order to meet the needs of this
diverse group of customers, the Company expects to offer a wide variety of
pricing and system options to meet specific needs of each customer. For
example, customers may purchase or lease dark fiber or purchase capacity on a
short- or long-term basis.
Generally, the Company's plans provide for the installation of 96 fibers
along the entire route of the Qwest Network. The Frontier and GTE agreements
each provide for the purchase of 24 fibers along all of the route of the Qwest
Network. The WorldCom agreement provides for the purchase of 24 fibers along
certain selected segments of the Qwest Network and 36 fibers along other
selected segments. Several smaller construction contracts for sales of dark
fiber provide for the sale of smaller numbers of fibers over a more limited
number of segments. In segments where the Company agrees under construction or
sales contracts to sell more than 48 fibers, it generally will install more
than 96 fibers so that it can retain 48 fibers for its own use along
substantially all of the route of the Qwest Network.
With the installation of the advanced transmission electronics contracted to
be purchased from Nortel, the fibers initially activated by Qwest will have a
transmission capacity of 20 gigabits per second, which will more than
accommodate the growth in Carrier Services and Commercial Services anticipated
by the Company over the next five years. If the Company fully activated all of
its retained fibers by installing additional amounts of the same transmission
electronics, which is not currently planned, it could further expand the
transmission capacity to approximately two terabits per second.
Build-Out Plan for the Qwest Network. The Company estimates the total cost
to construct and activate the Qwest Network and complete construction of the
dark fiber sold to Frontier, WorldCom and GTE will be approximately $1.4
billion. Of this amount, the Company had already expended approximately $300.0
million as of April 30, 1997. The Company anticipates remaining total cash
outlays for these purposes of approximately $600.0 million in 1997 and $500.0
million in 1998. Estimated total expenditures for 1997 include the Company's
commitment to purchase a minimum quantity of fiber for approximately $257.0
million (subject to quality and performance specifications), of which
approximately $80.0 million had been expended as of April 30, 1997. Estimated
total expenditures for 1997 and 1998 together also include $100.0 million for
the purchase of electronic equipment. In addition, the Company anticipates
approximately $97.0 million of capital expenditures in 1997 and 1998 to
support growth in Carrier Services and Commercial Services.
As of the date of this Prospectus, the Company has obtained the following
sources of funds to complete the build-out: (i) approximately $1.0 billion
under the Frontier, WorldCom and GTE contracts and additional smaller
construction contracts for sales of dark fiber, of which approximately $177.0
million had already been paid and $842.0 million remained to be paid at April
30, 1997; (ii) $90.0 million of vendor financing; and (iii) $117.8 million in
net proceeds from the sale on March 31, 1997 of $250.0 million in principal
amount of the Notes remaining after repayment of certain existing debt.
The Company expects to finance the construction of the Qwest Network, as
well as its debt service and working capital needs, primarily through a
combination of the funding sources identified above, proceeds from the
Offerings and future borrowings.
With the completion of the 13,000 route mile network, Qwest will provide
services nationally to its customers primarily over its own facilities using
leased facilities in those portions of the country not covered by the Qwest
Network. Qwest will continue to evaluate the economics of extending its core
network versus continuing to lease network capacity. In this regard, the
Company is considering
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extensions in the Southeast United States, the California Valley and, perhaps,
the Pacific Northwest. The Company has made no final decisions in this regard,
and any decisions would be dependent, among other things, upon the Company's
assessment of the potential for dark fiber sales or long-term leases of high
volume capacity and the availability of additional capital on acceptable
terms.
CARRIER SERVICES
General. The Company has been positioned historically in the long distance
business as a "carrier's carrier," providing dedicated line and switched
services to other carriers over the Company's owned or leased fiber optic
network facilities. Management believes that the Company has earned a
reputation of providing quality services at competitive prices to meet
specific customer needs. Total revenues from Carrier Services were
approximately $57.6 million, $67.8 million and $50.2 million for the years
1996, 1995 and 1994, respectively, and approximately $11.2 million and $18.5
million for the three months ended March 31, 1997 and 1996, respectively.
Products. Products offered by Carrier Services fall into three primary
categories: (i) high volume capacity services; (ii) conventional dedicated
line services; and (iii) switched services.
. High Volume Capacity Services. The Company provides high volume
transmission capacity at or above the OC-3 level (or its equivalent)
through service agreements for terms of one year or longer. As the Qwest
Network is deployed, the Company also is targeting potential large users
in the inter-LATA market that may seek to augment their own networks or
provide diverse routing alternatives in strategic areas of their systems.
. Conventional Dedicated Line Services. The Company currently provides
dedicated line services on owned capacity to a wide range of customers at
capacities below the OC-3 level generally for terms of one year or less.
The Company expects the Qwest Network will enable the Company to offer
these services over a significantly expanded geographic area.
. Switched Services. The Company currently provides switched terminating
services over its switched service network to large and small long
distance carriers. The carrier switched terminating service business is
specifically used to increase volume on the Company's switched service
network to allow for more efficient "trunking" of calls. While the
carrier switched services generate revenue at lower margins than the
dedicated line services, such services facilitate cost effective
management of the Qwest Network.
The Company also plans to provide high speed ATM and Frame Relay data
services to Internet Service Providers by installing ATM and Frame Relay
switching equipment following completion of the Company's coast-to-coast
backbone route at the end of 1997.
Customers. Carrier Services' customer base in the inter-LATA carrier market
consists of the following:
. Tier 1 and Tier 2 Carriers. The Company offers high volume transmission
capacity, conventional dedicated line services and dedicated switched
services to the Tier 1 and Tier 2 carriers on a national or regional
basis. As RBOCs enter the long distance market, the Company believes they
will be potential customers to lease high volume capacity from the
Company on a national basis.
. Tier 3 Carriers. The Company currently offers switchless resale services
to Tier 3 carriers on a limited basis. The Company anticipates that this
business will expand as coverage of the Company's switched network grows.
. Internet Service Providers. The Company believes that ISPs will become
customers for significant high volume capacity. The Company is providing
capacity at the OC-3 level on its Cal-Fiber system under a recently
signed contract with an ISP.
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. Operator Services Companies and Other Niche Companies. These companies
concentrate on providing operator services and other communications
services to the long distance industry, private payphone operators,
prisons and credit card companies. These carriers also manage their own
networks and switching equipment while leasing virtually all of their
transmission facilities. The Company provides transmission services to
these carriers.
Service Agreements. The Company provides high volume transmission capacity
services through service agreements for terms of one year or longer. Dedicated
line services are generally offered under service agreements for an initial
term of one year. High volume capacity service agreements and dedicated line
service agreements generally provide for "take or pay" monthly payments at
fixed rates based on the capacity and length of circuit used. Customers are
typically billed on a monthly basis and also may incur an installation charge
or certain ancillary charges for equipment. After contract expiration, the
contracts may be renewed or the services may be provided on a month-to-month
basis. Switched services agreements are generally offered on a month-to-month
basis and the service is billed on a minutes-of-use basis. Revenues from
carrier customers that are billed on a minutes-of-use basis have the potential
to fluctuate significantly based on changes in usage that are highly dependent
on differences between the prices charged by the Company and its competitors.
The Company, however, has not experienced significant fluctuations to date.
COMMERCIAL SERVICES
General. The Company began offering Commercial Services in 1993. Commercial
Services focuses primarily on the sale of inter-LATA long distance services to
the retail market, principally to small- and medium-sized businesses and to
consumers. The Company currently provides facilities-based services along the
Cal-Fiber and Texas routes, and is a switch based reseller elsewhere. Total
revenues from Commercial Services were approximately $34.3 million, $20.4
million and $8.7 million in 1996, 1995 and 1994, respectively, and
approximately $9.4 million and $7.0 million in the three months ended March
31, 1997 and 1996, respectively. The Company plans to transfer carrier and
commercial switched traffic from leased facilities onto the Qwest Network as
it is activated. As traffic volumes increase and the Company carries a greater
percentage of traffic on the Qwest Network, the Company believes it will
realize economies of scale and thereby lower its cost of sales as a percentage
of revenue. See "Risk Factors--Risks Related to Completing the Qwest Network;
Increasing Traffic Volume."
Products. The Company markets the following products:
. One Plus. This basic service offers customers the ability to make
outbound long distance calls from any local telephone line by simply
dialing a 1, plus the area code and phone number. Customers select the
Company as their primary long distance provider by placing an order with
it. This service may be used for both domestic and international calling.
. 10XXX. This service allows the customer to access the Qwest Network by
dialing 10056 plus 1, plus the area code and phone number, with no need
to change their primary long distance provider. These customers are
solicited through direct mailing and receive a sticker to place on their
phones.
. Dedicated Access Service. These lines are designed for larger users with
enough traffic volume to warrant the use of a dedicated access line to
originate calls. Instead of a switched access line that is shared by many
users, this service uses a high capacity line that is used exclusively to
connect between the end user and the long distance carrier's switch. This
results in lower originating access cost and reduced rates to the user.
. Toll Free 800/888. This inbound service, where the receiving party pays
for the call, is accessed by dialing an 800/888 area code. This is used
in a wide variety of applications, many of which generate revenue for the
user (such as reservation centers or customer service centers). The
Company plans to introduce additional enhanced features such as call
routing by origination point, time of day routing and other premium,
high-margin features in 1997.
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. Calling Card. These traditional, basic telephone calling cards allow the
user to place calls from anywhere in the United States or Canada. The
Company offers additional higher margin features such as conference
calling, international origination, information service access (such as
weather or stock quotes), speed dialing and voice messaging.
. Prepaid Card. Prepaid cards allow a customer to purchase and pay in
advance for a card with a fixed amount of calling time. The card is then
used as a standard calling card. Prepaid cards may be purchased with
enhanced features similar to those of calling cards and also may be
renewed by purchasing additional time.
. International Callback. This service operates by allowing a customer in a
foreign country to place a toll-free call to the U.S. and be "called
back" by the Company's equipment. The Company charges a rate similar to
that which the customer would pay if the call were originally initiated
in the U.S., allowing the customer to take advantage of the fact that the
rates for calling from the U.S. to many foreign destinations are lower
than the cost of the same call if it were originated in the foreign
country.
. Media Express(TM). This is an exclusive switched digital broadband
service that provides variable bandwidth for video communications and
other data applications on demand and allows users to control all the
required components of a video conference from a personal computer.
Other services offered by Commercial Services include audio conferencing,
operator services, directory assistance, special rate structures, custom
services, special contract pricing and special local access arrangements in
selected markets. In addition, the Company intends to develop and offer
additional value-added services to its customers, particularly business
customers, to differentiate the Company from its competitors and enhance
Commercial Services' profit margins. The Company also is evaluating and
intends to introduce in the future a variety of services specifically designed
to capture a share of the growing data networking market.
Customers. The Company is currently targeting businesses spending up to
$1,000 per month on long distance and intends to expand this target segment in
early 1998 to businesses spending from $2,000 to $10,000 per month on long
distance. The strategy of Commercial Services is to develop a customer base in
geographic proximity to the Qwest Network.
NETWORK CONSTRUCTION SERVICES
General. The Company's Network Construction Services operations commenced in
1988 with the construction of conduit systems for major interexchange
carriers. Since then, Network Construction Services has served as the platform
for the Company's expansion into Carrier Services and, since 1993, Commercial
Services. Total revenue from Network Construction Services were approximately
$139.2 million, $36.9 million and $11.9 million for the years ended 1996, 1995
and 1994, respectively, and approximately $52.1 million and $9.1 million for
the three months ended March 31, 1997 and 1996, respectively.
The Company has built for itself and other carriers approximately 5,600
route miles of telecommunications conduit systems principally along railroad
rights-of-way. Management believes that this experience and expertise create
competitive advantages for the Company in the construction, ongoing
maintenance and operation of the Qwest Network.
Products. The principal product of Network Construction Services
historically has been turn-key conduit systems built for other carriers. In
most cases, while fulfilling customer contracts, the Company installed
additional conduit that it retained for its own use. The Company is using its
Network Construction Services resources to implement its strategic plan to
complete the Qwest Network, in addition to providing Network Construction
Services to third party customers along Qwest Network routes.
Commencing in 1996, the Company began selling dark fiber to
telecommunications entities to help fund development of the Qwest Network. In
1996, the Company's Network Construction Services revenue was derived largely
from two principal dark fiber sales contracts with Frontier and WorldCom. The
Company expects that these two contracts, along with the May 1997 contract
with GTE, will
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generate the majority of Network Construction Services revenue in 1997 and
1998. In addition, the Company expects to generate additional revenue through
the sale of dark fiber along various segments of the Qwest Network to other
carriers.
Customers. Network Construction Services customers historically have been
primarily interexchange carriers, as well as major LECs and other
telecommunications companies. For the year ended December 31, 1996, WorldCom
was the Company's largest single Network Construction Services customer,
accounting for 27.8% of the Company's consolidated gross revenue, and Frontier
accounted for 26.3% of the Company's consolidated gross revenue. No other
customers accounted for more than 10% of consolidated gross revenue. For the
year ended December 31, 1995, MCI was the Company's largest single customer,
accounting for 35.4% of consolidated gross revenue. No other customer
accounted for more than 10% of consolidated gross revenue in 1995. For the
year ended December 31, 1994, WorldCom was the Company's largest single
customer, accounting for 18% of consolidated gross revenue. No other customer
accounted for more than 10% of consolidated gross revenue in 1994. In the
first three months of 1997, Frontier was the largest single customer,
accounting for 59.0% of the Company's consolidated gross revenue, with
WorldCom accounting for 8.8%.
SALES AND MARKETING
The Company sells network dedicated and switched services to carriers
through its carrier sales organization. This organization consists of senior
level management personnel and experienced sales representatives with
extensive knowledge of the industry and key contacts within the industry at
various levels in the carrier organizations. The Company also markets its
construction services for dark fiber and conduit systems through its carrier
sales organization. Contacts are made primarily through individual premises
visits and at meetings of trade associations that serve large carriers.
In Commercial Services, the Company currently solicits targeted businesses
through telemarketing personnel and independent contractors and will establish
a direct sales channel as it expands its targeted segment to higher volume
users. Consumer customers currently are solicited by the Company through a
combination of direct marketing and independent contractors. The Company plans
to build on its Carrier Services experience to expand its presence in the
Commercial Services market by creating a distinctive brand identity for
"Qwest" and aggressively marketing its existing and planned voice, data and
other transmission products and services. The Company plans to build direct
end user relationships by developing strong distribution channels, providing
competitive pricing and superior network quality and offering enhanced,
market-driven services to businesses and consumers.
COMPETITION
There are currently four principal facilities-based long distance fiber
optic networks. The Company is aware that others are planning additional
networks that, if constructed, could employ similar advanced technology as the
Qwest Network. Upon completion of the Qwest Network, each of Frontier and GTE
will have a fiber network similar in geographic scope and potential operating
capability to that of the Company. Another competitor is constructing, and has
already obtained a significant portion of the financing for, a fiber optic
network. The scope and capacity of that competitor's network, as publicly
announced, is less than that of the Company, and does not contain all of the
advanced technologies designed for the Qwest Network, but nevertheless is
expected to compete directly with the Qwest Network for many of the same
customers along a significant portion of the same routes.
The Company's competitors in Carrier Services include many large and small
interexchange carriers. The Company's Carrier Services business competes
primarily on the basis of pricing, transmission quality, reliability and
customer service and support. Commercial Services has been and expects to
continue to be a provider of high quality, low cost service primarily to
small- and medium-sized business customers and consumers. The Company intends
to move into the market for higher volume business customers as the Qwest
Network is completed and new products are introduced. In recent years the
small- and medium-sized business market has experienced increased competition.
The industry wide changes in technology and the effects of deregulation
resulting from the Telecom
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Act of 1996 are likely to further increase competition. Many of the Company's
competitors and potential competitors have financial, personnel and other
resources substantially greater than those of the Company. See "Risk Factors--
Competition" and "Industry Overview--Telecommunications Markets."
In the future, the Company may be subject to additional competition due to
the development of new technologies and increased supply of domestic and
international transmission capacity. The telecommunications industry is in a
period of rapid technological evolution, marked by the introduction of new
product and service offerings and increasing satellite transmission capacity
for services similar to those provided by the Company. The Company cannot
predict which of many possible future product and service offerings will be
important to maintain its competitive position or what expenditures will be
required to develop and provide such products and services.
High initial network cost and low marginal costs of carrying long distance
traffic have led to a trend among nonfacilities-based carriers to consolidate
in order to achieve economies of scale. Such consolidation could result in
larger, better capitalized competitors. However, the Company believes that
such competitors would also be stronger prospects as potential Carrier
Services customers.
The Company believes that its railroad rights-of-way offer a more secure
route for the Qwest Network than other types of rights-of-way. There can be no
assurance that competitors will not obtain rights to use railroad rights-of-
way for expansion of their networks, although the Company believes that it
would involve significant time and effort for competitors to assemble railroad
rights-of-way comparable to those that the Company already has available for
the Qwest Network.
PROPERTIES
The Qwest Network in progress and its component assets are the principal
properties owned by the Company. The Company owns substantially all of the
telecommunications equipment required for its business. The Company's
installed fiber optic cable is laid under the various rights-of-way held by
the Company. Other fixed assets are located at various leased locations in
geographic areas served by the Company.
The Company's executive, administrative and sales offices and its Network
Management Center are located at its principal office in Denver, Colorado.
Qwest leases this space from an affiliate of Anschutz Company at market rates
under an agreement that expires in August 1999. The Company leases additional
space in Dallas, Texas, housing the headquarters for operation of its
Microwave System.
In December 1995, the Company entered into an agreement (as amended in
January 1997) with Ferrocarriles Nacionales de Mexico whereby the Company was
granted easements for the construction of multiple conduit systems along
railroad rights-of-way within Mexico for consideration of approximately $7.7
million, including $1.1 million in value-added taxes. The Company has
capitalized total costs, including right-of-way, equipment, construction and
design costs, relating to this investment of approximately $13.0 million as of
December 31, 1996.
EMPLOYEES
As of April 30, 1997, the Company employed approximately 900 employees of
which 100 perform corporate and administrative services, 530 provide Network
Construction Services, 80 provide Commercial Services, 10 provide Carrier
Services, and 180 perform network engineering and related functions. The
Company uses the services of independent contractors for installation and
maintenance of portions of the Qwest Network. None of the Company's employees
are currently represented by a collective bargaining agreement. The Company
believes that its relations with its employees are good.
LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to various claims and
proceedings in the ordinary course of business. Based on information currently
available, the Company believes that none of such current claims or
proceedings, individually or in the aggregate, will have a material adverse
effect on the Company's financial condition or results of operations, although
there can be no assurances in this regard.
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REGULATION
GENERAL REGULATORY ENVIRONMENT
The Company's operations are subject to extensive federal and state
regulation. Carrier Services and Commercial Services (but not Network
Construction Services) are subject to the provisions of the Communications Act
of 1934, as amended, including the Telecom Act of 1996, and the FCC
regulations thereunder, as well as the applicable laws and regulations of the
various states, including regulation by PUCs and other state agencies. Federal
laws and FCC regulations apply to interstate telecommunications (including
international telecommunications that originate or terminate in the United
States), while state regulatory authorities have jurisdiction over
telecommunications both originating and terminating within the state. The
regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. Moreover, as
deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to the Company. All of
the Company's operations are also subject to a variety of environmental,
safety, health and other governmental regulations. There can be no assurance
that future regulatory, judicial or legislative activities will not have a
material adverse effect on the Company, or that domestic or international
regulators or third parties will not raise material issues with regard to the
Company's compliance or noncompliance with applicable regulations.
A recent federal legislative change, the Telecom Act of 1996, may have
potentially significant effects on the operations of the Company. The Telecom
Act of 1996, among other things, allows the RBOCs and the General Telephone
Operating Companies to enter the long distance business, and enables other
entities, including entities affiliated with power utilities and ventures
between LECs and cable television companies, to provide an expanded range of
telecommunications services. Entry of such companies into the long distance
business would result in substantial competition to the Company's Commercial
Services and Carrier Services customers, and may have a material adverse
effect on the Company and such customers. However, the Company believes that
the RBOCs' and other companies' participation in the market will provide
opportunities for the Company to sell fiber or lease long distance high volume
capacity.
Under the Telecom Act of 1996, the RBOCs may immediately provide long
distance service outside those states in which they provide local exchange
service ("out-of-region" service), and long distance service within the
regions in which they provide local exchange service ("in-region" service)
upon meeting certain conditions. The General Telephone Operating Companies may
enter the long distance market without regard to limitations by region. The
Telecom Act of 1996 does, however, impose certain restrictions on, among
others, the RBOCs and General Telephone Operating Companies in connection with
their provision of long distance services. Out-of-region services by RBOCs are
subject to receipt of any necessary state and/or federal regulatory approvals
that are otherwise applicable to the provision of intrastate and/or interstate
long distance service. In-region services by RBOCs are subject to specific FCC
approval and satisfaction of other conditions, including a checklist of pro-
competitive requirements. The RBOCs may provide in-region long distance
services only through separate subsidiaries with separate books and records,
financing, management and employees, and all affiliate transactions must be
conducted on an arm's length and nondiscriminatory basis. The RBOCs are also
prohibited from jointly marketing local and long distance services, equipment
and certain information services unless competitors are permitted to offer
similar packages of local and long distance services in their market. Further,
the RBOCs must obtain in-region long distance authority before jointly
marketing local and long distance services in a particular state.
Additionally, AT&T and other major carriers serving more than 5% of
presubscribed long distance access lines in the United States are also
restricted from packaging other long distance services and local services
provided over RBOC facilities. The General Telephone Operating Companies are
subject to the provisions of the Telecom Act of 1996 that impose
interconnection and other requirements on LECs. General Telephone Operating
Companies providing long distance services must obtain regulatory approvals
otherwise applicable to the provision of long distance services.
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FEDERAL REGULATION
The FCC has classified QCC, the Company's principal operating subsidiary, as
a non-dominant carrier. Generally, the FCC has chosen not to exercise its
statutory power to closely regulate the charges, practices or classifications
of non-dominant carriers. However, the FCC has the power to impose more
stringent regulation requirements on the Company and to change its regulatory
classification. In the current regulatory atmosphere, the Company believes
that the FCC is unlikely to do so with respect to the Company's domestic
service offerings.
The FCC regulates many of the charges, practices and classifications of
dominant carriers to a greater degree than non-dominant carriers. Among
domestic carriers, large LECs and the RBOCs are currently considered dominant
carriers for the provision of interstate access services, while all other
interstate service providers are considered non-dominant carriers. On April
18, 1997, the FCC ordered that the RBOCs and independent LECs offering
domestic interstate inter-LATA services, in-region or out-of-region, be
regulated as non-dominant carriers. However, such services offered in-region
must be offered in compliance with the structural separation requirements
mentioned above. AT&T was classified as a dominant carrier, but AT&T
successfully petitioned the FCC for non-dominant status in the domestic
interstate interexchange market in October 1995 and in the international
market in May 1996. Therefore, certain pricing restrictions that once applied
to AT&T have been eliminated. A number of parties have, however, sought the
FCC's reconsideration of AT&T's status. The Company is unable to predict the
outcome of these proceedings on its operations.
As a non-dominant carrier, QCC may install and operate facilities for the
transmission of domestic interstate communications without prior FCC
authorization, so long as QCC obtains all necessary authorizations from the
FCC for use of any radio frequencies. Non-dominant carriers are required to
obtain prior FCC authorization to provide international telecommunications,
and the Company has obtained such authorization for international switched
resale services. The FCC also imposes prior approval requirements on certain
transfers of control and assignments of operating authorizations. Non-dominant
carriers are required to file periodic reports with the FCC concerning their
interstate circuits and deployment of network facilities. The Company is
required to offer its interstate services on a nondiscriminatory basis, at
just and reasonable rates, and remains subject to FCC complaint procedures.
While the FCC generally has chosen not to exercise direct oversight over cost
justification or levels of charges for services of non-dominant carriers, the
FCC acts upon complaints against such carriers for failure to comply with
statutory obligations or with the FCC's rules, regulations and policies. The
Company or any of its operating subsidiaries could be subject to legal actions
seeking damages, assessment of monetary forfeitures and/or injunctive relief
filed by any party claiming to have been injured by the Company's practices.
The Company cannot predict either the likelihood of the filing of any such
complaints or the results if filed.
Under existing regulations, non-dominant carriers are required to file with
the FCC tariffs listing the rates, terms and conditions of both interstate and
international services provided by the carrier. Pursuant to such regulations,
the Company has filed with the FCC tariffs for its interstate and
international services. On October 29, 1996, the FCC adopted an order in which
it eliminated, as of September 1997, the requirement that non-dominant
interstate carriers such as the Company maintain tariffs on file with the FCC
for domestic interstate services, although tariffs for international service
must still be filed. Such carriers were given the option to cease filing
tariffs during a nine-month transition period that concludes on September 22,
1997. The FCC's order was issued pursuant to authority granted to the FCC in
the Telecom Act of 1996 to "forbear" from regulating any telecommunications
service provider if the FCC determines that the public interest will be
served. However, on February 19, 1997, the United States Court of Appeals for
the District of Columbia Circuit suspended the FCC's order pending further
expedited judicial review and/or FCC reconsideration. The Company cannot
predict the ultimate outcome of this or other proceedings on its service
offerings or operations.
On May 8, 1997, the FCC released an order intended to reform its system of
interstate access charges to make that regime compatible with the pro-
competitive deregulatory framework of the
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Telecom Act of 1996. Access service is the use of local exchange facilities
for the origination and termination of interexchange communications. The FCC's
historic access charge rules were formulated largely in anticipation of the
1984 divestiture of AT&T and the emergence of long distance competition, and
were designated to replace piecemeal arrangements for compensating LECs for
use of their networks for access, to ensure that all long distance companies
would be able to originate and terminate long distance traffic at just,
reasonable, and non-discriminatory rates, and to ensure that access charge
revenues would be sufficient to provide certain levels of subsidy to local
exchange service. While there has been pressure on the FCC historically to
revisit its access pricing rules, the Telecom Act of 1996 has made access
reform timely. The FCC's recent access reform order adopts various changes to
its rules and policies governing interstate access service pricing designed to
move access charges, over time, to more economically efficient levels and rate
structures. Among other things, the FCC modified rate structures for certain
non-traffic sensitive access rate elements, moving some costs from a per-
minute-of-use basis to flat-rate recovery, including one new flat rate
element; changed its structure for interstate transport services; and affirmed
that ISPs may not be assessed interstate access charges. In response to claims
that existing access charge levels are excessive, the FCC stated that it would
rely on market forces first to drive prices for interstate access to levels
that would be achieved through competition but that a "prescriptive" approach,
specifying the nature and timing of changes to existing access rate levels,
might be adopted in the absence of competition. The FCC intends to address
these and other related matters in subsequent proceedings. Though the Company
believes that access reform through lowering and/or eliminating excessive
access service charges will have a positive effect on its service offerings
and operations, it cannot predict how or when such benefits may present
themselves, or the outcome of any possible judicial appeal or petition for FCC
reconsideration.
The FCC also released a companion order on universal service reform on May
8, 1997. The universal availability of basic telecommunications service at
affordable prices has been a fundamental element of U.S. telecommunications
policy since enactment of the Communications Act of 1934. The current system
of universal service is based on the indirect subsidization of LEC pricing,
funded as part of a system of direct charges on some LEC customers, including
interexchange carriers such as QCC, and above-cost charges for certain LEC
services such as local business rates and access charges. In accordance with
the Telecom Act of 1996, the FCC adopted plans to implement the
recommendations of a Federal-State Joint Board to preserve universal service,
including a definition of services to be supported, and defining carriers
eligible for contributing to and receiving from universal service subsidies.
The FCC ruled, among other things, that: contributions to universal service
funding be based on all interexchange carriers' gross revenues from both
interstate and international telecommunications services; only common carriers
providing a full complement of defined local services be eligible for support;
and up to $2.25 billion in new annual subsidies for discounted
telecommunications services used by schools, libraries, and rural health care
providers be funded by an assessment on total interstate and intrastate
revenues of all interexchange carriers. The FCC stated that it intends to
study the mechanism for continued support of universal service in high cost
areas in a subsequent proceeding. The Company is unable to predict the outcome
of these proceedings or of any judicial appeal or petition for FCC
reconsideration on its operations.
The Company's Microwave System subsidiary is subject to applicable FCC
regulations for the use of radio frequencies. The FCC issues domestic
microwave radio licenses for limited periods not to exceed 10 years. The
Company must seek renewal of such licenses prior to their expiration. The
Company knows of no facts that would result in the denial of any such
renewals, although there can be no assurance in that regard. Although the FCC
has never denied a microwave license application made by the Company, there
can be no assurance that the Company will receive all authorizations or
licenses necessary to implement its business plan or that delays in the
licensing process will not adversely affect the Company's business.
52
<PAGE>
The Communications Act of 1934 limits the ownership by non-U.S. citizens,
foreign corporations and foreign governments of an entity directly or
indirectly holding a common carrier radio license. These ownership
restrictions apply to the Company's Microwave System but currently do not
apply to non-radio facilities, such as fiber optic cable. The FCC recently
adopted new rules relating to requests to exceed the statutory limit on
indirect foreign ownership of common carrier radio licenses, and the
participation of foreign carriers or U.S. entities with foreign carrier
affiliates (generally an ownership interest greater than 25% or a controlling
interest) in an entity holding U.S. international authority. Under those
rules, the FCC will scrutinize either form of foreign participation to
determine whether the relevant foreign market offers "effective competitive
opportunities" ("ECO"). The FCC may impose restrictions (including prohibition
of the proposed participation or investment) on applicants not meeting the ECO
test. The new rules also require international carriers to notify the FCC 60
days in advance of an acquisition of a 10% or greater interest by a foreign
carrier in that U.S. carrier. The FCC has discretion to determine that unique
factors require application of the ECO test or a change in regulatory status
of the U.S. carrier even though the foreign carrier's interest is less than
25%. These rules also reduce international tariff notice requirements for
dominant, foreign-affiliated carriers from 45 days' notice to 14 days' notice.
Such reduced tariff notice requirements may make it easier for dominant,
foreign-affiliated carriers to compete with the Company. The Telecom Act of
1996 partially amends existing restrictions on foreign ownership of radio
licenses by allowing corporations with non-U.S. citizen officers or directors
to hold radio licenses. Other non-U.S. ownership restrictions, however,
currently remain unchanged, but the U.S. has agreed in recent world trade
negotiations to allow for a significant increase in permissible foreign
investment, including 100% indirect foreign ownership of U.S. common carrier
radio licensees. The FCC is expected to revisit the continued applicablity of
its ECO test in light of this agreement. Though the Company believes these
changes will have a positive effect on its ability to identify potential
sources of capital, the effect on the Company of the Telecom Act of 1996 or
other new legislation, negotiations or regulations which may become applicable
to the Company cannot be determined.
INTERNATIONAL SETTLEMENTS
Under the international settlement system, international long distance
traffic is exchanged under bilateral correspondent agreements between
facilities-based carriers in two countries. Correspondent agreements generally
are three to five years in length and provide for the termination of traffic
in, and return traffic to, the carriers' respective countries at a negotiated
accounting rate, known as the Total Accounting Rate ("TAR"). In addition,
correspondent agreements provide for network coordination and accounting and
settlement procedures between the carriers. Both carriers are responsible for
their own costs and expenses related to operating their respective halves of
the end-to-end international connection.
Settlement costs, which typically equal one-half of the TAR, are the fees
owed to another international carrier for transporting traffic on its
facilities. Settlement costs are reciprocal between each party to a
correspondent agreement at a negotiated rate (which must be the same for all
U.S. based carriers, unless the FCC approves an exception). For example, if a
foreign carrier charges a U.S. carrier $0.30 per minute to terminate a call in
the foreign country, the U.S. carrier would charge the foreign carrier the
same $0.30 per minute to terminate a call in the United States. Additionally,
the TAR is the same for all carriers transporting traffic into a particular
country, but varies from country to country. The term "settlement costs"
arises because carriers essentially pay each other on a net basis determined
by the difference between inbound and outbound traffic between them.
The difference in cost between providing domestic long distance and
international service is minimal, and technical advances in facilities
deployed for international calling are making distance largely irrelevant to
cost. Increased worldwide competition has already brought about certain
reductions in settlement rates and end user prices, thereby reducing overseas
termination costs for United States based carriers. However, it is believed
that certain foreign countries use settlement rates
53
<PAGE>
to subsidize their domestic call rates. As a result, domestic customers
currently pay significantly more for an international call than they do for a
domestic long distance call. The FCC has proposed
measures intended to overhaul the system of international settlements,
although such proposals have not yet been enacted and remain subject to
modification or appeal to the courts or both. Additionally, recent worldwide
trade negotiations may have a significant impact on settlement rates.
The Company believes that the average cost of international telephone calls
will be reduced, and anticipates further international opportunities will be
created as a result of recent worldwide trade negotiations. On February 15,
1997, representatives of 70 countries, including the United States, finalized
the World Trade Organization ("WTO") Basic Telecommunications Agreement ("WTO
Agreement"), a compact addressing market access, investment and pro-
competitive regulatory principles in areas currently generating over 95% of
the world's telecommunications revenue. The WTO Agreement takes effect January
1, 1998. Among other things, the agreement provides U.S. companies market
access for local, long distance and international service in 53 historically
monopolized countries through any means of network technology, either as a
facilities-based provider or as a reseller of existing network capacity. The
countries providing market access for telecommunications services as a result
of the WTO Agreement account for 99% of the world's telecommunications
revenue. Although some countries have reserved specific exceptions, the
agreement generally ensures that U.S. companies may acquire, establish, or
hold a significant stake in telecommunications companies around the world, and
that foreign companies may acquire, establish or hold such a stake in U.S.
telecommunications companies. Additionally, pro-competitive regulatory
principles based largely upon the Telecom Act of 1996 were adopted by 65
countries within the WTO Agreement. U.S. companies will be able to enforce
these principles, as well as the WTO Agreement's market access and investment
commitments, at the WTO and through enabling legislation in the U.S. The
Company expects to benefit from the anticipated effects of the WTO Agreement,
but cannot predict where or when such opportunities may present themselves.
STATE REGULATION
The Company's intrastate long distance telecommunications operations are
subject to various state laws and regulations including, in many
jurisdictions, certification and tariff filing requirements. Generally, the
Company must obtain and maintain certificates of authority from regulatory
bodies in most states in which it offers intrastate services. In most of these
jurisdictions the Company must also file and obtain prior regulatory approval
of tariffs for its intrastate services. Certificates of authority can
generally be conditioned, modified, canceled, terminated, or revoked by state
regulatory authorities for failure to comply with state law and/or the rules,
regulations, and policies of the state regulatory authorities. Fines and other
penalties also may be imposed for such violations. The Company is currently
authorized to provide intrastate services in 47 states, and has a pending
application for authority to provide intrastate services in one additional
state. The Company intends to have authority in all states where competition
is allowed.
Those states that permit the offering of intrastate/intra-LATA service by
interexchange carriers generally require that end users desiring to use such
services dial special access codes. Historically, this has put the Company at
a competitive disadvantage compared with LECs whose customers can make
intrastate/intra-LATA calls simply by dialing 1 plus the desired number. If a
long distance carrier's customer attempts to make an intra-LATA call by simply
dialing 1 plus the desired number, the call will be routed to and completed by
the LEC. Regulatory agencies in a number of states have issued decisions that
would permit the Company and other interexchange carriers to provide intra-
LATA calling on a 1 + basis. Further, the Telecom Act of 1996 requires in most
cases that the RBOCs provide such dialing parity coincident to their providing
in-region inter-LATA services. The Company expects to benefit from the ability
to offer 1 + intra-LATA services in states that allow this type of dialing
parity.
54
<PAGE>
LOCAL REGULATION
The Company is occasionally required to obtain street use and construction
permits and licenses and/or franchises to install and expand its fiber optic
network using municipal rights-of-way. Termination of the existing franchise
or license agreements prior to their expiration dates or a failure to renew
the franchise or license agreements and a requirement that the Company remove
its facilities or abandon its network in place could have a material adverse
effect on the Company. In some municipalities where the Company has installed
or anticipates constructing networks, it will be required to pay license or
franchise fees based on a percentage of gross revenue or on a per linear foot
basis. There can be no assurance that, following the expiration of existing
franchises, fees will remain at their current levels. In addition, the Company
could be at a competitive disadvantage if its competitors do not pay the same
level of fees as the Company. However, the Telecom Act of 1996 requires
municipalities to manage public rights-of-way in a competitively neutral and
non-discriminatory manner.
OTHER
The Company monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally
sensitive materials, including the emission of electromagnetic radiation. The
Company believes that it is in compliance with such regulations, although
there can be no assurance that any such discharge, disposal or emission might
not expose the Company to claims or actions that could have a material adverse
effect on the Company.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of Qwest, their ages and positions with
Qwest, and brief biographies are set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Philip F. Anschutz....... 57 Director and Chairman
Joseph P. Nacchio........ 47 Director, President and Chief Executive Officer
Robert S. Woodruff....... 48 Director, Executive Vice President--Finance and
Chief Financial Officer and Treasurer
Cannon Y. Harvey......... 56 Director
Richard T. Liebhaber..... 62 Director
Douglas L. Polson........ 55 Director
Craig D. Slater.......... 40 Director
Joseph T. Garrity........ 45 Secretary
Richard L. Smith......... 36 Vice President and Controller
</TABLE>
Jordan L. Haines and W. Thomas Stephens have been appointed to serve as
independent directors effective immediately upon completion of the Offerings.
OTHER MANAGEMENT
In addition, management of QCC includes the individuals set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Anthony J. Brodman...... 55 Senior Vice President--Strategy and Planning
Stephen M. Jacobsen..... 38 Senior Vice President--Consumer Markets
Daniel I. O'Callaghan... 54 Senior Vice President--Construction
A. Dean Wandry.......... 56 Senior Vice President--New Business Development
</TABLE>
Philip F. Anschutz has been a Director and the Chairman of the Board of
Qwest since February 1997. He has been a Director and Chairman of the Board of
QCC since November 1993. He has been a Director and Chairman of the Board of
Anschutz Company ("AC"), Qwest's parent, for more than five years, and a
Director and Chairman of the Board of The Anschutz Corporation ("TAC"), a
wholly owned subsidiary of Anschutz Company, for more than five years. Since
the merger of Southern Pacific Rail Corporation ("SPRC") and Union Pacific
Corporation ("UP") in September 1996, Mr. Anschutz has served as Vice-Chairman
of UP. Prior to the merger, Mr. Anschutz was a Director of SPRC from June 1988
to September 1996, Chairman of SPRC from October 1988 to September 1996, and
President and Chief Executive Officer of SPRC from October 1988 to July 1993.
He also has been a Director of Forest Oil Corporation since 1995.
Joseph P. Nacchio became Director, President and Chief Executive Officer of
Qwest in February 1997, having been appointed to the same positions at QCC in
January 1997. Prior to joining the Company he was Executive Vice President of
AT&T Corp.'s ("AT&T") Consumer and Small Business Division since January 1996.
In that capacity he was responsible for AT&T's core consumer long distance
business, and AT&T's DirecTV, AT&T Alascom and Language Line businesses. He
was also responsible for marketing and sales targeted at all consumer and
small businesses in the United States. In 1994 and 1995 Mr. Nacchio was
President of AT&T's Consumer Communications Services long distance, a winner
of the Malcolm Baldrige National Quality Award for Excellence. From November
1991 until August 1994, Mr. Nacchio was President of AT&T's Business
Communications Services unit focused on the long distance communications needs
of business customers. Since joining AT&T in June 1970 he held assignments in
network operations, engineering, marketing and sales. Mr. Nacchio earned an
M.S. degree in management from the Massachusetts Institute of Technology in
the Sloan Fellows Program. He also received an M.B.A. degree and a B.S. degree
in electrical engineering, both from New York University. He has been a
Director of Internet Communications Corporation since May 1997.
56
<PAGE>
Robert S. Woodruff became a Director and Executive Vice President--Finance
and Chief Financial Officer of Qwest in February 1997. He served as interim
Chief Operating Officer of Qwest and QCC from November 1996 through April
1997. He has served as a Director of QCC since December 1996. He became
Executive Vice President--Finance, Chief Financial Officer and Treasurer of
QCC in August 1994. He serves as a Director of FSI Acquisition Corp.,
Government Communications Inc., Qwest Transmission Inc., Qwest Properties,
Inc., and U.S. TeleSource, Inc., all of which are wholly owned subsidiaries of
QCC. He is also Sole Administrator of QCC's Mexican subsidiaries, Opticom,
S.A. de C.V., Servicios Derecho de Via, S.A. de C.V., and S.P. Servicios
Mexico, S.A. de C.V. Prior to joining the Company he had been a partner in the
accounting firm of Coopers & Lybrand since 1984, where his responsibilities
included providing services to communications companies. Mr. Woodruff received
a B.B.A. degree in accounting, with honors, from the University of Wisconsin.
Cannon Y. Harvey has been a Director of Qwest since February 1997 and a
Director of QCC since December 1996. He has been President and Chief Operating
Officer of both AC and TAC since December 1996. From February 1995 until
September 1996 he served as Executive Vice President--Finance and Law of SPRC;
from September 1993 to February 1995 he served as Senior Vice President and
General Counsel of SPRC; from May 1993 to September 1993 he served as Vice
President--Finance and Law and General Counsel of SPRC. Prior to joining SPRC,
Mr. Harvey was a Partner in the law firm of Holme Roberts & Owen LLP for more
than five years.
Richard T. Liebhaber has been a Director of Qwest since February 1997. He
has been a Managing Director of Veronis, Suhler & Associates, Inc., the New
York media merchant banking firm, since June 1, 1995. Mr. Liebhaber has been a
member of the board of directors of Objective Communications, Inc. since
August 1994, the board of directors of Alcatel Network Systems, Inc. since
June 1995, the board of directors of Geotek Communications, Inc. since April
1995, the board of directors of Advanced Network Services, Inc. (America
OnLine, Inc.) since July 1996, the board of directors of Internet
Communications Corporation since May 1997, and the board of directors of
Scholz Master Builders since December 1985. From December 1985 to his
retirement in May 1995, Mr. Liebhaber served as Executive Vice President of
MCI Communications Corporation and as a member of its Management Committee.
Mr. Liebhaber was a member of the board of directors of MCI Communications
Corporation from July 1992 until his retirement in May 1995.
Douglas L. Polson has been a Director of Qwest since February 1997 and a
Director of QCC for more than five years. He has been a Director and Vice
President--Finance of both AC and TAC for more than five years. He was a
Director of SPRC from June 1988 to September 1996; Vice Chairman of SPRC from
June 1988 to September 1996; and a Vice President of SPRC from October 1988 to
September 1996.
Craig D. Slater has been a Director of Qwest since February 1997 and a
Director of QCC since November 1996. He has been Vice President--Acquisitions
and Investments of both AC and TAC since August 1995 and Corporate Secretary
of AC and TAC from September 1991 to October 1996. Mr. Slater held various
other positions with AC and TAC from 1988 to 1995. He has been a Director of
Forest Oil Corporation since 1995 and Internet Communications Corporation
since 1996.
Joseph T. Garrity has been Secretary of Qwest since February 1997 and
Secretary of QCC since November 1996. He is also Senior Director--Legal,
Regulatory and Legislative Affairs of QCC since November 1996 and was
Director--Regulatory and Legislative Affairs of QCC from March 1995 to
November 1996. Prior to joining the Company, from 1992 to March 1995, Mr.
Garrity was Senior Attorney with MCI Telecommunications Corporation; and from
1991 to 1992 he was President of Garrity, Inc. and Joseph T. Garrity, P.C.,
where he was an attorney and consultant in the areas of domestic and
international telecommunications. From 1988 to 1991 he was Counsel and
Assistant Secretary to Jones International, Ltd., Jones Intercable, Inc. and
Jones Spacelink, Ltd. and from 1989 to 1991 was President, Jones Programming
Services, Inc. He has B.S. and M.S. degrees from Northwestern University and a
J.D. from DePaul University College of Law.
57
<PAGE>
Richard L. Smith became Vice President and Controller of Qwest in February
1997 and of QCC in October 1995. Prior to becoming Controller for QCC, he had
been the Director of Financial Operations for QCC since November 1993. From
1989 through October 1993, Mr. Smith served as Vice President of Finance for
Centrex Equipment Associates, Inc., an interconnect company. He was Controller
of Convenience Video Movies, Inc., a national distribution company, from 1987
to 1989 and was a Senior Accountant with Coopers & Lybrand from 1983 to 1987.
Mr. Smith received a B.S. degree in accounting from San Diego State
University.
Jordan L. Haines was Chairman of the Board of Fourth Financial Corporation,
a Kansas-based bank holding company, and its subsidiary, Bank IV Wichita,
N.A., from 1983 until his retirement in 1991. He has been a member of the
Board of Directors of KN Energy, Inc. since 1983 and a Director of Forest Oil
Corporation since 1996. Mr. Haines will serve as a member of the Audit
Committee.
W. Thomas Stephens served from 1986 until his retirement as President and
Chief Executive Officer of Manville Corporation, an international
manufacturing and resources company. He also served as a member of the
Manville Corporation Board of Directors from 1986 to 1996, and served as
Chairman of the Board from 1990 to 1996. Mr. Stephens has been a Director of
Public Service Company of Colorado since 1989, a Director of Mail Well, Inc.
since 1996, a Trustee of Eagle Picher Settlement Trust since 1996 and a
Trustee of The Denver Art Museum since 1994. He will serve as a member of the
Audit Committee.
Anthony J. Brodman joined QCC in 1989 and has been Senior Vice President--
Strategy and Planning since 1995. From 1994 to June 1995 he served as Vice
President--Strategy, Planning and Public Relations and from 1989 to 1994 was
Vice President--Sales and Marketing. Prior to joining QCC, he held senior
level marketing and sales positions from 1973 to 1989 with Sprint. He has 11
years of experience in field and headquarters marketing positions with Pacific
Telephone. Mr. Brodman holds a degree from DeAnza College and attended
Northrop Institute of Technology and San Francisco State University.
Stephen M. Jacobsen became Senior Vice President--Consumer Markets of QCC in
March 1997. In this capacity, he is responsible for all of QCC's consumer
marketing and sales programs. Prior to joining QCC, Mr. Jacobsen was Regional
Vice President--Consumer and Small Business for AT&T in Southern California
and Nevada since 1996, with responsibility for all marketing functions for
consumer and small business customers in those geographic areas. During his
nearly sixteen-year career at AT&T, Mr. Jacobsen held key managerial positions
in the network services division, including responsibility for AT&T's network
operations center in the western region as well as positions in sales,
marketing and product management, Mr. Jacobsen holds an M.S. degree in
management from the Massachusetts Institute of Technology in the Sloan Fellows
Program and a B.S.B.A. degree from the University of Arizona.
Daniel I. O'Callaghan became Senior Vice President--Construction for QCC in
November 1994. From 1989 to September 1994 he was Vice President--Construction
for QCC and from 1988 to 1989 he was Vice President--Operations for QCC. He
has been with QCC since its inception. From 1964 to 1988 he was with Southern
Pacific Lines and last served as Assistant Chief Engineer. He has extensive
experience in construction, engineering, operations, facilities, planning and
project management. He has the direct responsibility for managing all of QCC's
fiber optic construction projects. Mr. O'Callaghan holds a B.S. degree in
mathematics and physics from the University of San Francisco, a B.S. degree in
engineering from Santa Clara University, and an M.B.A., with honors, from St.
Mary's College. He is a professional civil engineer in Louisiana, Colorado and
California, and is the qualified individual for the contractor's licenses of
SP Construction Services in California, Arizona and Utah.
58
<PAGE>
A. Dean Wandry became Senior Vice President--Cable & Access Services for QCC
in November 1994 and Senior Vice President--New Business Development for QCC
in December 1995. In 1981 Mr. Wandry formed Citation Cable Systems Limited,
which merged into Fanch Communications, Inc. in 1986. Following the merger, he
served as Vice President--Operations until he joined QCC. He joined Bayly
Corp., a multinational apparel manufacturer, in 1967 and served as President
of the Sales and Marketing Division from 1977 to 1981. He holds a B.S. degree
in economics from the University of Colorado.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid or accrued to Qwest's
chief executive officer and four other most highly compensated executive
officers of Qwest and its operating subsidiaries (the "Named Executives")
during the fiscal years ended December 31, 1996, 1995, and 1994. The position
identified in the table for each person is that person's current position at
Qwest unless otherwise indicated.
Mr. Joseph P. Nacchio became President and Chief Executive Officer of Qwest
effective January 4, 1997. His employment agreement is described below the
table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------
OTHER
ANNUAL ALL OTHER
NAME/PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION
- ----------------------- ---- -------- ------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert S. Woodruff,
Interim Chief 1996 $182,200 $25,000 $ -- $ 5,466(1)
Operating Officer,
Executive Vice 1995 167,766 16,500 -- 1,671
President--Finance and
Chief Financial Officer
and Treasurer 1994 65,683(2) -- -- --
Anthony Brodman, Senior
Vice President 1996 152,333 30,000 -- 7,945(1)
Strategy and Planning 1995 130,270 11,634 15,752(3) 7,163
(QCC) 1994 112,140 -- 2,083(3) 62,602
A. Dean Wandry, Senior
Vice President--New 1996 148,300 30,000 -- 7,725(1)
Business Development 1995 141,866 14,000 -- 2,310
(QCC) 1994 45,141(4) -- -- --
Joseph DePetro, Vice
President--Sales and 1996 130,083 -- 48,337(5) 7,203(1)
Marketing (QCC) 1995 120,000 -- 45,634(3) 6,712
1994 99,897 -- 50,403(6) 62,313
Douglas H. Hanson, 1996 193,557 -- -- 128,420(8)
former President and
Chief Executive 1995 200,040 20,004 -- 8,240
Officer (QCC)(7) 1994 195,865 -- -- 79,001
Peter R. Geddis, former
Executive Vice President 1996 157,150 -- -- 24,147(10)
(QCC) (9) 1995 188,127 18,504 239,680(11) 9,738
1994 180,865 -- 239,680(11) 75,000
</TABLE>
- --------
(1) The amount shown represents QCC's contribution to QCC's 401(k) plan.
(2) Mr. Woodruff began his employment with QCC in August 1994 and amounts
disclosed for Mr. Woodruff for 1994 represent compensation paid after
that date.
(3) The amount shown represents commissions.
(4) Mr. Wandry began his employment with QCC in September 1994 and amounts
disclosed for Mr. Wandry for 1994 represent compensation paid after that
date.
(5) The amount shown represents commissions. In August 1996, QCC extended a
loan to Mr. DePetro in the principal amount of $31,850 with interest at
5% per year and secured by a deed of trust on his principal residence.
The principal amount is
59
<PAGE>
forgiven in annual increments of $7,963 on December 31, 1996 through 1999.
Mr. DePetro pays interest on the outstanding principal balance on the first
day of each month. If Mr. DePetro terminates his employment voluntarily or
if QCC terminates his employment on account of wilful misconduct, QCC may
declare the then outstanding principal amount and accrued interest due and
payable within 45 days after he terminates employment. If his employment
terminates for any other reason, the outstanding principal balance will be
forgiven.
(6) The amount shown represents commissions ($38,577) and QCC's forgiveness
of a portion of a loan ($11,826).
(7) Mr. Hanson resigned his position effective November 11, 1996. In
connection with his termination, Qwest and Mr. Hanson entered into a
severance agreement that is described under "--Employment Contracts and
Termination of Employment and Change-in-Control Arrangements," below.
(8) The amount shown represents QCC's contribution to QCC's 401(k) Plan
($9,000) and a payment for accrued but unused vacation ($119,420). For a
description of the severance payments paid or payable to Mr. Hanson, see
"--Employment Contracts and Termination of Employment and Change-In-
Control Arrangements," below.
(9) Mr. Geddis terminated employment as an executive officer effective July
1, 1996. He continued to perform services for QCC on a reduced-time basis
through December 31, 1996.
(10) The amount shown represents QCC's contribution to QCC's 401(k) Plan
($9,215) and QCC's payment for accrued but unused vacation time ($14,932)
upon his termination of employment. In January 1997, QCC paid Mr. Geddis
the sum of $450,000 in full satisfaction of Mr. Geddis' interest in the
Growth Share Plan, which is described below.
(11) The amount shown represents QCC's forgiveness of a loan.
CEO EMPLOYMENT AGREEMENT
Qwest and Joseph P. Nacchio entered into an employment agreement dated as of
December 21, 1996 and amended as of January 3, 1997, pursuant to which Mr.
Nacchio joined Qwest as its President and Chief Executive Officer effective
January 4, 1997 for a term through the close of business on December 31, 2001,
unless terminated earlier by either party. The agreement provides for an
annual base salary of $600,000, a $300,000 bonus for 1997, and, unless Qwest
makes an initial public offering of its stock in 1998, a $300,000 bonus for
1998. Mr. Nacchio may participate in the employee benefit plans available to
Qwest's senior executives according to the plans' terms and conditions. Under
the agreement, Mr. Nacchio will be granted 300,000 growth shares under Qwest's
Growth Share Plan, with a five year performance cycle commencing January 1,
1997 and a "beginning company value" of $1 billion. See "--Growth Share Plan."
The agreement provides generally that the growth shares will vest in 20%
increments on each January 1 beginning January 1, 1998. The growth share
agreement between the Company and Mr. Nacchio provides for terms that are
different from the terms of the Growth Share Plan in certain respects.
Following the completion of the Offerings, Mr. Nacchio may elect to receive
payment for up to 20% of his vested growth shares in shares of Common Stock;
the growth shares for which he has received payment will be canceled. The
number of growth shares granted to Mr. Nacchio are subject to adjustment upon
changes in the Company's capital structure in connection with mergers and
other reorganizations. If Mr. Nacchio's employment is terminated for good
reason (generally, resignation after a reduction in title or responsibility)
or other than for cause (as defined below), he will vest in one-twelfth of the
20% of growth shares subject to annual vesting for the year of termination for
each full month of employment in such calendar year. A change in control (as
defined in the employment agreement) will not result in full vesting of, or
payment for, the growth shares unless Mr. Nacchio is terminated without cause
or resigns for good reason after the change in control. If his employment is
terminated for cause, he will be paid for his vested growth shares based on
the value of the Company as of the end of the immediately preceding calendar
year. Upon payment of certain dividends, the growth shares will vest 100% and
Mr. Nacchio will be paid for a portion of the growth shares. Termination of
the Plan will not be a "triggering event," see "--Growth Share Plan," with
respect to Mr. Nacchio's growth shares.
The Company intends to enter into an amendment to the growth share agreement
with Mr. Nacchio to provide that (1) upon completion of the Offerings, the
value of the growth shares will be capped at a value generally determined by
the Price to Public and (2) the performance cycle will end on a date in 2001
selected by the Company in its sole discretion and communicated to Mr. Nacchio
in writing. The Company expects to grant Mr. Nacchio an option under the
Company's Equity Incentive Plan to purchase three million shares of Common
Stock. See "--Equity Incentive Plan." The exercise
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price will be equal to the Price to Public. The option will vest 20% per year
beginning at the same time as the growth shares and will become fully vested
upon Mr. Nacchio's death, disability, retirement, or the end of the performance
cycle for his growth shares. If Mr. Nacchio's employment terminates for any
other reason, he will forfeit the unvested portion of his option and retain the
vested portion of his option; provided that if he is terminated other than for
cause or he voluntarily terminates his employment for good reason (as defined
in his growth share agreement), in each case following a change in control, the
option will become fully vested. He can exercise the vested portions of the
option at any time before the option expires. Generally, the option will
terminate and expire 18 months after the end of the performance cycle for his
growth shares.
The employment agreement also provides that in order to compensate
Mr. Nacchio for certain benefits from his former employer, AT&T, that Mr.
Nacchio may lose or forfeit as a result of his termination of employment and
commencement of employment with Qwest, Qwest will pay him $10,735,861, as
adjusted (the "equalization payment"). The equalization payment is to be made
in three installments. The first installment of $7,232,000 has been paid. The
remaining two installments are scheduled to be paid on each of January 1, 1998
($1,469,861) and 1999 ($2,034,000), with annual interest at the rate of 5% from
January 7, 1997 to the date of payment. If Mr. Nacchio's employment is
terminated for cause (including any willful misconduct materially detrimental
to the Company, felony conviction, or nonfeasance with respect to duties set
forth in the employment agreement) on or before December 31, 1999, the
agreement provides that he will repay to Qwest a portion of the equalization
payment previously paid. If a termination for cause occurs after December 31,
1999, the equalization payment will not be repaid. If Qwest terminates Mr.
Nacchio's employment other than for cause or if Mr. Nacchio resigns for good
reason, which for this purpose includes a change in control of Qwest or certain
other events, Qwest will be obligated to make certain payments to him,
including an amount equal to two times his base salary at the rate in effect on
the date of employment termination and any installments of the equalization
payment that have not yet been made, with interest. Mr. Nacchio will also be
entitled to continuation of certain benefits, including welfare benefits and
participation in the Growth Share Plan for a two-year period following
termination. For this purpose, change in control means the acquisition of 20%
or more of Qwest by an individual, entity (not controlled by Philip F.
Anschutz) or group if the new acquirors own a larger percentage of Qwest than
entities controlled by Philip F. Anschutz. The agreement provides that if Mr.
Nacchio receives any payments upon a change in control that are subject to the
excise tax of section 4999 of the Internal Revenue Code, Qwest will pay
Mr. Nacchio an amount that reimburses him in full for the excise tax.
GROWTH SHARE PLAN
The Growth Share Plan was originally adopted by QCC effective November 1,
1993. Qwest adopted, assumed, and continued the Growth Share Plan, effective
May 1, 1996. The Growth Share Plan was amended and restated in its entirety,
effective October 1, 1996 (the "October 1996 amendment and restatement"). The
October 1996 amendment and restatement provides for the grant of "growth
shares" to selected employees and directors of Qwest and certain affiliates who
can significantly affect the long-term financial success of Qwest. Growth share
grants may include additional or different terms and conditions from those
described herein. A "growth share" is a unit of value based on the increase in
value of Qwest over a specified performance cycle or other specified measuring
period. The value of a growth share is generally equal to (1) the value of
Qwest at or near the date of a "triggering event," as defined below, minus (2)
the value of Qwest as of a date determined by Qwest's board of directors in its
sole discretion at the time of grant of a growth share ("beginning company
value"), minus (3) the value of contributions to capital during the period
beginning with the date as of which Qwest's value for purposes of the growth
share's grant is determined and ending with the date as of which the value of
the growth share is determined (the "measuring period") together with an amount
equal to 9% of each such contribution made by entities
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controlled by Philip F. Anschutz, compounded annually, plus (4) dividends paid
during the measuring period, divided by (5) 10 million (the total number of
growth shares). The value of Qwest as of the last day of the measuring period
is determined by independent appraisal; provided that if all classes of
Qwest's outstanding equity securities are publicly traded and Qwest is subject
to the reporting and disclosure rules of the Securities Exchange Act, the
value of Qwest will be based on the trading price of the equity securities
over the 20 consecutive trading days ending on the last day of the measuring
period.
Payment for growth shares is generally made at the end of the performance
cycle; however, the October 1996 amendment and restatement provides that the
outstanding growth shares will be valued and payment will be made upon the
termination of the October 1996 amendment and restatement or a "change in
control" (defined below), which are referred to as "triggering events." In the
case of payments made other than at the end of a performance cycle, Qwest is
valued as of the last day of the month following the triggering event, in the
case of termination of the October 1996 amendment and restatement, and
immediately after the date of the change in control, in the case of a change
in control. Generally, payment is made in a single cash payment or in shares
of Qwest's common stock, as determined by the board, although Qwest may elect
to pay in two equal annual installments, the first installment to be made
within 30 days after the growth shares are valued and the second installment
to be made one year later with interest at the consolidated prime rate
published in The Wall Street Journal. Payment will be made in shares of
Qwest's common stock if Qwest's common stock is actively traded on an
established securities market, and Qwest is subject to the reporting and
disclosure requirements of the Exchange Act.
The October 1996 amendment and restatement provides that no more than
850,000 of the 10 million growth shares will be outstanding at one time.
Growth shares generally vest at 20% for each full year of service after the
date of grant. Participants become fully vested in their outstanding growth
shares at death, disability or retirement after age 65. If a participant is
terminated for cause, he or she will forfeit all vested growth shares. A
participant who voluntarily terminates employment will forfeit 25% of his or
her vested growth shares. Different vesting arrangements may apply to
different participants. A participant who is not 100% vested at the date of a
triggering event will be paid for the vested growth shares; however, 25% of
the payment will be withheld and will be forfeited if the participant
voluntarily terminates employment. Payment will be made for the unvested
growth shares if and when they vest.
Upon a "change of control" of Qwest, the outstanding growth shares will
become fully vested. For this purpose, "change of control" is defined as
either (A) the acquisition by any individual, entity or group (as defined in
the Exchange Act), other than Anschutz Company, The Anschutz Corporation, or
any entity controlled by Philip F. Anschutz ("Anschutz Entities"), of
beneficial ownership of 20% or more of either (1) the then-outstanding shares
of Common Stock or (2) the combined voting power of the then-outstanding
voting securities of Qwest entitled to vote generally in the election of
directors and the beneficial ownership of the individual, entity or group
exceeds the beneficial ownership of the Anschutz Entities or (B) the Anschutz
Entities no longer have beneficial ownership of at least 20% of Qwest's common
stock or 20% of the combined voting power.
The October 1996 amendment and restatement provides that growth shares
granted prior to October 1, 1996, remain subject to the terms and conditions
of the Growth Share Plan that were in effect when the growth shares were
granted, unless otherwise agreed in writing by the Participant and Qwest. A
total of 253,900 outstanding growth shares were granted under prior versions
of the Growth Share Plan (the "Prior Plan"). Those growth shares will become
100% vested (if not previously vested) upon completion of the Offerings and
completion of the Offerings will constitute a triggering event with respect to
those growth shares, resulting in payment by Qwest to the holders of the value
of those growth shares. Under the Prior Plan, in the event of an initial
public offering of Qwest's stock, payment may be made either in cash or in
shares of Common Stock, as determined in the sole discretion of Qwest.
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Following completion of the Offerings, up to 2,000,000 shares of Common
Stock will be issuable to holders of growth shares granted under the Prior
Plan. However, the number of shares to be issued may be reduced as follows:
holders who are required to agree to refrain from selling Common Stock for 180
days (see "Underwriting") may elect to receive up to 10% of their growth
shares in cash; and all holders may elect to have between 28% and 50% of the
growth shares in Common Stock withheld or set aside for tax and other
withholdings.
Growth shares granted under the October 1996 amendment and restatement will
not be accelerated or triggered by completion of the Offerings. The Company
intends to enter into amendments to the growth share agreements with
participants who hold growth shares granted under the October 1996 amendment
and restatement. The amendments will provide that (1) upon completion of the
Offerings, the value of the growth shares will be capped at a value generally
determined by the Price to Public and (2) the performance cycle will end on a
date in 2001 selected by the Company in its sole discretion and communicated
to the participant in writing. The Company expects to grant the participant an
option under the Company's Equity Incentive Plan to purchase a number of
shares of Common Stock equal to ten times the number of the participant's
growth shares. See "--Equity Incentive Plan." The exercise price will be equal
to the Price to Public. The options will vest 20% per year beginning at the
same time as the growth shares and will become fully vested upon the
participant's death, disability, retirement, a change in control of the
Company, termination of the Growth Share Plan, or the end of the performance
cycle for the participant's growth shares. If the participant is terminated
for cause, he will forfeit all options, including vested options. If the
participant voluntarily terminates employment, he will forfeit all unvested
options and 25% of his vested options. The participant may exercise up to 75%
of the vested options at any time before the options expire. Upon the first to
occur of a change in control (as defined in the Equity Incentive Plan),
termination of the Growth Share Plan, or the end of the performance cycle for
the participant's growth shares ("full vesting event"), the participant may
exercise all vested options for a period of 18 months after the full vesting
event, and the options will terminate and expire at the end of the 18 month
period.
The Company does not anticipate that any growth shares will be granted after
the completion of the Offerings.
The first growth shares were granted as of November 1, 1993. As of April 15,
1997, a total of 631,900 growth shares had been granted and were outstanding.
The following table shows the growth shares that were granted to the named
executive officers prior to 1996. All of the growth shares have a measuring
period commencing November 1, 1993, a performance cycle commencing November 1,
1993 and ending November 1, 1998, and a beginning company value of $50
million. All of the growth shares vest in annual 20% increments; the first
annual increment vested on the date shown in the table.
<TABLE>
<CAPTION>
INITIAL
GRANT NUMBER OF VESTING
NAME DATE GROWTH SHARES DATE
---- ------- ------------- -------
<S> <C> <C> <C>
Robert Woodruff................................ 8/8/94 40,000 8/8/95
Anthony Brodman................................ 11/1/93 25,000 11/1/94
A. Dean Wandry................................. 9/6/94 35,000 9/6/95
Joseph DePetro................................. 11/1/93 25,000 11/1/94
</TABLE>
Messrs. Slater, Polson, and Liebhaber, directors of Qwest, have each been
granted a total of 20,000, 7,500, and 10,000 growth shares, respectively.
The following table shows the growth shares granted in 1996 to the named
individuals in the Summary Compensation Table:
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF
NAME GROWTH SHARES PERFORMANCE PERIOD
---- ------------- ------------------
<S> <C> <C>
Anthony Brodman............................. 2,500 January 1, 1997 to
December 31, 2001
</TABLE>
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The growth shares were granted as of October 1, 1996 and will vest in annual
increments of 20% on each October 1, beginning October 1, 1997. The growth
shares have a measuring period commencing November 1, 1993 and a beginning
company value of $50 million.
EQUITY INCENTIVE PLAN
The Company adopted the Qwest Communications International Inc. Equity
Incentive Plan (the "Equity Incentive Plan") effective immediately before
completion of the Offerings.
The Equity Incentive Plan permits the grant of non-qualified stock options,
incentive stock options, stock appreciation rights, restricted stock, stock
units and other stock grants to key employees of the Company and affiliated
companies and key consultants to the Company and affiliated companies. A
maximum of 10,000,000 shares of Common Stock may be subject to awards under
the Equity Incentive Plan. The number of shares is subject to adjustment on
account of stock splits, stock dividends and other dilutive changes in the
Common Stock. Shares of Common Stock covered by unexercised non-qualified or
incentive stock options that expire, terminate or are canceled, together with
shares of Common Stock that are forfeited pursuant to a restricted stock grant
or any other award (other than an option) under the Equity Incentive Plan or
that are used to pay withholding taxes or the option exercise price, will
again be available for option or grant under the Equity Incentive Plan.
Participation. The Equity Incentive Plan provides that awards may be made to
eligible employees and consultants who are responsible for the Company's
growth and profitability. The Company currently considers all of its employees
and consultants to be eligible for grant of awards under the Equity Incentive
Plan. As of April 30, 1997, there were approximately 900 eligible
participants.
Administration. The Equity Incentive Plan is administered by the Company's
Compensation Committee (the "Committee"). The Committee must be structured at
all times so that it satisfies the "non-employee director" requirement of Rule
16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). To the
extent practicable, the Company intends to satisfy the similar requirement for
administration by "outside" directors under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to grants to
employees whose compensation is subject to Section 162(m) of the Code. The
Committee has the sole discretion to determine the employees and consultants
to whom awards may be granted under the Equity Incentive Plan and the manner
in which such awards will vest. Options, stock appreciation rights, restricted
stock and stock units are granted by the Committee to employees and
consultants in such numbers and at such times during the term of the Equity
Incentive Plan as the Committee shall determine, except that the maximum
number of shares subject to one or more awards that can be granted during the
term of the Equity Incentive Plan to any employee or consultant is 10,000,000
shares of Common Stock, and except that incentive options may be granted only
to employees. In granting options, stock appreciation rights, restricted stock
and stock units, the Committee will take into account such factors as it may
deem relevant in order to accomplish the Equity Incentive Plan's purposes,
including one or more of the following: the extent to which performance goals
have been met, the duties of the respective employees and consultants and
their present and potential contributions to the Company's success.
Exercise. The Committee determines the exercise price for each option;
however, incentive 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 incentive
stock option is granted (at least equal to 110% of fair market value in the
case of an incentive stock option granted to an employee who owns Common Stock
having more than 10% of the voting power). An option holder may exercise an
option by written notice and payment of the exercise price in (i) cash or
certified funds, (ii) by the surrender of a number of shares of Common Stock
already owned by the option holder for at least six months with a fair market
value equal to the exercise price, or (iii) through a broker's transaction by
directing the broker to sell all or a portion of the Common Stock to pay the
exercise price or make a loan to the option holder to permit the option holder
to pay the exercise price. Option holders who are subject to the withholding
of federal
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and state income tax as a result of exercising an option may satisfy the
income tax withholding obligation through the withholding of a portion of the
Common Stock to be received upon exercise of the option. Options, stock
appreciation rights, stock units and restricted stock awards granted under the
Equity Incentive Plan are not transferable other than by will or by the laws
of descent and distribution.
Change in Control. All awards granted under the Equity Incentive Plan shall
immediately vest upon any "change in control" of the Company unless provided
otherwise by the Committee at the time of grant. A "change in control" occurs
if (i) 20% or more of the Company's voting stock or outstanding stock is
acquired by persons or entities (other than any entity controlled by Philip F.
Anschutz ("Anschutz Entities")) and the beneficial ownership so acquired
exceeds the beneficial ownership of the Anschutz Entities or (ii) the Anschutz
Entities no longer have beneficial ownership of at least 20% of the Company's
voting stock or outstanding stock.
Merger and Reorganization. Upon the occurrence of (i) the reorganization
(other than a bankruptcy reorganization), merger or consolidation of the
Company (other than a reorganization, merger or consolidation in which the
Company is the continuing company and that does not result in any change in
the outstanding shares of Common Stock), (ii) the sale of all or substantially
all of the assets of the Company (other than a sale in which the Company
continues as a holding company of an entity that conducts the business
formerly conducted by the Company), or (iii) the dissolution or liquidation of
the Company, all outstanding options will terminate automatically when the
event occurs if the Company gives the option holders 30 days' prior written
notice of the event. Notice is also given to holders of other awards. Notice
is not required for a merger or consolidation or for a sale if the Company,
the successor, or the purchaser makes adequate provision for the assumption of
the outstanding options or the substitution of new options or awards on terms
comparable to the outstanding options or awards. When the notice is given, all
outstanding options fully vest and can be exercised prior to the event and
other awards become exercisable and payable.
Amendment and Termination. The Board may amend the Equity Incentive Plan in
any respect at any time provided shareholder approval is obtained when
necessary or desirable, but no amendment can impair any option, stock
appreciation rights, awards or units previously granted or deprive an option
holder, without his or her consent, of any Common Stock previously acquired.
The Equity Incentive Plan will terminate in 2007 unless sooner terminated by
the Board.
Federal Income Tax Consequences of Exercise of Options Under the Equity
Incentive Plan. When a non-qualified stock option is granted, there are no
income tax consequences for the option holder or the Company. When a non-
qualified stock option is exercised, in general, the option holder recognizes
compensation equal to the excess of the fair market value of the Common Stock
on the date of exercise over the exercise price. If, however, the option
holder exercises the non-qualified option within six months after it was
granted and if the sale of the Common Stock at a profit would subject the
option holder to liability under Section 16(b) of the Exchange Act ("Section
16(b)"), the option holder will recognize compensation income equal to the
excess of (i) the fair market value of the Common Stock on the earlier of the
date that is six months after the date of exercise or the date the option
holder can sell the Common Stock without Section 16(b) liability over (ii) the
exercise price. The option holder can make an election under section 83(b) of
the Code to measure the compensation as of the date the non-qualified option
is exercised. The compensation recognized by an employee is subject to income
tax withholding. The Company is entitled to a deduction equal to the
compensation recognized by the option holder for the Company's taxable year
that ends with or within the taxable year in which the option holder
recognized the compensation, assuming the compensation amounts satisfy the
ordinary and necessary and reasonable compensation requirements for
deductibility.
When an incentive stock option is granted, there are no income tax
consequences for the option holder or the Company. When an incentive option is
exercised, the option holder does not recognize income and the Company does
not receive a deduction. The option holder, however, must treat the
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excess of the fair market value of the Common Stock on the date of exercise
over the exercise price
as an item of adjustment for purposes of the alternative minimum tax. If the
option holder makes a "disqualifying disposition" of the Common Stock
(described below) in the same taxable year the incentive stock option was
exercised, there are no alternative minimum tax consequences.
If the option holder disposes of the Common Stock after the option holder
has held the Common Stock for at least two years after the incentive stock
option was granted and one year after the incentive stock option was
exercised, the amount the option holder receives upon the disposition over the
exercise price is treated as long-term capital gain for the option holder. The
Company is not entitled to a deduction. If the option holder makes a
"disqualifying disposition" of the Common Stock by disposing of the Common
Stock before it has been held for at least two years after the date the
incentive option was granted and one year after the date the incentive option
was exercised, the option holder recognizes compensation income equal to the
excess of (i) the fair market value of the Common Stock on the date the
incentive option was exercised or, if less, the amount received on the
disposition over (ii) the exercise price. At present, the Company is not
required to withhold income or other taxes. The Company is entitled to a
deduction equal to the compensation recognized by the option holder for the
Company's taxable year that ends with or within the taxable year in which the
option holder recognized the compensation, assuming the compensation amounts
satisfy the ordinary and necessary and reasonable compensation requirements
for deductibility.
The Equity Incentive Plan provides that option holders are responsible for
making appropriate arrangements with the Company to provide for any additional
withholding amounts. Furthermore, the Company shall have no obligation to
deliver shares of Common Stock upon the exercise of any options, stock
appreciation rights, awards or units under the Equity Incentive Plan until all
applicable federal, state and local income and other tax withholding
requirements have been satisfied.
The Company expects to grant options to certain holders of growth shares.
See "--CEO Employment Agreement" and "--Growth Share Plan" above.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
The employment agreement between Qwest and Joseph P. Nacchio, which includes
provision for a payment if Mr. Nacchio resigns following a change in control,
is described under "--CEO Employment Agreement" above.
In November 1996 QCC extended Robert S. Woodruff an unsecured, noninterest-
bearing loan in the principal amount of $100,000. The principal amount is
forgiven in monthly increments of $2,083 beginning December 1, 1996. If Mr.
Woodruff terminates employment voluntarily or if QCC terminates his employment
on account of willful misconduct, QCC may declare the unforgiven outstanding
principal amount due and payable within 45 days after the date he terminates
employment. If Mr. Woodruff's employment terminates for any other reason, the
outstanding principal balance will be forgiven. In December 1996, QCC and Mr.
Woodruff entered into a letter agreement to provide that if his employment is
terminated for reasons other than willful misconduct, he will receive either a
lump sum payment equal to one year's compensation at his then current rate or
payment in accordance with QCC's severance policy then in effect, as he
elects.
Douglas H. Hanson resigned his position as President and Chief Executive
Officer of QCC effective as of November 11, 1996. QCC, The Anschutz
Corporation, Anschutz Company, and Mr. Hanson entered into an agreement (the
"Agreement") to provide for Mr. Hanson's termination. Pursuant to the
Agreement, QCC will pay Mr. Hanson $9,000,000, payable in three equal
installments. The first installment was paid January 2, 1997; the two
remaining installments are scheduled to be paid on January 2, 1998 and 1999
with accrued interest at the annual rate of 6%. Anschutz Company, Qwest's
parent, unconditionally guaranteed these payments. The Agreement provides that
QCC will
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continue Mr. Hanson's health, disability or life insurance coverage, or provide
comparable coverage through November 10, 1997 unless Mr. Hanson obtains such
coverage from any other source before November 10, 1997, and that QCC will
transfer to Mr. Hanson his home office computer, facsimile machine and copying
machine. As described above in the Summary Compensation Table, QCC paid Mr.
Hanson for his accrued but unused vacation time. The Anschutz Corporation
agreed to forgive the $1,000,000 outstanding amount that Mr. Hanson owed
pursuant to a promissory note in favor of The Anschutz Corporation and to
release the mortgage and deed of trust securing the promissory note. Mr. Hanson
agreed that for a period of 36 months he will not compete with QCC by owning,
operating, consulting for, or being connected in any way with any business that
competes with QCC in the construction or sale of fiber optic systems or by
soliciting or contacting QCC's customers or any person identified as a QCC
customer within twelve months before the Agreement was signed. However,
Mr. Hanson, together with his wife, children, and parents may own up to 5% of
the stock of a corporation that is a direct competitor of QCC in the
construction and sale of fiber optic cable systems. Mr. Hanson agreed not to
disclose any confidential information in connection with the construction and
sale of fiber optic cable systems for a period of 36 months and not to disclose
any other confidential information that would adversely affect QCC or its
business for six months, in both cases without QCC's prior written permission,
which QCC may withhold in its reasonable discretion. The Agreement provides for
Mr. Hanson's release of all rights under the Growth Share Plan, see "--Growth
Share Plan" above, and for the parties' mutual releases of all claims for acts
or omissions prior to the date of the Agreement.
The Growth Share Plan provides that, upon a change in control, the
outstanding growth shares will become fully vested. See "--Growth Share Plan"
above.
The Equity Incentive Plan provides that, upon a change in control, all awards
granted under the Equity Incentive Plan will vest immediately. See "--Equity
Incentive Plan" above.
DIRECTOR COMPENSATION
Directors who are officers or employees of Qwest or any of its affiliates do
not receive compensation, except as officers or employees of Qwest or its
affiliates. Mr. Liebhaber has a consulting agreement with QCC that is described
under "Certain Transactions." The consulting agreement provides that he will be
paid an annual retainer fee of $250,000 plus reimbursement for out-of-pocket
expenses not to exceed $10,000 without QCC's prior approval. Mr. Liebhaber
agreed to waive director's fees in consideration for these payments.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company did not have a Compensation Committee during 1996. The Chairman
performed the functions of a Compensation Committee with respect to determining
compensation of senior executive officers of Qwest and QCC. In December 1996,
the board of directors of the Company's predecessor company created a
Compensation Committee and appointed Philip F. Anschutz and Cannon Y. Harvey to
serve on the committee. The Compensation Committee determines the salaries,
cash bonuses, and fringe benefits of the executive officers, reviews the salary
administration and benefit policies of the Company and administers the Growth
Share Plan.
Mr. Anschutz is a Director and Chairman of Qwest, a Director of QCC, a
Director and Chairman of Anschutz Company, Qwest's parent, and a Director and
Chairman of The Anschutz Corporation, a
subsidiary of Anschutz Company. Mr. Harvey is a Director of Qwest and QCC and
President and Chief Operating Officer of Anschutz Company and The Anschutz
Corporation.
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PRINCIPAL STOCKHOLDER
The Company is wholly owned directly by Anschutz Company, a Delaware
corporation, of which Mr. Philip F. Anschutz is the direct, sole owner. After
completion of the Offerings, assuming no exercise of the over-allotment
options granted to the Underwriters, Mr. Anschutz will be the beneficial owner
of 86.5% of the outstanding shares of Common Stock. The Company has granted a
warrant to Anschutz Family Investment Company LLC, an affiliate of Anschutz
Company, to purchase 4,300,000 shares of Common Stock after giving effect to
the increase in the authorized capital stock of Qwest and the stock dividend
effected prior to the Offerings. See "Certain Transactions." Anschutz Company
has granted or expects to grant from time to time security interests in all or
part of its shares of the Common Stock in connection with transactions entered
into by it or its affiliates. Although not anticipated, under certain
circumstances, shares of Common Stock could be sold pursuant to such security
interests, which could result in a change of control of the Company for
purposes of Delaware law.
CERTAIN TRANSACTIONS
The Company has easement agreements with certain railroads owned by Union
Pacific Corporation ("Union Pacific") arising from the 1996 merger between a
subsidiary of Union Pacific and Southern Pacific Rail Corporation ("Southern
Pacific"). The Company's sole beneficial owner, Mr. Philip F. Anschutz, was
the principal stockholder of Southern Pacific prior to the merger and is the
largest shareholder (holding approximately 5.2%) of Union Pacific. The
easement agreements provide for payment by the Company to Southern Pacific of
specified amounts based on miles of conduit used by the Company or sold to
third parties. The amounts paid by the Company to Southern Pacific under these
easement agreements for the years 1996, 1995 and 1994 and to reimburse
Southern Pacific for expenses related to the construction, operation and
maintenance of the Company's fiber optic system were approximately $3.5
million, $2.2 million and $0.9 million, respectively.
In October and November 1996, Union Pacific entered into agreements with the
Company to survey, construct and operate a fiber optic telecommunications
system on Union Pacific rights-of-way between Alazon, Nevada and Salt Lake
City, Utah. Fees paid or accrued by the Company during 1996 pursuant to these
agreements totaled $0.9 million.
Southern Pacific performed certain administrative functions for the Company
for which it charged the Company approximately $0.1 million for 1994. Charges
to the Company were not material in amount for each of the years 1996 and
1995. The Company provides telecommunications services to Southern Pacific.
For these services, Southern Pacific paid the Company $1.6 million, $3.6
million and $3.4 million in the years 1996, 1995 and 1994, respectively.
Certain affiliates of Anschutz Company indirectly provide facilities to the
Company at prevailing market rates. The Company rents its corporate office in
Denver, Colorado from a limited partnership in which Mr. Anschutz serves as a
general partner and indirectly holds limited partner interests and rents
certain telecommunications equipment used by the Company at its corporate
office from an affiliate of Anschutz Company. Such expenses totaled $0.3
million, $1.2 million and $1.0 million in the three months ended March 31,
1997 and the years ended December 31, 1996 and 1995, respectively, and were
not material in amount in 1994.
Affiliates of Anschutz Company incur certain costs on the Company's behalf,
including primarily insurance and corporate transportation services, and
allocate such costs to the Company based on actual usage. The cost to the
Company for such services was approximately $0.7 million, $2.1 million and
$2.5 million for the three months ended March 31, 1997 and for the years ended
December 31, 1996 and 1995, respectively, and was not material in 1994.
The Company historically has received capital contributions and noninterest-
bearing advances from Anschutz Company and an affiliate of Anschutz Company to
fund operations. The Company
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received capital contributions from Anschutz Company of $28.0 million and
$20.9 million in 1995 and 1994, respectively. Neither Anschutz Company nor any
of its affiliates made cash capital contributions to the Company during 1996.
Outstanding advances totaled $19.1 million at December 31, 1996 and
approximately $28.0 million at March 31, 1997.
On May 23, 1997, the Company sold to the Anschutz Family Investment Company
LLC, for $2.3 million in cash, a three-year warrant to acquire 4,300,000
shares of Common Stock at an exercise price of $28.00 per share, exercisable
on May 23, 2000. The warrant is not transferable. Shares of Common Stock
issued upon exercise of the warrant would be subject to restrictions on sale
and transfer for two years after exercise. Anschutz Company is the manager of,
and owns a 1% equity interest in, the Anschutz Family Investment Company LLC,
and a trust, of which members of Mr. Anschutz's immediate family are
beneficiaries, owns the remainder of the equity interests.
The Company has a tax sharing agreement with Anschutz Company that provides
for the allocation of tax liabilities and benefits. In general, the agreement
requires the Company to pay to Anschutz Company the applicable income taxes
for which the Company would be liable if it filed a separate return and
requires Anschutz Company to pay the Company for losses or credits which would
have resulted in a refund of taxes as if the Company had filed a separate
return. The payments under the agreement may be made in the form of cash,
setoffs, contributions to capital, dividends, notes or any combination of the
foregoing. The tax benefits payable to the Company under the existing
agreement through December 31, 1996 ($11.1 million) were forgiven.
The tax sharing agreement was amended, effective as of January 1, 1997 (the
"Effective Date"), to provide that the Company will be responsible to Anschutz
Company to the extent of income taxes for which the Company would have been
liable if it had filed a separate return after giving effect to any loss or
credit carryover belonging to the Company from taxable periods after the
Effective Date. Anschutz Company will be responsible to the Company to the
extent an unused loss or credit can be carried back to an earlier taxable
period after the Effective Date.
The ABN AMRO $100.0 million revolving credit facility and $50.0 million line
of credit are collateralized by shares owned and pledged by an affiliate of
Anschutz Company. For a description of these facilities, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources" and "Description of Certain Indebtedness."
Anschutz Company has guaranteed a QCC construction loan with an outstanding
balance at March 31, 1997 of approximately $15.0 million. The construction
loan pertains to a network construction project undertaken by QCC for an
interexchange carrier. The guarantee is limited to indemnification against
defective construction, warranty or other claims of the interchange carrier
that would reduce or eliminate the interexchange carrier's obligation to pay
QCC. In addition, Anschutz Company has guaranteed bonds totaling $175.0
million furnished by the Company to support its construction obligations under
the Frontier contract for sale of dark fiber. See "Business--The Qwest
Network--Dark Fiber and High Volume Capacity Sales." The Company has agreed to
indemnify Anschutz Company and its subsidiaries against any cost or losses
incurred by any of them as a result of their providing credit support to the
Company (in the form of collateral pledges, guarantees, bonds or otherwise).
Richard T. Liebhaber, a Director of the Company, entered into a consulting
agreement with an affiliate of Anschutz Company in December 1996 to provide
consulting services in 1997 and serve on the board of directors of Qwest and
its subsidiaries upon request. The agreement was assigned to the Company in
February 1997. Mr. Liebhaber is required under the contract to provide a
minimum of 30 days of consulting services to QCC during 1997 and will be paid
$250,000 plus out-of-pocket expenses not to exceed $10,000. Mr. Liebhaber, was
granted 10,000 growth shares, effective December 1, 1996, with a performance
cycle ending December 31, 2001. See "Management--Growth Share Plan."
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DESCRIPTION OF CAPITAL STOCK
The following summary description of the capital stock of the Company does
not purport to be complete and is subject to the provisions of the Certificate
of Incorporation and By-laws, which are included as exhibits to the
Registration Statement of which this Prospectus forms a part and by the
provisions of applicable law.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
Pursuant to the Certificate of Incorporation, the Company has authority to
issue 425,000,000 shares of capital stock, consisting of 400,000,000 shares of
Common Stock, par value $.01 per share, and 25,000,000 shares of Preferred
Stock, par value $.01 per share ("Preferred Stock"). As of March 31, 1997, the
Common Stock was held solely by Anschutz Company.
As of March 31, 1997, on a pro forma basis as adjusted to reflect a stock
dividend of 86,490,000 shares effected prior to the Offerings, 86,500,000
shares of Common Stock and no shares of Preferred Stock were issued and
outstanding. The rights of the holders of Common Stock discussed below are
subject to such rights as the Board may hereafter confer on the holders of
Preferred Stock; accordingly, rights conferred on holders of Preferred Stock
that may be issued in the future under the Certificate of Incorporation may
adversely affect the rights of the holders of Common Stock.
On May 23, 1997, the Company sold to the Auschutz Family Investment Company
LLC a three-year warrant to acquire 4,300,000 shares of Common Stock,
exercisable on May 23, 2000. See "Certain Transactions."
COMMON STOCK
Voting Rights. Each holder of the Common Stock shall be entitled to attend
all special and annual meetings of the stockholders of the Company and,
together with the holders of all other classes of stock entitled to attend and
vote at such meetings, to vote upon any matter or thing (including, without
limitation, the election of one or more directors) properly considered and
acted upon by the stockholders. Holders of the Common Stock are entitled to
one vote per share.
Liquidation Rights. In the event of any dissolution, liquidation or winding
up of the Company, whether voluntary or involuntary, the holders of the Common
Stock and holders of any class or series of stock entitled to participate
therewith, shall become entitled to participate in the distribution of any
assets of the Company remaining after the Company shall have paid, or provided
for payment of, all debts and liabilities of the Company and after the Company
shall have paid, or set aside for payment, to the holders of any class of
stock having preference over the Common Stock in the event of dissolution,
liquidation or winding up the full preferential amounts (if any) to which they
are entitled.
Dividends. Dividends may be paid on the Common Stock and on any class or
series of stock entitled to participate therewith when and as declared by the
Board. See "Dividend Policy."
AUTHORIZED PREFERRED STOCK
The Certificate of Incorporation authorizes the Board, from time to time and
without further stockholder action, to provide for the issuance of up to
25,000,000 shares of Preferred Stock, par value $.01 per share, in one or more
series, and to fix the relative rights and preferences of the shares,
including voting powers, dividend rights, liquidation preferences, redemption
rights and conversion privileges. As of the date hereof, the Board has not
provided for the issuance of any series of such Preferred Stock and there are
no agreements or understandings for the issuance of any such Preferred Stock.
Through its broad discretion with respect to the creation and issuance of
Preferred Stock
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without stockholder approval, the Board could adversely affect the voting
power of the holders of Common Stock and, by issuing shares of Preferred Stock
with certain voting, conversion or redemption rights or all of them, could
discourage any attempt to obtain control of the Company.
CERTAIN CHARTER AND STATUTORY PROVISIONS
The Company's Certificate of Incorporation and By-laws include certain
provisions that may have the effect of delaying, deterring or preventing a
future takeover or change in control of the Company unless such takeover or
change in control is approved by the Company's Board of Directors. See "Risk
Factors--Anti-Takeover Provisions."
The Company's Certificate of Incorporation places certain restrictions on
who may call a special meeting of stockholders. In addition, the Company's
Board of Directors has the authority to issue up to 25,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, and
privileges of those shares without any further vote or actions by the
stockholders. The rights of the holders of Common Stock will be subject to,
and may be adversely affected by, the rights of the holders of any Preferred
Stock that may be issued in the future. The issuance of such shares of
Preferred Stock, while potentially providing desirable flexibility in
connection with possible acquisitions and serving other corporate purposes,
could have the effect of making it more difficult for a third party to
acquire, or may discourage a third party from attempting to acquire, a
majority of the outstanding voting stock of the Company. The Company has no
present intention to issue such shares of Preferred Stock.
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, the statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless (i)
prior to such date, the board approved either the business combination or the
transaction that resulted in the stockholder becoming an interested
stockholder, (ii) upon consummation of the transaction that resulted in such
person becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the
transaction commenced (excluding, for purposes of determining the number of
shares outstanding, shares owned by certain directors or certain employee
stock plans), or (iii) on or after the date the stockholder became an
interested stockholder, the business combination is approved by the board of
directors and authorized by the affirmative vote (and not by written consent)
of at least two-thirds of the outstanding voting stock excluding that stock
owned by the interested stockholder. A "business combination" includes a
merger, asset sale or other transaction resulting in a financial benefit to
the interested stockholder. An "interested stockholder" is a person who (other
than the corporation and any direct or indirect majority-owned subsidiary of
the corporation), together with affiliates and associates, owns (or, as an
affiliate or associate, within three years prior, did own) 15% or more of the
corporation's outstanding voting stock. The application of Section 203 could
have the effect of delaying or preventing a change of control of the Company.
The Certificate of Incorporation allows the Company to require
certifications with respect to beneficial ownership of Common Stock by
"aliens." For purposes of this restriction, the term "alien" means aliens and
their representatives, foreign governments and their representatives and
corporations organized under the laws of a foreign country. The Communications
Act of 1934 limits the ownership by non-U.S. citizens, foreign corporations
and foreign governments of an entity directly or indirectly holding a common
carrier radio license. See "Business--Regulation."
Certain provisions of the Company's By-laws may have the effect of delaying
or preventing changes in control or management of the Company. See "Risk
Factors--Anti-Takeover Provisions."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholders Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Offerings, there has been no public market for the Common
Stock. Sales of a substantial amount of Common Stock in the public market, or
the perception that such sales may occur, could adversely affect the market
price of the Common Stock prevailing from time to time in the public market
and could impair the Company's ability to raise additional capital through the
sale of its equity securities in the future.
Upon completion of the Offerings, assuming no exercise of the over-allotment
options granted to the Underwriters, the Company will have 100,000,000 shares
of Common Stock outstanding, including 13,500,000 Shares of Common Stock
offered hereby and 86,500,000 "restricted" shares of Common Stock. The
restricted shares of Common Stock generally will be eligible for sale under
Rule 144 as currently in effect, beginning in February 1998.
The Shares offered hereby will be freely tradable without restriction or
further registration under the Securities Act by persons other than
"affiliates" of the Company within the meaning of Rule 144 promulgated under
the Securities Act. The holders of restricted shares generally will be
entitled to sell these shares in the public securities market without
registration under the Securities Act to the extent permitted by Rule 144 (or
Rule 145, as applicable) promulgated under the Securities Act or any exemption
under the Securities Act.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted shares from the
Company or any "affiliate" of the Company, as that term is defined under the
Securities Act, the holder is entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of the
then-outstanding shares of Common Stock or the average weekly trading volume
of shares of Common Stock on all exchanges and reported through the automated
quotation system of a registered securities association during the four
calendar weeks preceding the date on which notice of the sale is filed with
the Commission. Sales under Rule 144 are also subject to certain restrictions
on the manner of sales, notice requirements and the availability for current
public information about the Company. If two years have elapsed since the date
of acquisition of restricted shares from the Company or from any "affiliate"
of the Company, and the holder thereof is deemed not to have been an affiliate
of the Company at any time during the 90 days preceding a sale, such person
would be entitled to sell such Common Stock in the public market under Rule
144(k) without regard to the volume limitations, manner of sale provisions,
public information requirements or notice requirements.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under the Equity
Incentive Plan, thus permitting the resale of such shares by non-affiliates
upon issuance in the public market without restriction under the Securities
Act. Such registration statement will automatically become effective
immediately upon filing. Following completion of the Offerings, approximately
2,000,000 shares of Common Stock will be issuable to certain holders of growth
shares under the Growth Share Plan. To the extent such shares are issued, they
will be either freely tradeable or eligible for sale under Rule 144; however
approximately 59% of the issuable shares will be subject to the lock-up
restrictions described below. See "Management--Growth Share Plan."
Subject to certain exceptions, the Company, its parent and certain directors
and officers of the Company have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, or announce the offering of
any shares of Common Stock, including any such shares beneficially or
indirectly owned or controlled by the Company, or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock for 180 days
from the date of this Prospectus, without the prior written consent of Salomon
Brothers Inc.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
THE NOTES
On March 31, 1997, Qwest issued and sold $250.0 million in principal amount
of its 10 7/8% Senior Notes Due 2007 (the "Notes") to a group of institutional
and accredited investors. The Indenture for the Notes contains certain
covenants that, among other things, limit the ability of Qwest and certain of
its subsidiaries (the "Restricted Subsidiaries") to incur additional
indebtedness and issue preferred stock, pay dividends or make other
distributions, repurchase capital stock or subordinated indebtedness, create
certain liens, enter into certain transactions with affiliates, sell assets of
Qwest or its Restricted Subsidiaries, issue or sell capital stock of Qwest's
Restricted Subsidiaries or enter into certain mergers and consolidations. In
addition, under certain limited circumstances, Qwest will be required to offer
to purchase the Notes at a price equal to 100% of the principal amount thereof
plus accrued and unpaid interest to the date of purchase, with the excess
proceeds of certain asset sales. In the event of a Change of Control (as
defined in the Indenture), holders of the Notes will have the right to require
Qwest to purchase all of their Notes at a price equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest. The Indenture
relating to the Notes is an exhibit to the Registration Statement of which
this Prospectus is a part. Generally, the Notes are redeemable, at the option
of the Company, at stated premiums over par on or after April 1, 2002, and up
to 35% of the Notes may be redeemed at a premium over par prior to April 1,
2000 with the proceeds of certain public stock offerings.
The Company entered into a Registration Agreement dated March 31, 1997 (the
"Registration Agreement") with the initial purchasers of the Notes (the
"Initial Purchasers") for the benefit of the holders of the Notes. Pursuant to
the Registration Agreement the Company agreed, for the benefit of the holders,
that it will, at its cost, (a) file a registration statement (the "Exchange
Offer Registration Statement") with the Commission with respect to a
registered offer (the "Exchange Offer") to exchange the Notes for a series of
notes (the "New Notes") with terms identical in all material respects to the
Notes (except that the New Notes will not contain terms with respect to
registration rights or transfer restrictions) or (b) in lieu of the Exchange
Offer Registration Statement, file a shelf registration statement (the "Shelf
Registration Statement") with respect to registration of resales of the Notes.
If (i) the Exchange Offer Registration Statement has not been filed with the
Commission within 90 days after March 31, 1997 (the "Closing Date") or
declared effective within 150 days after the Closing Date, or the Exchange
Offer has not been consummated within 180 days after the Closing Date or (ii)
in lieu thereof, the Shelf Registration Statement has not been filed with the
Commission and declared effective within 210 days after the Closing Date or
(iii) after either the Exchange Offer Registration Statement or the Shelf
Registration Statement has been declared effective, as the case may be, it
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes or New Notes in accordance with and during
the periods specified in the Registration Agreement (each such event referred
to in clauses (i) through (iii), a "Registration Default"), additional
interest ("Liquidated Interest") will accrue on the Notes and the New Notes
(in addition to the stated interest on the Notes and the New Notes) from and
including the date on which any such Registration Default shall occur to but
excluding the date on which all Registration Defaults have been cured.
Liquidated Interest will be payable in cash semiannually in arrears each April
1 and October 1, at a rate per annum equal to 0.50% of the principal amount of
the Notes during the 90-day period immediately following the occurrence of any
Registration Default and shall increase by 0.25% per annum of the principal
amount of the Notes at the end of each subsequent 90-day period, but in no
event shall such rates exceed 2.00% per annum in the aggregate regardless of
the number of Registration Defaults.
CREDIT FACILITIES
QC is the borrower under a $100.0 million revolving credit facility with
certain commercial lending institutions and ABN AMRO North America, Inc. as
agent for the lenders. The credit facility is secured by pledges of publicly
traded stock owned by an affiliate of Anschutz Company and is being used to
provide working capital and capital expansion funds to QCC. The credit
facility is structured as a three-year revolving bank credit facility which
converts to a two-year term loan that matures on April 2, 2001.
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Borrowings bear interest at an adjustable rate, currently 6.54% per annum,
which is based on the agent's prime rate or LIBOR plus an applicable margin.
On March 31, 1997, the Company paid down the $80.0 million balance under this
facility with a portion of the net proceeds of the sale of the Notes. In May
1997 (following receipt of the proceeds under the GTE agreement), the Company
borrowed $28.0 million under this facility and used this amount to repay all
outstanding advances from the Company's parent, the proceeds of which were
used to fund network construction capital expenditures and working capital.
The outstanding balance under this facility will be repaid with a portion of
the proceeds of the Offerings. See "Use of Proceeds."
The facility contains covenants that, among other things, restrict QC's use
of the loan proceeds to working capital, capital expenditures and general
corporate purposes of QC and its subsidiaries and limit QC's ability to make
certain dividends, distributions or investments, and mergers. The facility
also requires certain collateral value to outstanding amount ratios to be
maintained. The facility generally permits dividends or distributions on
capital stock in amounts necessary to service scheduled principal and interest
payments on debt of the Company of up to a maximum of $450.0 million principal
amount plus amounts not to exceed 50% of consolidated net income, and other
amounts for certain taxes and an annual $2.0 million basket. The facility
contains certain events of default including, among other things, failure to
pay, breach of the agreement and insolvency. An event of default also occurs
if obligations under the facility cease to rank pari passu with other
unsecured obligations. Upon the occurrence of an event of default, the
facility permits the lenders to declare all outstanding borrowings to be
immediately due and payable and to proceed against the collateral.
QC also has a one year $50.0 million line of credit from ABN AMRO. The
facility is secured by pledges of publicly traded stock owned by an affiliate
of Anschutz Company and is being used to provide working capital to QCC. The
facility contains, except for terms of repayment, substantially identical
terms as the $100.0 million revolving credit facility described above. No
amounts are, or ever have been, outstanding under the facility.
The Company intends to terminate the latter two existing credit facilities
totalling $150.0 million as soon as practicable after completion of the
Offerings. The Company intends to obtain new bank credit facilities of lesser
amount, which may be secured or unsecured, as permitted under the Indenture.
The Company is in discussions with various potential lenders in this regard.
The Company also may issue other public or private debt. No credit support
will be provided by the Company's parent for any new facilities. No assurance
can be given as to when or whether the Company will be able to obtain new
credit facilities on acceptable terms.
VENDOR FINANCING
The Company and Nortel, individually and as agent for itself and other
specified lenders, entered into a $90.0 million credit agreement dated as of
May 6, 1997 to finance the transmission electronics equipment to be purchased
from Nortel under a procurement agreement. Under this credit agreement, the
Company may borrow funds as it purchases the equipment to fund up to 75% of
the purchase price of such equipment and related engineering and installation
services provided by Nortel, with the purchased equipment and related items
serving as the collateral for the loans. Principal amounts outstanding under
the credit agreement will be payable in quarterly installments commencing on
June 30, 2000, with repayment in full due and payable on March 31, 2004.
Borrowings will bear interest at the Company's option at either: (i) a
floating base rate announced by a designated reference bank plus an applicable
margin; or (ii) LIBOR plus an applicable margin.
The credit agreement contains covenants that, among other things, restrict
application of the loan proceeds to the purchase of the Nortel equipment and
related engineering and installation services provided by Nortel, place
limitations on certain asset dispositions and sales of collateral, and require
QCC's direct compliance with the debt-service ratios to which it is subject as
a Restricted Subsidiary under the Indenture for the Notes. Initial extensions
of credit are subject to certain conditions, among
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others, requiring that QCC deliver to the agent for the benefit of the lenders
security interests, in form and substance satisfactory to the agent, in the
equipment to be purchased. The credit agreement generally permits QCC to pay
dividends and make distributions in respect to its capital stock except where
such payments would impair QCC's ability, for the three-month period following
such dividend or distribution, to repay indebtedness incurred under the credit
agreement, and authorizes QCC to pay dividends and make distributions to Qwest
in order to allow Qwest to satisfy its obligations with respect to the Notes
and other debt that is solely an obligation of Qwest. The credit agreement
contains certain events of default including, among other things, failure to
pay, breach of the agreement and insolvency. Upon the occurrence of an event
of default, the credit agreement permits the agent to declare all borrowings
to be immediately due and payable, terminate loan commitments and/or proceed
against the collateral.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the U.S. Underwriters (the "U.S. Underwriting
Agreement"), the Company has agreed to sell to each of the U.S. Underwriters
named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for
whom Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated are acting as the representatives (the "U.S. Representatives"),
has severally agreed to purchase the number of Shares set forth opposite its
name below:
<TABLE>
<CAPTION>
UNDERWRITING
U.S. UNDERWRITERS COMMITMENT
----------------- ------------
<S> <C>
Salomon Brothers Inc ...........................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
Goldman, Sachs & Co. ...........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..............................................
----------
Total......................................................... 11,500,000
==========
</TABLE>
The Company has been advised by the U.S. Representatives that the several
U.S. Underwriters initially propose to offer such Shares to the public at the
Price to Public set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per Share. The
U.S. Underwriters may allow, and such dealers may re-allow, a concession not
in excess of $ per Share to other dealers. After the Offerings, the Price
to Public and such concessions may be changed.
The Company has granted to the U.S. Underwriters and the international
underwriters (the "International Underwriters" and, collectively with the U.S.
Underwriters, the "Underwriters") options, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 2,025,000
additional shares of Common Stock from the Company at the Price to Public less
the Underwriting Discount, solely to cover over-allotments. To the extent that
the U.S. Underwriters and the International Underwriters exercise such
options, each of the U.S. Underwriters and the International Underwriters, as
the case may be, will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such U.S. Underwriter's or
International Underwriter's initial commitment.
The Company has entered into an International Underwriting Agreement with
the International Underwriters named therein, for whom Salomon Brothers
International Limited, Donaldson, Lufkin & Jenrette Securities Corporation,
Goldman Sachs International and Merrill Lynch International are acting as the
representatives (the "International Representatives" and, together with the
U.S. Representatives, the "Representatives"), providing for the concurrent
offer and sale of 2,000,000 Shares (in addition to the shares covered by the
over-allotment options described above) outside the United States and Canada.
Both the U.S. Underwriting Agreement and the International Underwriting
Agreement provide that the obligations of the U.S. Underwriters and the
International Underwriters are such that if any of the Shares are purchased by
the U.S. Underwriters pursuant to the U.S. Underwriting Agreement, or by the
International Underwriters pursuant to the International Underwriting
Agreement, all the Shares agreed to be purchased by either the U.S.
Underwriters or the International Underwriters, as the case may be, pursuant
to their respective agreements must be so purchased. The Price to Public and
Underwriting Discount per Share for the U.S. Offering and the International
Offering will be identical. The closing of the International Offering is a
condition to the closing of the U.S. Offering and the closing of the U.S.
Offering is a condition to the closing of the International Offering.
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Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 11,500,000 Shares offered by the U.S. Underwriters, (i) it is not
purchasing any Shares for the account of anyone other than a United States or
Canadian Person, (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute this Prospectus to any person
outside of the United States or Canada, or to anyone other than a United
States or Canadian Person and (iii) any dealer to whom it may sell any Shares
will represent that it is not purchasing for the account of anyone other than
a United States or Canadian Person and agree that it will not offer or resell,
directly or indirectly, any Shares outside of the United States or Canada, or
to anyone other than a United States or Canadian Person or to any other dealer
who does not so represent and agree. Each International Underwriter has
severally agreed that, as part of the distribution of the 2,000,000 Shares
offered by the International Underwriters, (i) it is not purchasing any Shares
for the account of any United States or Canadian Person, (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any
Shares or distribute any Prospectus relating to the International Offering to
any person in the United States or Canada, or to any United States or Canadian
Person and (iii) any dealer to whom it may sell any Shares will represent that
it is not purchasing for the account of any United States or Canadian Person
and agree that it will not offer or resell, directly or indirectly, any Shares
in the United States or Canada, or to any United States or Canadian Person or
to any other dealer who does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S.
Underwriters and International Underwriters. "United States or Canadian
Person" means any person who is a national or resident of the United States or
Canada, any corporation, partnership or other entity created or organized in
or under the laws of the United States or Canada or of any political
subdivision thereof, and any estate or trust the income of which is subject to
United States or Canadian federal income taxation, regardless of its source
(other than any non-United States or non-Canadian branch of any United States
or Canadian Person), and includes any United States or Canadian branch of a
person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of Shares as may be mutually agreed.
The price of any Shares so sold shall be the Price to Public, less an amount
not greater than the concession to securities dealers. To the extent that
there are sales between the U.S. Underwriters and the International
Underwriters pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, the number of Shares initially available for sale
by the U.S. Underwriters or by the International Underwriters may be more or
less than the amount specified on the cover page of this Prospectus.
Any offer of the Shares in Canada will be made only pursuant to an exemption
from the prospectus filing requirement and an exemption from the dealer
registration requirement (where such an exemption is not available, offers
shall be made only by a registered dealer) in the relevant Canadian
jurisdiction where such offer is made.
The U.S. Underwriting Agreement provides that the Company will indemnify the
U.S. Underwriters against certain liabilities and expenses, including
liabilities under the Securities Act, or contribute to payments the U.S.
Underwriters may be required to make in respect thereof.
Subject to certain exceptions, the Company, its parent and certain directors
and officers of the Company have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, or announce the offering of
any shares of Common Stock, including any such shares beneficially or
indirectly owned or controlled by the Company, or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock, for 180 days
from the date of this Prospectus, without the prior written consent of Salomon
Brothers Inc.
77
<PAGE>
At the Company's request, the U.S. Underwriters have reserved up to 675,000
shares of Common Stock (the "Directed Shares") for sale at the Price to Public
to persons who are directors, officers or employees of, or otherwise
associated with, the Company and who have advised the Company of their desire
to purchase such Shares. The number of Shares of Common Stock available for
sale to the general public will be reduced to the extent of sales of Directed
Shares to any of the persons for whom they have been reserved. Any Shares not
so purchased will be offered by the U.S. Underwriters on the same basis as all
other Shares offered hereby.
During and after the Offerings, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offerings. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offerings
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail
in the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public will be determined by negotiations between the
Company and the Representatives. Among the factors to be considered in
determining the Price to Public are prevailing market conditions, the market
values of publicly traded companies that the Underwriters believe to be
somewhat comparable to the Company, the demand for the Shares and for similar
securities of publicly traded companies that the Underwriters believe to be
somewhat comparable to the Company, the future prospects of the Company and
its industry in general, sales, earnings and certain other financial and
operating information of the Company in recent periods, and other factors
deemed relevant. There can be no assurance that the prices at which the Shares
will sell in the public market after the Offerings will not be lower than the
Price to Public.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters in
connection with the Common Stock offered hereby are being passed upon for the
Company by Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver,
Colorado 80203. The validity of the Common Stock is being passed upon for the
Underwriters by their counsel, Shearman & Sterling, 599 Lexington Avenue, New
York, NY 10022-6069.
EXPERTS
The financial statements and schedules of Qwest Communications International
Inc. as of December 31, 1996 and 1995, and for each of the years in the three-
year period ended December 31, 1996, have been included herein and in the
Registration Statement in reliance upon the report, dated February 19, 1997,
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
78
<PAGE>
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the Offerings, the Company will be required to file reports and
other information with the Securities and Exchange Commission (the
"Commission") pursuant to the informational requirements of the Exchange Act.
The Company intends to furnish its stockholders with Annual Reports containing
Consolidated Financial Statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each year.
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is a part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the securities offered hereby, reference is made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of
any documents referred to herein are not necessarily complete, and in each
instance, reference is made to the copy of the document filed as an exhibit to
the Registration Statement. The Company will issue annual and quarterly
reports. Annual reports will include audited financial statements prepared in
accordance with accounting principles generally accepted in the United States
and a report of its independent auditors with respect to the examination of
such financial statements. In addition, the Company will issue to its
securityholders such other unaudited quarterly or other interim reports as it
deems appropriate.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of
the Registration Statement may be obtained from the Commission at prescribed
rates from the Public Reference Section of the Commission at such address, and
at the Commission's regional offices located at 7 World Trade Center, 13th
Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are
publicly available through the Commission's site on the Internet's World Wide
Web, located at http://www.sec.gov.
79
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
<TABLE>
<S> <C>
Independent Auditors' Report.............................................. F-2
Consolidated Balance Sheets of Qwest Communications International Inc. and
Subsidiaries as of December 31, 1996 and 1995 and March 31, 1997 (Unau-
dited).................................................................... F-3
Consolidated Statements of Operations of Qwest Communications Interna-
tional Inc. and Subsidiaries for the years ended December 31, 1996, 1995 and
1994 and the Three Months Ended March 31, 1997 and 1996 (Unaudited)....... F-4
Consolidated Statements of Stockholder's Equity of Qwest Communications
International Inc. and Subsidiaries for the years ended December 31,
1996, 1995 and 1994 and the Three Months Ended March 31, 1997 and 1996
(Unaudited).............................................................. F-5
Consolidated Statements of Cash Flows of Qwest Communications Interna-
tional Inc. and Subsidiaries for the years ended December 31, 1996, 1995 and
1994 and the Three Months Ended March 31, 1997 and 1996 (Unaudited)...... F-6
Notes to Consolidated Financial Statements of Qwest Communications Inter-
national Inc. and Subsidiaries (Information as of March 31, 1997 and for
the three months ended March 31, 1997 and 1996 is Unaudited)............. F-8
</TABLE>
F-1
<PAGE>
When the transactions referred to in note 18 of the notes to consolidated
financial statements have become effective, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Qwest Communications International Inc.:
We have audited the accompanying consolidated balance sheets of Qwest
Communications International Inc. and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholder's
equity and cash flows for each of the years in the three-year period ended
December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 provide a reasonable basis
for our opinion.
In our opinion, the consolidated 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, 1996 and
1995, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Denver, Colorado
February 19, 1997, except as
to note 1, paragraph (i) and
note 18, which are as of June , 1997
F-2
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995, AND MARCH 31, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................... $160,669 $ 6,905 $ 1,484
Accounts receivable, net (notes 4 and 7)..... 20,618 29,248 14,871
Costs and estimated earnings in excess of
billings (note 6)........................... 9,187 4,989 24,127
Deferred income tax asset (note 12).......... 2,008 6,301 4,392
Notes and other receivables (note 8)......... 14,967 14,934 6,253
Other current assets (note 14)............... 5,886 328 1,260
-------- -------- --------
Total current assets....................... 213,335 62,705 52,387
Property and equipment, net (notes 5, 9, 11 and
12)........................................... 231,228 186,535 114,748
Deferred income tax asset...................... 5,082 -- --
Notes and other receivables (note 8)........... 127 11,052 8,430
Intangible and other long-term assets, net of
amortization (notes 11 and 14)................ 19,842 3,967 8,613
-------- -------- --------
Total assets............................... $469,614 $264,259 $184,178
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable and accrued expenses (note
10)......................................... $ 98,761 $ 80,129 $ 26,748
Payable to related parties, net (note 13).... -- -- 2,983
Deferred revenue............................. 2,828 2,649 3,969
Billings in excess of costs and estimated
earnings (note 6)........................... 298 5,034 --
Current portion of long-term debt (note 11).. 24,859 25,193 21,270
Advances from Parent (note 13)............... 27,952 19,138 --
-------- -------- --------
Total current liabilities.................. 154,698 132,143 54,970
Long-term debt (note 11)....................... 286,325 109,268 68,793
Advances from Parent (note 13)................. -- -- 27,119
Deferred income tax liability (note 12)........ -- 1,708 922
Other liabilities (note 15).................... 23,925 11,698 5,899
-------- -------- --------
Total liabilities.......................... 464,948 254,817 157,703
-------- -------- --------
Stockholder's equity:
Preferred stock, $.01 par value. Authorized
25,000,000 shares. No shares issued and
outstanding (note 18)....................... -- -- --
Common stock, $.01 par value. Authorized
400,000,000 shares. Issued and outstanding
86,500,000 shares (note 18)................. 865 865 865
Additional paid-in capital (note 18)......... 55,027 55,027 65,093
Accumulated deficit.......................... (51,226) (46,450) (39,483)
-------- -------- --------
Total stockholder's equity................. 4,666 9,442 26,475
-------- -------- --------
Commitments and contingencies (note 14)
Total liabilities and stockholder's
equity.................................... $469,614 $264,259 $184,178
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- ----------------------------
1997 1996 1996 1995 1994
--------- --------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Carrier services......... $ 11,199 $ 18,493 $ 57,573 $ 67,789 $ 50,240
Commercial services (note
13)..................... 9,411 7,013 34,265 20,412 8,712
--------- --------- -------- -------- --------
20,610 25,506 91,838 88,201 58,952
Network construction
services (note 6)....... 52,083 9,126 139,158 36,901 11,921
--------- --------- -------- -------- --------
72,693 34,632 230,996 125,102 70,873
--------- --------- -------- -------- --------
Operating expenses:
Telecommunications
services................ 18,063 23,862 80,368 81,215 48,239
Network construction
services (note 13)...... 36,265 6,847 87,542 32,754 9,369
Selling, general and
administrative (notes 2
and 13)................. 13,947 14,527 45,755 37,195 21,516
Growth share plan (note
15)..................... 13,100 -- 13,100 -- --
Depreciation and
amortization............ 3,962 4,049 16,245 9,994 2,364
--------- --------- -------- -------- --------
85,337 49,285 243,010 161,158 81,488
--------- --------- -------- -------- --------
Loss from operations... (12,644) (14,653) (12,014) (36,056) (10,615)
Other income (expense):
Gain on sale of contract
rights (note 3)......... 7,710 -- -- -- --
Gain on sale of
telecommunications
service agreements (note
4)...................... -- -- 6,126 -- --
Interest expense, net.... (984) (1,351) (6,827) (4,248) (219)
Interest income.......... 680 769 2,454 1,782 191
Other (expense) income,
net (note 4)............ (1,996) (54) 60 55 (42)
--------- --------- -------- -------- --------
Loss before income tax
benefit............... (7,234) (15,289) (10,201) (38,467) (10,685)
Income tax benefit (note
12)....................... 2,458 5,310 3,234 13,336 3,787
--------- --------- -------- -------- --------
Net loss............... $ (4,776) $ (9,979) $ (6,967) $(25,131) $ (6,898)
========= ========= ======== ======== ========
Loss per share............. $ (.05) $ (.11) $ (.08) $ (.29) $ (.08)
========= ========= ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK
----------------- ADDITIONAL TOTAL
NUMBER PAID-IN ACCUMULATED STOCKHOLDER'S
OF SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- ------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1,
1994................... 86,500,000 $865 $ 18,668 $ (7,454) $ 12,079
Contribution from
Parent................. -- -- 20,900 -- 20,900
Repurchase of warrants.. -- -- (1,500) -- (1,500)
Net loss................ -- -- -- (6,898) (6,898)
---------- ---- -------- -------- --------
BALANCES, DECEMBER 31,
1994................... 86,500,000 865 38,068 (14,352) 24,581
Contribution from
Parent................. -- -- 28,000 -- 28,000
Reduction in additional
paid-in capital
attributable to effect
of the tax allocation
agreement with Parent
(note 12).............. -- -- (975) -- (975)
Net loss................ -- -- -- (25,131) (25,131)
---------- ---- -------- -------- --------
BALANCES, DECEMBER 31,
1995................... 86,500,000 865 65,093 (39,483) 26,475
Cancellation of income
tax benefit receivable
from Parent (note 12).. -- -- (11,088) -- (11,088)
Expenses incurred by
Parent on Company's
behalf (note 13)....... -- -- 1,022 -- 1,022
Net loss................ -- -- -- (6,967) (6,967)
---------- ---- -------- -------- --------
BALANCES, DECEMBER 31,
1996................... 86,500,000 865 55,027 (46,450) 9,442
Net loss (Unaudited).... -- -- -- (4,776) (4,776)
---------- ---- -------- -------- --------
BALANCES, MARCH 31, 1997
(UNAUDITED)............ 86,500,000 $865 $ 55,027 $(51,226) $ 4,666
========== ==== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
-------------------- --------------------------
1997 1996 1996 1995 1994
--------- --------- ------- -------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss.................. $ (4,776) $ (9,979) $(6,967) $(25,131) $(6,898)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities:
Gain on sale of contract
rights (note 3)........ (7,710) -- -- -- --
Gain on sale of
telecommunications
service agreements
(note 4)............... -- -- (6,126) -- --
Depreciation and
amortization........... 3,962 4,049 16,245 9,994 2,364
Deferred income tax
(benefit) expense (note
12).................... (2,497) 475 (1,123) (2,839) 6,920
Changes in operating
assets and liabilities:
Receivables--accounts
and notes, net....... 19,522 3,828 (25,680) (21,379) 910
Costs and estimated
earnings in excess of
billings............. (4,198) 2,133 19,138 (21,650) (2,210)
Accounts payable and
accrued expenses..... 33,632 (5,733) 25,381 4,339 5,795
Payable to related
parties.............. -- 403 (2,983) 1,263 1,560
Billings in excess of
costs and estimated
earnings............. (4,736) 4,034 5,034 -- (831)
Other changes......... 160 (395) 9,605 (1,232) (4,304)
--------- --------- ------- -------- -------
Net cash provided by
(used in) operating
activities......... 33,359 (1,185) 32,524 (56,635) 3,306
--------- --------- ------- -------- -------
Cash flows from investing
activities:
Proceeds from sale of
contract rights
(note 3)................. 7,000 -- -- -- --
Proceeds from sale of
telecommunications
service agreements....... -- -- 4,500 -- --
Expenditures for property
and equipment............ (63,922) (11,606) (57,122) (46,313) (40,926)
Cash paid for
acquisitions, net of cash
acquired................. -- -- -- (12,545) --
Investments in and
advances to
telecommunications
companies, net........... -- -- -- -- (786)
--------- --------- ------- -------- -------
Net cash used in
investing
activities......... (56,922) (11,606) (52,622) (58,858) (41,712)
--------- --------- ------- -------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------------- --------------------------
1997 1996 1996 1995 1994
---------- --------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing
activities:
Borrowings of long-term
debt..................... $ 270,000 $ 4,058 $ 65,000 $62,606 $25,401
Repayments of long-term
debt..................... (93,277) (10,504) (21,322) (2,331) (173)
Debt issuance costs....... (8,210) (36) (112) (591) (190)
Advances from Parent, net
of repayments............ 8,814 22,386 (19,069) 26,256 (10,174)
Contribution from Parent.. -- -- -- 28,000 20,900
Expenses incurred by
Parent on Company's
behalf (note 13)......... -- -- 1,022 -- --
Repurchase of common stock
warrants................. -- -- -- -- (1,500)
---------- -------- -------- ------- -------
Net cash provided by
financing
activities......... 177,327 15,904 25,519 113,940 34,264
---------- -------- -------- ------- -------
Net increase
(decrease) in cash
and cash
equivalents........ 153,764 3,113 5,421 (1,553) (4,142)
Cash and cash equivalents,
beginning of period........ 6,905 1,484 1,484 3,037 7,179
---------- -------- -------- ------- -------
Cash and cash equivalents,
end of period.............. $ 160,669 $ 4,597 $ 6,905 $ 1,484 $ 3,037
========== ======== ======== ======= =======
Supplemental disclosure of
cash flow information:
Cash paid for interest,
net...................... $ 3,056 $ 2,320 $ 8,825 $ 3,972 $ 128
========== ======== ======== ======= =======
Cash paid for taxes, other
than Parent.............. $ 68 $ 21 $ 160 $ 725 $ 2,232
========== ======== ======== ======= =======
Supplemental disclosure of
significant non-cash
investing and financing
activities:
Capital lease obligation.. $ -- $ 415 $ 720 $ 2,419 $ --
========== ======== ======== ======= =======
Accrued capital
expenditures............. $ 15,000 $ -- $ 28,000 $ -- $ --
========== ======== ======== ======= =======
Reduction in additional
paid-in capital
attributable to effect of
cancellation of income
tax benefit receivable
from Parent.............. $ -- $ -- $ 11,088 $ -- $ --
========== ======== ======== ======= =======
Reduction in additional
paid-in capital
attributable to effect of
the tax allocation
agreement with Parent.... $ -- $ -- $ -- $ 975 $ --
========== ======== ======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) General and Business
Qwest Communications International Inc. (the Company) is wholly-owned by
Anschutz Company (the Parent). The Company is the ultimate holding company for
the operations of Qwest Communications Corporation and subsidiaries (Qwest)
through a merger in 1996 with another wholly-owned subsidiary of the Parent.
The merger was accounted for as a business combination of entities under
common control using carryover basis.
The Company is a developer and operator of telecommunications networks and
facilities and operates in a single business segment, the telecommunications
industry. It provides the following services within that industry:
. Telecommunications Services--the Company provides dedicated line and
switched services to interexchange carriers and competitive access
providers (Carrier Services) and long distance voice, data and video
services to businesses and consumers (Commercial Services).
. Network Construction Services--the Company installs fiber optic
communications systems for interexchange carriers, local telephone
companies, cable television companies, competitive access providers and
other communication entities, as well as for its own use.
Qwest's principal direct and indirect subsidiaries include Qwest
Transmission Inc. (QTI), Qwest Properties Inc. (QPI) and SP Services de Mexico
S.A. de C.V. (SP Mexico). QTI owns and operates a digital microwave
transmission network throughout the eastern and midwestern United States. QPI
is a lessor of a telecommunications switching facility in Dallas, Texas. SP
Mexico holds the rights assigned to it under construction easement agreements
in Mexico (as described in note (14)--Mexico Easement Agreement).
The accompanying consolidated financial statements include the accounts of
the Company and all majority-owned subsidiaries. Intercompany balances and
transactions have been eliminated in consolidation.
(b) Telecommunications Services Revenue
Revenue from telecommunications services is recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred revenue.
(c) Long-Term Construction Contracts
The Company accounts for long-term construction contracts relating to the
development of telecommunications networks using the percentage of completion
method. Under the percentage of completion method, progress is generally
measured on performance milestones relating to the contract where such
milestones fairly reflect progress toward contract completion.
Network construction costs include all direct material and labor costs and
those indirect costs related to contract performance. General and
administrative costs are charged to expense as incurred. When necessary, the
estimated loss on an uncompleted contract is expensed in the period in which
it is identified. Revisions to estimated profits on contracts are recognized
in the period they become known.
F-8
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
(d) Cash and Cash Equivalents
The Company classifies cash on hand and deposits in banks, including money
market accounts, and any other investments with an original maturity of three
months or less that the Company may hold from time to time, as cash and cash
equivalents.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the useful lives of the assets, commencing when
they are available for service. Leasehold improvements are amortized over the
lesser of the useful lives of the assets or the lease term. Expenditures for
maintenance and repairs are expensed as incurred. Network construction costs,
including interest during construction, are capitalized. Interest capitalized
in the three months ended March 31, 1997 and 1996, and in the years ended
December 31, 1996, 1995 and 1994 was approximately $1,712,000, $530,000,
$2,365,000, $1,856,000 and $285,000, respectively.
The useful lives of property and equipment is as follows:
<TABLE>
<S> <C>
Facility and improvements leasehold............. 20-25 years or lease term
Communications and construction equipment....... 3-10 years
Fiber and conduit systems....................... 15-25 years
Office equipment and furniture.................. 3-7 years
Capital leases.................................. lease term
</TABLE>
While constructing network systems for customers, the Company may install
additional conduit for its own use. This additional conduit is capitalized at
the incremental cost of construction. Costs of the initial conduit, fiber and
facilities are allocated to the customer and the Company based upon the number
of fibers retained by the Company relative to the total fibers installed, or
square footage in the case of facilities.
(f) Impairment of Long-Lived Assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121) requires that long-lived assets be reviewed for impairment when
events or changes in circumstances indicate that the carrying value of such
assets may not be recoverable. This review consists of a comparison of the
carrying value of the asset with the asset's expected future undiscounted cash
flows without interest costs. Estimates of expected future cash flows are to
represent management's best estimate based on reasonable and supportable
assumptions and projections. If the expected future cash flow exceeds the
carrying value of the asset, no impairment is recognized. If the carrying
value of the asset exceeds the expected future cash flows, an impairment
exists and is measured by the excess of the carrying value over the fair value
of the asset. Any impairment provisions recognized in accordance with SFAS 121
are permanent and may not be restored in the future. No impairment expense was
recognized in the three months ended March 31, 1997, or in the years ended
December 31, 1996 and 1995.
(g) Income Taxes
The Company is included in the consolidated income tax return of the Parent.
The Company uses the asset and liability method of accounting for income taxes
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Income taxes
F-9
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
have been computed by applying the asset and liability method as if the
Company were a separate taxpayer.
(h) Intangible and Other Long-Term Assets Amortization
Intangible and other long-term assets include debt issuance costs, deferred
compensation, goodwill and acquired intangibles such as customer contracts and
non-compete covenants. Such costs are amortized on a straight-line basis over
a period ranging from three to fifteen years.
(i) Loss Per Share
The loss per share for the three months ended March 31, 1997 and 1996, and
for the years ended December 31, 1996, 1995 and 1994, was computed by dividing
net loss by the weighted average number of common shares outstanding during
such periods. Common stock equivalent shares from warrants and common stock
issuable for Growth Shares are excluded from the computation as their effect
is antidilutive, except that, pursuant to Securities and Exchange Commission
Staff Accounting Bulletin Number 83, Earnings per Share Computations in an
Initial Public Offering, 1,658,000 common shares issuable for Growth Shares
granted during the 12-month period prior to the Company's initial public
offering at prices below the anticipated public offering price were included
in the calculation as if they were outstanding for all periods presented, up
to the close of the initial public offering.
(j) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The accompanying interim financial statements as of March 31, 1997, and for
the three months ended March 31, 1997 and 1996 are unaudited but, in the
opinion of management, reflect all adjustments (consisting of normal recurring
accruals) necessary for a fair presentation of the results of such periods.
The results of operations for any interim period are not necessarily
indicative of results for the full year.
(k) Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value due to the short-
term maturities of these assets and liabilities. The carrying amounts of notes
and other receivables approximate fair value due to the relatively short
period of time between the origination of these instruments and their expected
realization. The carrying amounts of long-term debt approximate its fair value
since the interest rates on substantially all of the debt are variable and
reset periodically.
(l) Reclassification
Certain prior year amounts have been reclassified to conform with 1996
presentation.
(2) RELOCATION AND RESTRUCTURING
Relocation and restructuring costs of approximately $1,599,000 were
recognized in 1996 and relate primarily to costs incurred in connection with
the restructuring of the direct sales group. Such costs were substantially
paid in 1996 and are included in selling, general and administrative expenses
F-10
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
in the consolidated financial statements. Relocation and restructuring costs
of approximately $1,955,000 in 1994 relate primarily to costs incurred to
consolidate the Company's operations in Denver, Colorado and are included in
selling, general and administrative expenses.
(3) GAIN ON SALE OF CONTRACT RIGHTS
On March 10, 1997, the Company entered into an agreement (the Termination
Agreement) with an unrelated third party (the Purchaser) to terminate certain
equipment purchase and tele-communications capacity rights and options of the
Company exercisable against the Purchaser, for $9,000,000 (the Termination
Agreement Consideration). As of March 31, 1997, the Company has received
$7,000,000 of the Termination Agreement Consideration in cash. The remaining
consideration is payable in cash to the Company upon delivery of certain
telecommunications capacity (Capacity Obligation) to the Purchaser.
As a result of the Termination Agreement, the Company is no longer required
to relocate certain terminal facilities. Accordingly, the Company has reduced
its liability for such costs by approximately $710,000 and has included the
adjustment in gain on sale of contract rights.
As of May 12, 1997, the Company has satisfied its Capacity Obligation and
has received the remaining $2,000,000 of cash consideration due under the
Termination Agreement.
(4) GAIN ON SALE OF TELECOMMUNICATIONS SERVICE AGREEMENTS
On July 1, 1996, the Company sold its right, title and interest in certain
telecommunications service agreements to an unrelated third party (the Buyer)
for $5,500,000. As of December 31, 1996, the Company has received $4,500,000
of the purchase price in cash. As a result of the sale, the Company is no
longer required to incur certain costs related to providing service under the
agreements. Accordingly, in 1996 the Company has reduced its liability for
such costs by approximately $3,899,000 and has included the adjustment in gain
on sale of telecommunications service agreements. Also included in the gain on
sale of telecommunications service agreements is the carrying value of the
related customer contracts sold of approximately $1,714,000 and approximately
$559,000 of other costs incurred as a result of the sale.
During the transition of the service agreements to the Buyer, the Company
has incurred certain facilities costs on behalf of the Buyer, which are
reimbursable to the Company. As of March 31, 1997 and December 31, 1996,
approximately $1,888,000 and $1,988,000, respectively, is due to the Company
for such costs and is included in accounts receivable in the consolidated
financial statements (as described in note (7)--Accounts Receivable). On March
31, 1997, the arrangement relating to transition services expired and has not
yet been renegotiated. A dispute has arisen with respect to reimbursement of
these costs and, as a result, the Company has made a provision of $2,000,000
in the three months ended March 31, 1997.
(5) ACQUISITIONS
On January 31, 1995, the Company purchased all of the outstanding stock of
QTI and Subsidiaries (formerly Qwest Communications, Inc.) for $18,770,000.
The purchase was initially financed with an advance from the Parent. The
Company repaid a substantial portion of this advance with the proceeds from
two term notes issued in July 1995 (as described in note (11)--Long-Term
Debt). The purchase price was allocated as follows (in thousands):
<TABLE>
<S> <C>
Working capital.................................................. $ 7,744
Property and equipment........................................... 11,012
Other............................................................ 14
-------
$18,770
=======
</TABLE>
F-11
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
The accompanying consolidated statements of operations include the operating
results of QTI since the effective date of the acquisition. The pro forma
effect of the acquisition was immaterial in 1995. The following pro forma
operating results of the Company and QTI for the year ended December 31, 1994
has been prepared assuming the acquisition had been consummated as of January
1, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1994
---------------------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNT)
<S> <C>
Revenue............................................. $84,865
Net loss............................................ $ 6,643
Loss per share...................................... $ .08
</TABLE>
The pro forma financial information is not necessarily indicative of the
operating results that would have occurred had the acquisition been
consummated as of January 1, 1994, nor is it necessarily indicative of future
operating results.
In January 1995, the Company also purchased certain assets from Fiber
Systems Inc. for $1,750,000.
(6) NETWORK CONSTRUCTION SERVICES REVENUE AND EXPENSES
Costs and billings on uncompleted contracts included in the accompanying
consolidated financial statements are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------
1997 1996 1995
----------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
Costs incurred on uncompleted contracts...... $ 119,105 $ 82,840 $ 23,339
Estimated earnings........................... 64,627 48,853 10,610
--------- --------- --------
183,732 131,693 33,949
Less: billings to date....................... 174,843 131,738 9,822
--------- --------- --------
$ 8,889 $ (45) $ 24,127
--------- --------- --------
Included in the accompanying balance sheets
under the following captions:
Costs and estimated earnings in excess of
billings.................................. $ 9,187 $ 4,989 $ 24,127
Billings in excess of costs and estimated
earnings.................................. (298) (5,034) --
--------- --------- --------
$ 8,889 $ (45) $ 24,127
========= ========= ========
Revenue the Company expects to realize for
work to be performed on the above
uncompleted contracts....................... $ 382,525 $ 328,688 $ 6,692
========= ========= ========
</TABLE>
In 1996, the Company entered into agreements with unrelated third-parties
whereby the Company will provide indefeasible rights of use (IRUs) in multiple
fibers along base routes for a minimum purchase price of approximately
$457,000,000. Under the agreements, the third-parties are entitled to require
the Company to provide IRUs along optional routes, as defined, for an
additional $65,000,000. One of the parties has the option to require the
Company to double the number of fibers along the base route for additional
consideration. These options, when combined with certain options of the
Company, result in a maximum purchase price of approximately $888,000,000. One
contract provides that in the event of delay or non-delivery of segments, the
payments may be reduced or penalties of
F-12
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
varying amounts may be due. The Company obtained construction performance
bonds totaling $175,000,000 which have been guaranteed by the Parent. As a
result of activity on these contracts, the Company has recorded approximately
$49,000,000 and $121,000,000 of network construction service revenue in the
three months ended March 31, 1997, and in the year ended December 31, 1996,
respectively. Earnings relating to these contracts are estimated using
allocations of the total cost of the Company's network construction project
(as described in note (14)--Commitments and Contingencies).
In April 1997, certain of the options described in the previous paragraph
were exercised. In April 1997, the option to double the number of fibers along
the base route expired. In May 1997, a third customer entered into a contract
with the Company to purchase such additional fibers. These events contributed
to an increase in the purchase price to approximately $980,000,000.
(7) ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Carrier services............................. $ 10,994 $ 9,978 $ 12,634
Commercial services.......................... 6,380 5,736 3,595
Network construction services................ 5,865 13,751 111
Transition costs (note 4).................... 1,888 1,988 --
Interest receivable (note 8)................. 174 1,289 1,088
Other........................................ -- 175 64
-------- -------- --------
25,301 32,917 17,492
Less allowance for doubtful accounts......... (4,683) (3,669) (2,621)
-------- -------- --------
Accounts receivable, net..................... $ 20,618 $ 29,248 $ 14,871
======== ======== ========
</TABLE>
(8) NOTES AND OTHER RECEIVABLES
On November 16, 1994, a third party entered into a $45,000,000 agreement to
purchase a single conduit and fund a portion of the total cost of a multiple
conduit system to be constructed by the Company. Three conduits were
constructed for the Company's own use. Contract revenues from this agreement
were approximately $3,059,000, $29,664,000, and $1,959,000 in the years ended
December 31, 1996, 1995 and 1994, respectively. The Company recognized the
remaining proceeds as cost recoveries in 1996 and 1995 by reducing its cost
basis in the Company-owned conduits. The Company may be required to pay up to
$13,000,000 to the third party in the event of the sale of the Company-owned
conduits.
Payment for installation of each route became due upon completion of the
route and was payable in three equal installments. Prior to completion,
interest was payable on costs incurred for route construction at 7.65%.
In November 1995, the Company completed construction of the first route. The
Company received cash payments of approximately $4,082,000 representing one-
third of the route's contract price, including cost recoveries, and $546,000
representing interest earned during construction. In addition, the Company
received a promissory note for approximately $8,163,000, representing the
remaining
F-13
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
two-thirds of the contract price, including cost recoveries. The second
installment of approximately $4,082,000 was received in November 1996. The
remaining note balance is due on the second anniversary of the note's issuance
and accrues interest at 6.59%.
In February 1996, the Company completed construction of the second route.
The Company received cash payments of approximately $10,918,000 representing
one-third of the route's contract price, including cost recoveries, and
$1,328,000 representing interest earned during construction. In addition, the
Company received two promissory notes for approximately $19,650,000 and
$2,187,000, representing the remaining two-thirds of the contract price for
that route, including cost recoveries. The notes are due in two equal annual
installments on the first and second anniversaries of the notes' issuance, and
accrue interest at 7.31% and 6.59% during the first and second years,
respectively, of the notes' term. The first installment of approximately
$10,918,000 was received in February 1997.
(9) PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Land....................................... $ 538 $ 506 $ 420
Facility and leasehold improvements........ 8,009 7,951 5,040
Communications and construction equipment.. 54,024 52,076 41,104
Fiber and conduit systems.................. 42,167 42,446 42,414
Office equipment and furniture............. 6,402 6,360 5,925
Network construction and other assets held
under capital leases (note 11)............ 3,197 3,197 2,419
Work in progress........................... 146,819 99,915 29,618
-------- -------- --------
261,156 212,451 126,940
Less accumulated depreciation and
amortization.............................. (29,928) (25,916) (12,192)
-------- -------- --------
Property and equipment, net................ $231,228 $186,535 $114,748
======== ======== ========
</TABLE>
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------
1997 1996 1995
----------- ------- -------
(UNAUDITED)
<S> <C> <C> <C>
Accounts payable................................ $32,742 $44,766 $13,587
Construction accounting accrual................. 37,585 18,071 --
Growth-share expenses (note 15)................. 3,000 3,810 --
Capacity service expenses....................... 3,164 3,658 3,719
Property, sales and other taxes................. 11,744 3,793 2,395
Contract obligations............................ 109 855 2,381
Other........................................... 10,417 5,176 4,666
------- ------- -------
Accounts payable and accrued expenses........... $98,761 $80,129 $26,748
======= ======= =======
</TABLE>
Accounts payable as of March 31, 1997 and December 31, 1996 includes
approximately $9,000,000 and $37,000,000, respectively, payable for fiber
purchases under the materials purchase agreement (as described in note (14)--
Network Construction Project).
F-14
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
(11) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1997 1996 1995
----------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Senior notes................................. $250,000 $ -- $ --
Revolving credit facility.................... -- 60,000 --
Customer contract credit facility............ 15,000 25,918 40,418
Network credit facility...................... 25,980 27,077 29,273
Equipment loans.............................. 9,260 9,820 6,765
Term notes................................... 8,916 9,416 11,100
Capital lease obligation..................... 1,808 2,010 2,187
Other........................................ 220 220 320
-------- -------- --------
Total debt.................................. 311,184 134,461 90,063
Less current portion......................... (24,859) (25,193) (21,270)
-------- -------- --------
Long-term debt............................... $286,325 $109,268 $ 68,793
======== ======== ========
</TABLE>
On March 31, 1997, the Company issued 10 7/8% Senior Notes (the Senior
Notes) due 2007 having an aggregate principal amount of $250,000,000. The net
proceeds of the Senior Notes was approximately $242,000,000, after deducting
offering costs which are included in intangible and other long-term assets. Of
the net proceeds, approximately $80,000,000 was used in March 1997 to repay
the principal outstanding under the $100,000,000 revolving credit facility
(described below). The Company expects to use the remaining net proceeds to
repay other existing indebtedness of the Company and its subsidiaries, other
than advances from the Parent and the customer contract credit facility, and
to fund a portion of capital expenditures required to complete construction of
segments of the Network currently under construction (as described in note
(14)--Network Construction Project).
Interest on the Senior Notes is payable semi-annually in arrears on April 1
and October 1 of each year, commencing October 1, 1997. The Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at
any time on or after April 1, 2002, at specified redemption prices. In
addition, prior to April 1, 2000, the Company may use the net cash proceeds
from certain specified equity transactions to redeem up to 35% of the Senior
Notes at specified redemption prices.
In connection with the sale of the Senior Notes, the Company agreed to make
an offer to exchange new notes, registered under the Securities Act of 1933
(the "Act") and with terms identical in all material respects to the Senior
Notes (the "New Notes"), for the Senior Notes or, alternatively, to file a
shelf registration statement under the Act with respect to the Senior Notes.
If the registration statement for the exchange offer or the shelf registration
statement, as applicable, are not filed or declared effective within specified
time periods or, after being declared effective, cease to be effective or
usable for resale of the Senior Notes during specified time periods (each a
"Registration Default"), additional interest will accrue at a rate per annum
equal to 0.50% of the principal amount of the Senior Notes during the 90-day
period immediately following the occurrence of a Registration Default and
increasing in increments of 0.25% per annum up to a maximum of 2.0% per annum,
at the end of each subsequent 90-day period until the Registration Default is
cured.
In April 1996, the Company entered into a $100,000,000 revolving credit
facility agreement (as amended in September 1996) (the Facility), the proceeds
of which will be used for working capital purposes, capital expenditures and
the issuance of letters of credit. The Facility provides for an initial
F-15
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
$100,000,000 three-year revolving loan commitment (the Revolver) which expires
on April 2, 1999. At that time, the outstanding loan amount converts to a two-
year term credit loan which matures on April 2, 2001. Quarterly mandatory
payments commence on June 30, 1999, and include equal quarterly principal
reductions, based on the amount of the outstanding loan at the date of
conversion. Letters of credit issued under the Facility are limited to a total
outstanding of $10,000,000. There were no letters of credit outstanding at
December 31, 1996 or March 31, 1997.
Interest on amounts borrowed under the Revolver is payable approximately
monthly at the bank's prime rate or other interest rate option plus an
applicable margin. The weighted average interest rate on amounts borrowed
under the Revolver was approximately 6.5% at December 31, 1996. In addition, a
commitment fee is payable on the unused portion of the Revolver. The Facility
is secured by pledges of certain stock owned by the Parent. The Facility
agreement contains certain affirmative and negative covenants. The Company can
make prepayments of outstanding principal without penalty. In March 1997, the
outstanding principal under the Revolver was repaid with a portion of the net
proceeds from the issuance of the Senior Notes.
In February 1997, the Company entered into a separate additional $50,000,000
revolving credit facility agreement which will be used primarily for working
capital purposes. This facility is secured by pledges of certain stock owned
by an affiliate of the Parent. This facility contains, except for terms of
repayment, substantially identical terms as the $100,000,000 credit facility
described above. No amounts are outstanding under this facility as of March
31, 1997.
In April 1995, the Company entered into a $45,000,000 customer contract
credit facility agreement to finance certain construction projects undertaken
at that time. The facility converted to a term loan upon completion of the
construction projects in 1996 and 1995 and is now secured by notes receivable
issued in connection with these construction projects (as described in note
(8)--Notes and Other Receivables). The facility bears interest at the
Company's option at either (a) the higher of (i) the bank's base rate of
interest, or (ii) the Federal Funds Rate plus 1/2%; or (b) LIBOR plus 9/16%.
The outstanding balance at December 31, 1996 is due in installments on the
anniversary dates of the completion of the projects, through February 1998.
In June 1994, the Company entered into a $27,600,000 network credit facility
agreement, secured by certain of the Company's fiber systems which bears
interest at 4.65% above the 90-day High Grade Commercial Paper rate. All
interest accrued on borrowings under this facility from June 1994 through June
1995 was added to the principal balance of the facility. Interest added as
additional principal was approximately $1,388,000 and $285,000 for 1995 and
1994, respectively. From July 1995 to June 1996, interest only payments were
paid on the loan balance. Monthly mandatory principal and interest payments
commenced on July 31, 1996 and increase from 1.25% to 2.08% of the initial
loan balance over the term of the loan, which is payable in full on July 31,
2001. Prepayments are permitted without penalty. The credit facility agreement
contains financial covenants for Qwest regarding the maintenance of certain
key ratios. This facility was repaid in April 1997.
In August 1995, the Company executed two equipment loans for approximately
$5,000,000 in aggregate, which bear interest at LIBOR plus 2.65%, and LIBOR
plus 2.55%, respectively, and are secured by certain equipment. Quarterly
mandatory payments commenced on December 1, 1995, which include $250,000
principal reductions and accrued interest, with the final installment due on
September 1, 2000. These loans were repaid in April 1997.
In 1996, the Company executed three equipment loans aggregating
approximately $5,000,000. The notes bear interest ranging from 8.86% to 10.15%
per annum, and are secured by certain
F-16
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
equipment. Monthly mandatory payments include monthly principal reductions
ranging from approximately $20,000 to $54,000 plus accrued interest, with the
final installment due August 1, 2001. These loans were repaid in May 1997.
In December 1992, the Company executed an equipment loan for approximately
$2,600,000. The loan bears interest at 4.65% above the 90-day High Grade
Commercial Paper rate and is secured by certain communications equipment.
Monthly mandatory payments include approximately $29,000 of principal
reduction and accrued interest, with the final installment due October 2001.
The loan agreement contains financial covenants for Qwest regarding the
maintenance of certain key ratios. This loan was repaid in April 1997.
In July 1995, the Company issued two term notes totaling $12,000,000, which
are secured by all current and future assets of QTI and used the proceeds to
repay a portion of the advance from the Parent used to purchase QTI (as
described in note (5)--Acquisitions). The notes bear interest at LIBOR plus
3%, which is to be reduced as the Company meets certain covenants. Quarterly
mandatory principal and interest payments commenced on September 30, 1995 and
increase from 3.75% to 5.4% of the initial loan balance over the term of the
loan, which is payable in full on September 30, 2000. The Company may prepay
the notes without penalty. Mandatory prepayments are required within 120 days
of each fiscal year end in the amount of 50% of the excess cash flow, as
defined, in excess of $500,000, if QTI's leverage ratio is in excess of 1.75
to 1. The note agreements contain financial covenants for QTI regarding the
maintenance of certain leverage and fixed charge coverage ratios. These notes
were repaid in April 1997.
Under the terms of certain loan agreements described above, at March 31,
1997 and December 31, 1996 all net assets of the Company's subsidiaries are
restricted.
The Company leases certain network construction equipment under capital
lease agreements. The amortization charge applicable to capital leases is
included in depreciation expense. Future minimum payments under capital lease
obligations is included in contractual maturities of long-term debt summarized
below.
Contractual maturities of long-term debt as of March 31, 1997 and December
31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Year ended December 31:
1997.............................................. $ 22,925 $ 25,193
1998.............................................. 10,826 21,533
1999.............................................. 12,189 34,458
2000.............................................. 11,180 41,430
2001.............................................. 4,064 11,847
Thereafter........................................ 250,000 --
--------- --------
$ 311,184 $134,461
========= ========
</TABLE>
In May 1997, the Company entered into a $90,000,000 credit agreement (the
Credit Agreement) with an unrelated third-party supplier (the Supplier) of
transmission electronics equipment to fund a portion of certain capital
expenditures required to equip the Network currently under construction (as
described in note (14)--Network Construction Project). Under the Credit
Agreement, the Company
F-17
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
may borrow to purchase equipment and related engineering and installation
services from the Supplier up to 75% of the purchase price of such equipment
and services, with the purchased equipment and related items serving as
collateral for the loans. The Company is committed to purchase from the
Supplier a minimum of $100,000,000 of such equipment and services under a
separate procurement agreement which was executed in May 1997. Principal
amounts outstanding under the Credit Agreement will be payable in quarterly
installments commencing on June 30, 2000, with repayment in full due and
payable on May 6, 2004. Borrowings will bear interest at the Company's option
at either: (i) a floating base rate offered by a designated reference bank
plus an applicable margin; or (ii) LIBOR plus an applicable margin.
(12) INCOME TAXES
Income tax benefit for years ended December 31, 1996, 1995 and 1994 is as
follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Current:
Federal......................................... $ 1,673 $ 10,497 $ 9,575
State........................................... 438 -- 1,132
------- -------- -------
Total current income tax benefit.............. 2,111 10,497 10,707
------- -------- -------
Deferred:
Federal......................................... 1,123 2,839 (6,720)
State........................................... -- -- (200)
------- -------- -------
Total deferred income tax benefit (expense)... 1,123 2,839 (6,920)
------- -------- -------
Total income tax benefit...................... $ 3,234 $ 13,336 $ 3,787
======= ======== =======
</TABLE>
Total income tax benefit differed from the amounts computed by applying the
federal statutory income tax rate (35%) to loss before income tax benefit as a
result of the following items for the years ended December 31, 1996, 1995 and
1994 (amounts in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------ ------- ------
<S> <C> <C> <C>
Expected income tax benefit....................... $3,570 $13,463 $3,740
State income taxes, net of federal income tax
benefit.......................................... 279 -- 281
Goodwill and other intangible asset amortization.. (568) (56) (67)
Other, net........................................ (47) (71) (167)
------ ------- ------
Total income tax benefit........................ $3,234 $13,336 $3,787
====== ======= ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1996 and
1995 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1996 1995
------- ------
<S> <C> <C>
Current deferred tax assets (liabilities):
Allowance for doubtful accounts........................... $ 1,283 $ 917
Accrued liabilities....................................... 7,578 3,475
------- ------
8,861 4,392
Network construction contracts............................ (2,560) --
------- ------
$ 6,301 $4,392
======= ======
</TABLE>
F-18
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1995
------- -------
<S> <C> <C>
Long-term deferred tax assets (liabilities):
Deferred compensation...................................... $ 3,252 $ --
Depreciation............................................... 961 136
Accrued liabilities........................................ 26 234
------- -------
4,239 370
Intangible assets, principally due to differences in basis
and amortization.......................................... (112) (919)
Property and equipment..................................... (5,835) (373)
------- -------
(5,947) (1,292)
------- -------
$(1,708) $ (922)
======= =======
</TABLE>
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable
to deductible temporary differences will be realized by recognition of future
taxable amounts. Accordingly, the Company believes a valuation allowance for
its federal deferred tax assets is not necessary.
The Company is included in the consolidated federal income tax return of its
Parent, which has a July 31 year-end for income tax purposes. A tax allocation
agreement between the Company and its Parent was implemented effective
November 4, 1993 which encompasses U.S. federal tax consequences. The Company
is responsible to its Parent for its share of current consolidated income tax
liabilities. The Parent is responsible to the Company to the extent that the
Company's income tax attributes are utilized by the Parent to reduce its
consolidated income tax liabilities, subject to certain limitations on net
operating loss and credit carryforwards. At December 31, 1996, the income tax
benefit receivable from Parent of approximately $11,088,000 was canceled which
resulted in a reduction of additional paid-in capital.
The tax allocation agreement has been amended effective as of January 1,
1997 (the Effective Date). Under the amended agreement, the Company would be
responsible to the Parent to the extent of income taxes for which the Company
and its subsidiaries would have been liable if the Company had filed a
consolidated federal income tax return, giving effect to any loss or credit
carryover belonging to the Company and its subsidiaries from periods after the
Effective Date. The Parent would be responsible to the Company to the extent
an unused loss or credit can be carried back to an earlier taxable period
after the Effective Date.
In certain cases, differences may arise between amounts reported in the
financial statements under generally accepted accounting principles and the
amounts actually payable or receivable under the tax allocation agreement.
Those differences are generally reported as adjustments to capital, as in-
substance dividends. The Company recorded $975,000 in 1995 as a reduction to
additional paid-in capital reflecting the difference between the current
income tax benefit calculable as if the Company filed a separate income tax
return and the current income tax benefit calculable under the tax allocation
agreement.
(13) RELATED PARTY TRANSACTIONS
(a) Transactions with Parent
Advances from Parent at March 31, 1997, and at December 31, 1996 and 1995,
which are non-interest bearing, include costs charged to the Company by the
Parent and advances received from the Parent to fund operations, net of
repayments, and are payable upon demand after March 31, 1997.
F-19
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
The Parent incurs certain costs on the Company's behalf, including primarily
insurance and corporate transportation services, and allocates such costs to
the Company based on actual usage. The cost to the Company for such services
was approximately $792,000, $495,000, $2,100,000 and $2,500,000 in the three
months ended March 31, 1997 and 1996, and in the years ended December 31, 1996
and 1995, respectively, and was not material in 1994.
Accounts receivable from (payable to) the Parent are recognized to reflect
income tax benefits receivable (income taxes payable) pursuant to the tax
allocation agreement between the Company and the Parent (as described in note
(12)--Income Taxes).
The Company has agreed to indemnify the Parent and its subsidiaries against
any costs or losses incurred by any of them as a result of their providing
credit support to the Company (in the form of collateral pledges, guarantees,
bonds or otherwise).
(b) Transactions with Other Related Parties
The Parent owned approximately 25% of Southern Pacific Rail Corporation and
its subsidiaries (SPRC) at December 31, 1995. In September 1996, SPRC was
acquired by Union Pacific Corporation. As a result of this transaction, the
Parent owns approximately 5% of Union Pacific Corporation, and SPRC ceased to
be a related party.
The Company provides telecommunication services to SPRC and charged SPRC
approximately $1,626,000, $3,625,000 and $3,358,000 in the years ended
December 31, 1996, 1995 and 1994, respectively, for these services. Amounts
due to the Company for telecommunication services totaled approximately
$411,000 at December 31, 1995. Services under these agreements can be
terminated with notice.
In certain instances the Company purchases and has made future commitments
(as described in note (14)--Commitments and Contingencies) relating to right-
of-way easements from SPRC and utilizes specialized SPRC personnel and
equipment for its construction projects. SPRC charged the Company
approximately $3,548,000, $2,179,000 and $870,000 for these services in the
years ended December 31, 1996, 1995 and 1994, respectively. Amounts due to
SPRC for these activities totaled approximately $3,394,000 at December 31,
1995.
The Company leases its corporate office in Denver, Colorado from an
affiliate of the Parent at prevailing market rates. The cost to the Company
for such lease was approximately $281,000 in the three months ended March 31,
1997 and 1996, and $1,155,000 and $1,047,000 in the years ended December 31,
1996 and 1995, respectively, and was not material in 1994.
(c) Expenses Incurred by Parent on Company's Behalf
On November 11, 1996, the former president and chief executive of the
Company resigned his position. Upon his resignation, the Parent forgave a note
receivable from him in the amount of approximately $1,022,000. This charge was
allocated to the Company in 1996 and is included in selling, general and
administrative expenses and additional paid-in capital in the Company's
consolidated financial statements.
(14) COMMITMENTS AND CONTINGENCIES
(a) Network Construction Project
In 1996, the Company commenced construction of a coast-to-coast fiber optic
telecommunications network (the Network) that is scheduled for completion in
1998. The Company projects its total remaining cost at December 31, 1996 for
completing the construction of the Network will be
F-20
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
approximately $765,000,000. This amount includes the Company's commitment to
purchase a minimum quantity of materials for approximately $257,000,000 in the
year ended December 31, 1997, subject to quality and performance
specifications. The Company has the option to extend the materials purchase
agreement through December 31, 1999 and may assign some or all of its
remaining purchase commitment to a third-party or cancel the agreement by
paying the seller an amount equal to 7% of any remaining commitment. The
Company has contracted to provide a portion of the fibers in the Network to a
third party and has granted an option for additional fibers in the Network (as
described in note (6)--Network Construction Services Revenue and Expenses).
The Company is pursuing financing to accomplish this construction and
installation of equipment and also contemplates additional sales of Network
fibers and capacity. Management believes that it will be successful in
obtaining the necessary financing and completing the sales that will permit it
to fulfill its contractual commitments. If all such financing were not
obtained or sufficient sales not consummated, the Company could modify its
plans and defer certain portions of the project.
In April 1997, certain options were exercised, and in May 1997 an option to
double the number of fibers along the base route of the Network was
renegotiated and a third customer entered into a contract with the Company to
purchase such additional fibers (as described in note (6)--Network
Construction Services Revenue and Expenses). As a result of these events, the
Company now projects its total remaining cost for completing the Construction
of the Network will be approximately $1,000,000,000. This includes the
Company's remaining commitment to purchase a minimum quantity of materials for
approximately $177,000,000 as of April 30, 1997.
(b) Leases and Telecommunications Service Commitments
The Company leases certain terminal locations and office space under
operating lease agreements and has committed to use certain telecommunications
capacity services. Future minimum payments under noncancelable operating lease
and service commitments as of December 31, 1996 and March 31, 1997 are as
follows (in thousands):
As of December 31, 1996
<TABLE>
<CAPTION>
CAPACITY
SERVICE OPERATING
COMMITMENTS LEASES TOTAL
----------- --------- -------
<S> <C> <C> <C>
Year ended December 31:
1997..................................... $3,250 $ 4,213 $ 7,463
1998..................................... 3,000 3,327 6,327
1999..................................... -- 2,404 2,404
2000..................................... -- 1,410 1,410
2001..................................... -- 556 556
Thereafter............................... -- 828 828
------ ------- -------
Total minimum payments................. $6,250 $12,738 $18,988
====== ======= =======
</TABLE>
F-21
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
As of March 31, 1997 (unaudited)
<TABLE>
<CAPTION>
CAPACITY
SERVICE OPERATING
COMMITMENTS LEASES TOTAL
----------- --------- -------
<S> <C> <C> <C>
Year ended December 31:
1997..................................... $2,350 $ 2,884 $ 5,234
1998..................................... 3,000 3,316 6,316
1999..................................... -- 2,478 2,478
2000..................................... -- 1,295 1,295
2001..................................... -- 441 441
Thereafter............................... -- 895 895
------ ------- -------
Total minimum payments................. $5,350 $11,309 $16,659
====== ======= =======
</TABLE>
Capacity service expenses are included in telecommunications service costs.
Amounts expensed in the three months ended March 31, 1997 and 1996, and in the
years ended December 31, 1996, 1995 and 1994 were approximately $2,119,000,
$8,947,000, $18,990,000, $19,622,000 and $17,226,000, respectively.
Amounts expensed in the three months ended March 31, 1997 and 1996, and in
the years ended December 31, 1996, 1995 and 1994 related to operating leases
were approximately $1,288,000, $1,109,000, $4,998,000, $4,645,000, and
$3,146,000, respectively.
(c) Easement Agreements
The Company has Master Easement Agreements (the Original Agreements) with
SPRC and its affiliated railroads which provide for payment of specified
amounts based on miles of conduit used by the Company or sold to third
parties. The Company has the option under the Original Agreements to either
make annual payments for the term of the easement or to make lump sum payments
at a discount. The Company has made annual payments through 1996 and retains
the option to make the discounted lump sum payments in the future.
The Original Agreement was amended effective August 20, 1996 (the Agreement
Amendment). The Agreement Amendment grants the Company the right to install up
to approximately 3,300 miles of new conduit in specified SPRC rail corridor,
through August 9, 2001. The Company is required to construct a minimum of two
conduits on a minimum of 1,200 route miles, as follows: (i) 400 miles on or
before August 9, 1997; (ii) 400 additional miles on or before August 9, 1998;
and (iii) 400 additional miles on or before August 9, 1999. In addition, the
Company is required to provide SPRC with limited communications capacity as
defined, for its own internal use.
The Agreement Amendment requires the Company in some instances, as defined,
to make lump-sum payments on a per-mile basis upon completion of conduit
construction, or within two years of the creation of the related easement
area. In other instances, as defined, the Company is required to make lump sum
payments on a per-mile basis when the related conduit is placed in service.
In addition to those with SPRC, the Company has easement agreements with
other railroads and certain public transportation authorities. The Company's
estimate of amounts payable under all noncancelable easement agreements,
assuming the Company continues to make annual payments pursuant to the
Original Agreement, totals approximately $83,000,000 and $82,000,000 at March
31, 1997 and December 31, 1996, respectively. The Company's estimate of the
amounts payable under all noncancelable easement agreements, assuming the
Company exercises its option to make
F-22
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
discounted lump-sum payments pursuant to the Original and Amended Agreement as
of December 31, 1996 and March 31, 1997 are as follows (in thousands):
As of December 31, 1996
<TABLE>
<S> <C>
Year ended December 31:
1997............................................................. $15,048
1998............................................................. 140
1999............................................................. 101
2000............................................................. 610
2001............................................................. 1,194
Thereafter....................................................... 2,170
-------
$19,263
=======
As of March 31, 1997 (unaudited)
Year ended December 31:
1997............................................................. $17,646
1998............................................................. 139
1999............................................................. 101
2000............................................................. 610
2001............................................................. 1,194
Thereafter....................................................... 1,960
-------
$21,650
=======
</TABLE>
In certain limited instances the Company may be obligated to pay costs of
relocating certain conduits owned by third-parties on approximately 500 miles
of railroad rights-of-way. The majority of such commitments expire in February
2001. The Company accrues for such costs as they are identified. As of March
31, 1997, the Company has accrued approximately $2,500,000 for such costs,
which amount is included in accounts payable and accrued expenses in the
consolidated financial statements.
The amounts charged to network construction costs for sub-easements sold and
other right-of-way costs associated with sales to third parties under the
Original and Amended Agreement for the three months ended March 31, 1997 and
1996, and for years ended December 31, 1996, 1995 and 1994 were approximately
$662,000, $1,319,000, $2,633,000, $2,981,000 and $2,696,000, respectively.
Amounts charged to selling, general and administrative expenses for easements
retained by the Company were approximately $726,000 and $789,000 in the three
months ended March 31, 1997 and 1996, respectively, $3,498,000 in year ended
December 31, 1996 and was not material in 1995 and 1994.
(d) Mexico Easement Agreement
In December 1995, the Company entered into an agreement (as amended January
1997) with Ferrocarriles Nacionales de Mexico, granting the Company easements
for the construction of multiple conduit systems along railroad rights-of-way
within Mexico, for consideration of approximately $7,700,000, including
$1,100,000 in value-added taxes. The Company has capitalized total costs,
including rights-of-way, equipment, construction and design costs, relating to
this investment of approximately $13,000,000 as of December 31, 1996.
(e) Executive Employment Agreement
In January 1997, the Company entered into an employment agreement (the
Agreement) with its new president and chief executive officer (the Executive),
effective through the close of business
F-23
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
December 31, 2001, unless terminated earlier by either party. The Agreement
provides for annual salary and bonuses of specific amounts, as well as an
approximate $11,300,000 payment (the Equalization Payment) to the Executive to
compensate him for certain benefits from his former employer that he may lose
or forfeit as a result of his resignation and commencement of employment with
the Company. Such payment is subject to reduction in the event the Executive
retains or receives a substitute payment for any of the benefits he expected
to forfeit.
The Equalization Payment is payable in cash in three installments. The first
installment of approximately $7,200,000 was paid in January 1997. The
remaining two installments of approximately $2,050,000 each are payable on
January 1, 1998 and 1999, with accrued interest thereon at the rate of 5% per
annum. The Company is amortizing the cost of the Equalization Payment on a
straight-line basis through December 31, 1999. At March 31, 1997, $3,800,000
of such costs are included in other current assets, and $6,700,000 are
included in intangible and other long-term assets.
Under the Agreement, the Executive is required to repay to the Company a
portion of the Equalization Payment previously paid in the event the Executive
is terminated for cause on or before December 31, 1999.
(15) GROWTH SHARE PLAN
The Company has a Growth Share Plan (the Plan) for certain employees and
directors of Qwest and certain affiliates. A Growth Share is a unit of value
based on the increase in value of the Company over a specified performance
cycle or other specified measuring period. The total number of Growth Shares
is set at 10,000,000 and the maximum number presently available for grant
under the Plan is 850,000. Growth Shares granted under the Plan vest at the
rate of 20% for each full year of service completed after the grant date
subject to risk of forfeiture. Participants receive their vested portion of
the increase in value of the Growth Shares upon a triggering event, as
defined, which includes the end of a Growth Share performance cycle. Certain
participants vest fully upon completion of an initial public offering by the
Company.
Compensation under the Growth Share Plan is measured by the increase in the
value of outstanding growth shares at each balance sheet date. Such
compensation is amortized to expense over the vesting period for each Growth
Share award. Certain triggering events, consisting of an initial public
offering for awards made prior to October 1996 and a change in control of the
Company, cause immediate vesting of related Growth Share awards and result in
accelerated expense recognition of all unamortized compensation for such
awards.
The Company has estimated an increase in value of the Growth Shares at
December 31, 1996 due to the signing of an agreement to provide an
indefeasible right of use to a third-party (as described in note (6)--Network
Construction Services Revenue and Expenses) and has recorded approximately
$13,100,000 of additional compensation expense in 1996, approximately
$9,000,000 of which is included in other liabilities at December 31, 1996.
Included in this 1996 compensation expense is $9,000,000 payable to the former
president and chief executive of the Company as settlement for his Growth
Share awards. No expense was recognized in the accompanying consolidated
financial statements for the years ended December 31, 1995 and 1994, as there
were no significant compensatory elements in those periods.
As of March 31, 1997, the Company has estimated an increase in the value of
Growth Shares, and has recorded approximately $13,100,000 of additional
compensation expense in the three months ended March 31, 1997.
F-24
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF MARCH 31, 1997, AND FOR THETHREE MONTHS ENDED MARCH 31,
1997 AND 1996 IS UNAUDITED)
(16) SAVINGS PLAN
The Company sponsors a 401(k) Savings Plan which permits employees to make
contributions to the Savings Plan on a pre-tax salary reduction basis in
accordance with the Internal Revenue Code. All full-time employees are
eligible to participate after one year of service. The Company contributes a
base percentage and matches a portion of the voluntary employee contributions.
The cost of this Savings Plan charged to expenses was approximately $165,000,
$171,000, $683,000, $385,000 and $283,000 in the three months ended March 31,
1997 and 1996, and in years ended December 31, 1996, 1995 and 1994,
respectively.
(17) SIGNIFICANT CUSTOMERS
During the three months ended March 31, 1997, and years ended December 31,
1996, 1995 and 1994, two or more customers, in aggregate, have accounted for
10% or more of the Company's total revenues in one or more periods, as
follows:
<TABLE>
<CAPTION>
CUSTOMER CUSTOMER CUSTOMER
A B C
-------- -------- --------
<S> <C> <C> <C>
1997........................................... -- 8.8% 59.0%
1996........................................... 4.0% 27.8% 26.3%
1995........................................... 35.4% 6.8% --
1994........................................... 5.9% 18.0% --
</TABLE>
(18) SECURITIES OFFERING
In May 1997, the Company filed a registration statement with the Securities
and Exchange Commission for an initial public offering (the Offering) of
13,500,000 shares of Common Stock. On May , 1997, the Board of Directors
approved a change in the Company's capital stock to authorize 400,000,000
shares of $.01 par value Common Stock, of which shares 10,000,000 are reserved
for issuance under the equity incentive plan (described in the following
paragraph), 2,000,000 are reserved for issuance under the Growth Share Plan
(as described in note (15) -- Growth Share Plan), and 4,300,000 are reserved
for issuance upon exercise of warrants (as described below), and 25,000,000
shares of $.01 par value Preferred Stock. On June , 1997, the Company
distributed a stock dividend to the existing shareholder of 86,490,000 shares
of Common Stock, which is accounted for as a stock split. All shares and per
share information included in the accompanying consolidated financial
statements has been adjusted to give retroactive effect to the change in
capitalization.
On May , 1997, the Board of Directors and the stockholder of the Company
approved an equity incentive plan. Under this plan, stock options, stock
appreciation rights, restricted stock awards, stock units and other stock
grants may be granted (with respect to up to 10,000,000 shares of Common
Stock) to eligible participants who significantly contribute to the Company's
growth and profitability.
On May 23, 1997, the Company sold to an affiliate (the Affiliate) of the
Parent for $2,300,000 in cash, a three year warrant to acquire 4,300,000
shares of Common Stock at an exercise price of $28 per share, exercisable on
May 23, 2000. The warrant is not transferable. Stock issued upon exercise of
the warrant will be subject to restrictions on sale or transfer for two years
after exercise.
F-25
<PAGE>
GLOSSARY
Access charges............. The fees paid by long distance carriers to LECs
for originating and terminating long distance
calls on the LECs' local networks.
ATM (Asynchronous Transfer
Mode)..................... An information transfer standard that is one of a
general class of packet technologies that relay
traffic by way of an address contained within the
first five bytes of a standard fifty-three-byte-
long packet or cell. The ATM format can be used
by many different information systems, including
local area networks, to deliver traffic at
varying rates, permitting a mix of voice, data
and video (multimedia).
AT&T....................... AT&T Corp.
Backbone................... The through-portions of a transmission network,
as opposed to spurs which branch off the through-
portions.
Band....................... A range of frequencies between two defined
limits.
Bandwidth.................. The relative range of analog frequencies or
digital signals that can be passed through a
transmission medium, such as glass fibers,
without distortion. The greater the bandwidth,
the greater the information carrying capacity.
Bandwidth is measured in Hertz (analog) or Bits
Per Second (digital).
Bit Error Rate........ A measure of transmission quality stated as the
expected probability of error per bit
transmitted.
Capacity................... Refers to transmission.
Carrier.................... A provider of communications transmission
services by fiber, wire or radio.
CLEC (Competitive Local
Exchange Carrier)......... A company that competes with LECs in the local
services market.
Common Carrier............. A government-defined group of private companies
offering telecommunications services or
facilities to the general public on a non-
discriminatory basis.
Dark Fiber................. Fiber that lacks the requisite electronic and
optronic equipment necessary to use the fiber for
transmission.
Digital.................... Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission/ switching technologies employ a
sequence of discrete, distinct pulses to
represent information, as opposed to the
continuously variable analog signal.
G-1
<PAGE>
DS-0, DS-1, DS-3........... Standard telecommunications industry digital
signal formats, which are distinguishable by bit
rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit
rate of 64 kilobits per second and typically
transmits only one voice conversation at a time.
DS-1 service has a bit rate of 1.544 megabits per
second and typically transmits 24 simultaneous
voice conversations. DS-3 service has a bit rate
of 45 megabits per second and typically transmits
672 simultaneous voice conversations.
DWDM (Dense Wave Division
Multiplexing)............. A technique for transmitting 8 or more different
light wave frequencies on a single fiber to
increase the information carrying capacity.
DS-3 miles................. A measure of the total capacity and length of a
transmission path, calculated as the capacity of
the transmission path in DS-3s multiplied by the
length of the path in miles.
Equal access............... The basis upon which customers of interexchange
carriers are able to obtain access to their
Primary Interexchange Carriers' (PIC) long
distance telephone network by dialing "1", thus
eliminating the need to dial additional digits
and an authorization code to obtain such access.
FBCs (Facilities Based
Carriers)................. Facilities based carriers that own and operate
their own network and equipment.
FCC........................ Federal Communications Commission.
Frame Relay................ A high-speed, data-packet switching service used
to transmit data between computers. Frame Relay
supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5
megabits per second. This service is well-suited
for connecting local area networks, but is not
presently well suited for voice and video
applications due to the variable delays which can
occur. Frame Relay was designed to operate at
high speeds on modern fiber optic networks.
Gbps....................... Gigabits per second, which is a measurement of
speed for digital signal transmission expressed
in billions of bits per second.
GTE........................ GTE Intelligent Network Services Incorporated.
Hertz...................... The unit for measuring the frequency with which
an electromagnetic signal cycles through the
zero-value state between lowest and highest
states. One Hz (Hertz) equals one cycle per
second. kHz (kilohertz) stands for thousands of
Hertz; MHz (megahertz) stands for millions of
Hertz.
ISP (Internet Service
Provider)................. A company that provides businesses and consumers
with access to the Internet.
10XXX Service.............. The ability for a user to access any carrier's
long distance network by dialing the carrier's
Carrier Identification Code (CIC) which is a 1
plus 0 plus three specifically assigned digits,
thereby bypassing the user's primary
interexchange carrier.
G-2
<PAGE>
Interconnect............... Connection of a telecommunications device or
service to the public switched telephone network
("PSTN").
Interexchange carrier...... A company providing inter-LATA or long distance
services between LATAs on an intrastate or
interstate basis.
Kbps....................... Kilobits per second, which is a measurement of
speed for digital signal transmission expressed
in thousands of bits per second.
LATAs (Local Access and
Transport Areas).......... The approximately 200 geographic areas that
define the areas between which the RBOCs
currently are prohibited from providing long
distance services.
LEC (Local Exchange
Carrier).................. A company historically providing local telephone
services.
Lit fiber.................. Fiber activated or equipped with the requisite
electronic and optronic equipment necessary to
use the fiber for transmission.
Local loop................. A circuit that connects an end user to the LEC
central office within a LATA.
Long-haul circuit.......... A dedicated telecommunications circuit generally
between locations in different LATAs.
Mbps....................... Megabits per second, which is a measurement of
speed for digital signal transmission expressed
in millions of bits per second.
MCI........................ MCI Communications, Inc.
MOU........................ Minutes of use of long distance service.
Multiplexing............... An electronic or optical process that combines a
large number of lower speed transmission lines
into one high speed line by splitting the total
available bandwidth into narrower bands
(frequency division), or by allotting a common
channel to several different transmitting
devices, one at a time in sequence (time
division).
OC-3, OC-12, OC-48 and
OC-192.................... OC is a measure of SONET transmission optical
carrier level, which is equal to the
corresponding number of DS-3s (e.g. OC-3 is equal
to 3 DS-3s and OC-48 is equal to 48 DS-3s).
RBOCs (Regional Bell
Operating Companies)...... The seven local telephone companies (formerly
part of AT&T) established as a result of the AT&T
Divestiture Decree.
Regeneration/amplifier..... Devices which automatically re-transmit or boost
signals on an out-bound circuit.
Reseller................... A carrier that does not own transmission
facilities, but obtains communications services
from another carrier for resale to the public.
G-3
<PAGE>
SONET (Synchronous Optical
Network Technology)....... An electronics and network architecture for
variable-bandwidth products which enables
transmission of voice, data and video
(multimedia) at very high speeds.
SONET ring................. A network architecture which provides for
instantaneous restoration of service in the event
of a fiber cut by automatically rerouting traffic
the other direction around the ring. This occurs
so rapidly (in 50 milliseconds) it is virtually
undetectable to the user.
Spectrum................... A term generally applied to radio frequencies.
Sprint..................... Sprint Corporation
Switch..................... A device that selects the paths or circuits to be
used for transmission of information and
establishes a connection. Switching is the
process of interconnecting circuits to form a
transmission path between users and it also
captures information for billing purposes.
Switched service
carriers.................. A carrier that sells switched long distance
service and generally refers to a carrier that
owns its switch.
Switchless resellers....... A carrier that does not own facilities or
switches, but purchases minutes in high volumes
from other carriers and resells those minutes.
Terabits................... A trillion bits of transmission capacity.
Trunk...................... A communications channel between two switches.
"Trunking" calls reduces the likelihood of
traffic blockage due to network congestion. A
trunked system combines multiple channels with
unrestricted access in such a manner that user
demands for channels are automatically "queued"
and then allocated to the first available
channel.
WorldCom................... WorldCom, Inc.
G-4
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE
UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE-
UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH IN-
FORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO-
LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO-
LICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH SOLICITATION.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Industry Overview........................................................ 34
Business................................................................. 38
Regulation............................................................... 50
Management............................................................... 56
Principal Stockholder.................................................... 68
Certain Transactions..................................................... 68
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 72
Description of Certain Indebtedness...................................... 73
Underwriting............................................................. 76
Legal Matters............................................................ 78
Experts.................................................................. 78
Additional Information................................................... 79
Index to Consolidated Financial Statements............................... F-1
Glossary................................................................. G-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
13,500,000 SHARES
QWEST COMMUNICATIONS INTERNATIONAL INC.
COMMON STOCK
($.01 PAR VALUE)
[LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE]
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
PROSPECTUS
DATED JUNE , 1997
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR +
+SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE +
+SECURITIES LAWS OF ANY SUCH STATE OR JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
SUBJECT TO COMPLETION
MAY 27, 1997
PROSPECTUS
13,500,000 SHARES
QWEST COMMUNICATIONS INTERNATIONAL INC.
[LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE]
COMMON STOCK
($.01 PAR VALUE)
All of the shares of Common Stock offered hereby (the "Shares") are being sold
by Qwest Communications International Inc. (the "Company" or "Qwest"). Of the
13,500,000 Shares being offered, 2,000,000 Shares are being offered by the
International Underwriters (as defined herein) outside the United States and
Canada (the "International Offering") and 11,500,000 Shares are being offered
by the U.S. Underwriters (as defined herein) in a concurrent offering in the
United States and Canada (the "U.S. Offering" and, collectively with the
International Offering, the "Offerings"), subject to transfers between the
International Underwriters and the U.S. Underwriters (collectively, the
"Underwriters"). The Price to Public and Underwriting Discount per Share will
be identical for the International Offering and the U.S. Offering. See
"Underwriting." The closing of the International Offering and the U.S. Offering
are conditioned upon each other.
Prior to the Offerings, there has been no public market for the Common Stock.
It is currently estimated that the initial public offering price of the Common
Stock will be between $17.00 and $20.00 per Share. See "Underwriting" for
factors to be considered in determining the Price to Public.
The Common Stock has been approved for listing on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "QWST," subject
to official notice of issuance.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS" BEGINNING ON PAGE 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY(1)
<S> <C> <C> <C>
Per Share................................... $ $ $
Total(2).................................... $ $ $
- --------------------------------------------------------------------------------
</TABLE>
(1) Before deducting expenses payable by the Company estimated to be $ .
(2) The Company has granted to the International Underwriters and the U.S.
Underwriters 30-day options to purchase up to an aggregate of 2,025,000
additional shares, at the Price to Public, less Underwriting Discount,
solely to cover over-allotments, if any. If the Underwriters exercise such
options in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $ , $ and $ , respectively. See
"Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about June , 1997.
SALOMON BROTHERS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
The date of this Prospectus is June , 1997.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal tax
consequences expected to result from the ownership and disposition of Common
Stock by a holder that, for United States federal income tax purposes, is not
a "United States person" (each such person is referred to herein as a "Non-
United States Holder"). For purposes of this discussion, the term "United
States person" means a person that, for United States federal income tax
purposes, is (i) a citizen or resident of the United States, (ii) a
corporation or partnership created or organized in or under the laws of the
United States or of any State, (iii) an estate the income of which is subject
to United States federal income tax, regardless of its source, or (iv) a trust
if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more United
States fiduciaries have the authority to control all substantial decisions of
the trust. Holders who are resident alien individuals will be subject to
United States federal taxation with respect to the Common Stock as if they
were United States citizens, and thus, are not Non-United States Holders for
purposes of this discussion.
This discussion is based upon the Internal Revenue Code of 1986, as amended,
(the "Code"), the applicable Treasury regulations ("Regulations"), and public
administrative and judicial interpretations of the Code and Regulations as of
the date hereof, all of which are subject to change, which changes could be
applied retroactively. This discussion does not purport to cover all aspects
of United Stated federal taxation that may be relevant to, or the actual tax
effect that any of the matters described herein will have on, any particular
Non-United States Holder and does not address any tax consequences arising
under the laws of any foreign, state, or local taxing jurisdiction.
The Company has not obtained an opinion of counsel with respect to the
matters discussed below, and nothing contained herein should be construed as
constituting such an opinion. Moreover, this discussion does not consider any
specific facts or circumstances that may apply to a particular Non-United
States Holder.
THIS DISCUSSION IS FOR GENERAL INFORMATION PURPOSES ONLY. EACH PROSPECTIVE
INVESTOR IS EXPECTED AND URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH PERSON OF OWNING AND DISPOSING OF COMMON
STOCK (INCLUDING SUCH PERSON'S STATUS AS A UNITED STATES PERSON OR A NON-
UNITED STATES PERSON) AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS
OF ANY FOREIGN, STATE, OR LOCAL TAXING JURISDICTION.
DIVIDENDS
Dividends paid by the Company to a Non-United States Holder will generally
be subject to withholding of United States federal income tax at the rate of
30 percent, or such lower rate as may be specified by an applicable income tax
treaty, unless the dividend is effectively connected with the conduct of a
trade or business within the United States by the Non-United States Holder or,
if any income tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder and the Non-United States Holder
provides the payor with proper documentation (Form 4224). In order to claim
the benefit of an applicable tax treaty, a Non-United States Holder may have
to file with the Company or its dividend paying agent an exemption or reduced
treaty rate certificate or letter in accordance with the terms of the treaty.
Under current Regulations, for purposes of determining whether tax is to be
withheld at a 30 percent rate or at a reduced rate as specified by an income
tax treaty, the Company ordinarily will presume that dividends paid to an
address in a foreign country are paid to a resident of such country absent
knowledge that such presumption is not warranted. However, under proposed
Regulations which have not yet been put into effect, additional certification
requirements would apply after December 31, 1997. See "--Information Reporting
and Backup Withholding."
76
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
In the case of dividends that are effectively connected with a Non-United
States Holder's conduct of a trade or business in the United States or, if an
income tax treaty applies, is attributable to a United States permanent
establishment of the Non-United States Holder, the Non-United States Holder
will generally be subject to the same United States federal income tax on net
income that applies to United States persons. A Non-United States Holder that
is a corporation receiving effectively connected dividends may also be subject
to an additional branch profits tax which is imposed, under certain
circumstances, at a rate of 30 percent (or such lower rate as may be specified
by an applicable treaty) of the corporate Non-United States Holder's
"effectively connected earnings and profits," subject to certain adjustments.
GAIN ON DISPOSITION
Except under special rules for individuals described below, a Non-United
States Holder generally will not be subject to United States federal income
tax on gain resulting from a sale or other disposition of Common Stock unless
the gain is (i) effectively connected with the conduct of a United States
trade or business by the Non-United States Holder or (ii) treated as
effectively connected with such a trade or business because the Company is or
has been a "United States real property holding corporation" within the
meaning of Section 897(c)(2) of the Code and certain other conditions are
satisfied as discussed below. Any gain from the disposition of Common Stock
that is (or is treated as) effectively connected with a United States trade or
business will be subject to substantially the same United States federal
income tax treatment that applies to United States persons (and, in the case
of corporate Non-United States Holders, may be subject to the branch profits
tax), except as otherwise provided by an applicable United States income tax
treaty.
A corporation is generally a "United States real property holding
corporation" for United States federal income tax purposes if the fair market
value of its United States real property interests equals or exceeds 50
percent of the sum of the fair market value of its worldwide real property
interests plus its other assets used or held for use in a trade or business
both within and outside of the United States. The Company cannot represent
that it is not a United States real property holding corporation or that it
will not become such a corporation. The Company's status as a United States
real property holding corporation will not cause gain from the disposition of
Common Stock to be treated as effectively connected with a United States trade
or business so long as (i) the Common Stock is regularly traded on an
established securities market (as defined in Regulations) and (ii) the Non-
United States Holder has not held, directly or indirectly, more than 5 percent
of the Common Stock at any time during the five-year period ending on the date
of disposition.
Special rules apply to individual Non-United States Holders. An individual
Non-United States Holder who recognizes gain from the disposition of Common
Stock held as a capital asset and is present in the United States for a period
or periods aggregating 183 days or more during the taxable year of disposition
generally will be taxed at a rate of 30 percent on any such gain (less certain
capital losses, if any, from United States sources), if the Non-United States
Holder either (i) has a "tax home" in the United States (as defined in
Regulations) or (ii) maintains an office or other fixed place of business in
the United States to which such gain is attributable. In addition, certain
individual Non-United States Holders who once were United States citizens may
be subject to special rules applicable to United States expatriates.
77
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a citizen
or resident (as specially defined for United States federal estate tax
purposes) of the United States at the date of death will be included in such
individual's estate for United States federal estate tax purposes and thus
will be subject to United States federal estate tax, unless an applicable
estate tax treaty provides otherwise.
INFORMATION REGARDING AND BACKUP WITHHOLDING
The Company must report annually to the United States Internal Revenue
Service ("IRS") and to each Non-United States Holder the amount of dividends
paid to, and the tax withheld with respect to, such Non-United States Holder,
regardless of whether any tax was actually withheld because, for example, the
dividends were effectively connected with a trade or business of the Non-
United States Holder in the United States or the withholding requirement was
reduced or eliminated under an applicable United States income tax treaty.
That information may also be made available to the tax authorities of the
country in which the Non-United States Holder resides under the provisions of
an applicable income tax treaty or agreement.
United States backup withholding (which generally is imposed at the rate of
31 percent on certain payments to persons not otherwise exempt who fail to
furnish certain identifying information to the IRS) will generally not apply
to dividends paid to a Non-United States Holder that are subject to
withholding at the 30 percent rate (or would be so subject but for a reduced
rate under an applicable income tax treaty). In addition, under current law
the payor of dividends may rely on the payee's foreign address in determining
that the payee is exempt from backup withholding, unless the payor has
knowledge that the payee is in fact a United States person. However, under
proposed Regulations, in the case of dividends paid after December 31, 1997
(December 31, 1999, in the case of dividends paid to accounts in existence on
or before the date that is 60 days after the proposed Regulations are
published as final Regulations), a Non-United States Holder generally would be
subject to backup withholding at a 31 percent rate, unless certain
certification procedures (or, in the case of payments made outside the United
States with respect to an offshore account, certain documentary evidence
procedures) are complied with directly or through an intermediary.
These backup withholding and information reporting requirements also apply
to the gross proceeds paid to a Non-United States Holder upon the disposition
of Common Stock by or through a United States office of a United States or
foreign broker, unless the Non-United States Holder certifies to the broker
under penalties of perjury as to its name and address and the holder either is
a Non-United States Holder or otherwise establishes an exemption from the
requirements. Generally, United States information reporting and backup
withholding will not apply to a payment of disposition proceeds if the payment
is made outside the United States through a non-United States office of a non-
United States broker. However, Information reporting requirements (but not
backup withholding) will apply to a payment of the proceeds of a disposition
of Common Stock by or through a foreign office of (i) a United States broker,
(ii) a foreign broker 50 percent or more of whose gross income for certain
periods is effectively connected with the conduct of a trade or business in
the United States, or (iii) a foreign broker that is a "controlled foreign
corporation" for United States federal income tax purposes, unless the broker
has documentary evidence in its records that the holder is a Non-United States
Holder and certain other conditions are met, or the holder otherwise
establishes an exemption from the requirements. Neither backup withholding nor
information reporting will generally apply to a payment of the proceeds of a
disposition of Common Stock by or through a foreign office of a foreign broker
not described in the preceding sentence.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that
required information is furnished to the IRS.
78
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
among the Company and the International Underwriters (the "International
Underwriting Agreement"), the Company has agreed to sell to each of the
International Underwriters named below (the "International Underwriters"), and
each of the International Underwriters, for whom Salomon Brothers
International Limited, Donaldson, Lufkin & Jenrette Securities Corporation,
Goldman Sachs International and Merrill Lynch International are acting as the
representatives (the "International Representatives"), has severally agreed to
purchase the number of Shares set forth opposite its name below:
<TABLE>
<CAPTION>
UNDERWRITING
INTERNATIONAL UNDERWRITERS COMMITMENT
-------------------------- ------------
<S> <C>
Salomon Brothers International Limited..........................
Donaldson, Lufkin & Jenrette Secutities Corporation.............
Goldman Sachs International ....................................
Merrill Lynch International.....................................
----------
Total......................................................... 2,000,000
==========
</TABLE>
The Company has been advised by the International Representatives that the
several International Underwriters initially propose to offer such Shares to
the public at the Price to Public set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in
excess of $ per Share. The International Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $ per Share to other
dealers. After the Offerings, the Price to Public and such concessions may be
changed.
The Company has granted to the International Underwriters and the U.S.
underwriters (the "U.S. Underwriters" and, collectively with the International
Underwriters, the "Underwriters") options, exercisable during the 30-day
period after the date of this Prospectus, to purchase up to 2,025,000
additional shares of Common Stock from the Company at the Price to Public less
the Underwriting Discount, solely to cover over-allotments. To the extent that
the International Underwriters and the U.S. Underwriters exercise such
options, each of the International Underwriters and the U.S. Underwriters, as
the case may be, will be committed, subject to certain conditions, to purchase
a number of option shares proportionate to such International Underwriter's or
U.S. Underwriter's initial commitment.
The Company has entered into a U.S. Underwriting Agreement with the U.S.
Underwriters named therein, for whom Salomon Brothers Inc, Donaldson, Lufkin &
Jenrette Securities Corporation, Goldman, Sachs & Co. and Merrill Lynch,
Pierce, Fenner & Smith Incorporated are acting as the representatives (the
"U.S. Representatives" and, together with the International Representatives,
the "Representatives") providing for the concurrent offer and sale of
11,500,000 Shares (in addition to the shares covered by the over-allotment
options described above) in the United States and Canada. Both the
International Underwriting Agreement and the U.S. Underwriting Agreement
provide that the obligations of the International Underwriters and the U.S.
Underwriters are such that if any of the Shares are purchased by the
International Underwriters pursuant to the International Underwriting
Agreement, or by the U.S. Underwriters pursuant to the U.S. Underwriting
Agreement, all the Shares agreed to be purchased by either the International
Underwriters or the U.S. Underwriters, as the case may be, pursuant to their
respective agreements must be so purchased. The Price to Public and
Underwriting Discount per Share for the International Offering and the U.S.
Offering will be identical. The closing of the U.S. Offering is a condition to
the closing of the International Offering and the closing of the International
Offering is a condition to the closing of the U.S. Offering.
79
<PAGE>
ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS
Each International Underwriter has severally agreed, that, as part of the
distribution of the 2,000,000 Shares offered by the International
Underwriters, (i) it is not purchasing any Shares for the account of any
United States or Canadian Person, (ii) it has not offered or sold, and will
not offer or sell, directly or indirectly, any Shares or distribute this
Prospectus to any person in the United States or Canada, or to any United
States or Canadian Person and (iii) any dealer to whom it may sell any Shares
will represent that it is not purchasing for the account of any United States
or Canadian Person and agree that it will not offer or resell, directly or
indirectly, any Shares in the United States or Canada, or to any United States
or Canadian Person or to any other dealer who does not so represent and agree.
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 11,500,000 Shares by the U.S. Underwriters, (i) it is not purchasing
any Shares for the account of anyone other than a United States or Canadian
Person, (ii) it has not offered or sold, and will not offer or sell, directly
or indirectly, any Shares or distribute any Prospectus relating to the U.S.
Offering to any person outside of the United States or Canada, or to anyone
other than a United States or Canadian Person and (iii) any dealer to whom it
may sell any Shares will represent that it is not purchasing for the account
of anyone other than a United States or Canadian Person and agree that it will
not offer or resell, directly or indirectly, any Shares outside of the United
States or Canada, or to anyone other than a United States or Canadian Person
or to any other dealer who does not so represent and agree.
The foregoing limitations do not apply to stabilization transactions or to
certain other transactions specified in the Agreement Between U.S.
Underwriters and International Underwriters. "United States or Canadian
Person" means any person who is a national or resident of the United States or
Canada, any corporation, partnership or other entity created or organized in
or under the laws of the United States or Canada or of any political
subdivision thereof, and any estate or trust the income of which is subject to
United States or Canadian federal income taxation, regardless of its source
(other than any non-United States or non-Canadian branch of any United States
or Canadian Person), and includes any United States or Canadian branch of a
person other than a United States or Canadian Person.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of Shares as may be mutually agreed.
The price of any Shares so sold shall be the Price to Public, less an amount
not greater than the concession to securities dealers. To the extent that
there are sales between the International Underwriters and the U.S.
Underwriters pursuant to the Agreement Between U.S. Underwriters and
International Underwriters, the number of Shares initially available for sale
by the International Underwriters or by the U.S. Underwriters may be more or
less than the amount specified on the cover page of this Prospectus.
Each International Underwriter has severally represented and agreed that (i)
it has not offered or sold and, prior to the expiry of six months from the
closing date of the Offerings, will not offer or sell in the United Kingdom,
by means of any document, any Shares other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments (whether as principal or agent) for the purposes of their
businesses or otherwise in circumstances which have not resulted in and will
not result in an offer to the public within the meaning of the Public Offers
of Securities Regulations 1995 (the "Regulations"); (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
and the Regulations with respect to anything done by it in relation to the
Shares in, from or otherwise involving the United Kingdom; and (iii) it has
only issued or passed on, and will only issue or pass on, to any person in the
United Kingdom any document received by it in connection with the issue of the
Shares to a person who is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
1995, or is a person to whom the document may otherwise lawfully be issued or
passed on.
80
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
Purchasers of the Shares offered hereby may be required to pay stamp taxes
and other charges in accordance with the laws and practices of the country of
purchase in addition to the Price to Public set forth in the cover page
hereof.
The International Underwriting Agreement provides that the Company will
indemnify the International Underwriters against certain liabilities and
expenses, including liabilities under the Securities Act, or contribute to
payments the International Underwriters may be required to make in respect
thereof.
Subject to certain exceptions, the Company, its parent and certain directors
and officers of the Company have agreed not to offer, sell, contract to sell
or otherwise dispose of, directly or indirectly, or announce the offering of
any shares of Common Stock, including any such shares beneficially or
indirectly owned or controlled by the Company, or any securities convertible
into, or exchangeable or exercisable for, shares of Common Stock, for 180 days
from the date of this Prospectus, without the prior written consent of Salomon
Brothers Inc.
During and after the Offerings, the Underwriters may purchase and sell the
Common Stock in the open market. These transactions may include overallotment
and stabilizing transactions and purchases to cover syndicate short positions
created in connection with the Offerings. The Underwriters also may impose a
penalty bid, whereby selling concessions allowed to syndicate members of other
broker-dealers in respect of the Shares of Common Stock sold in the Offerings
for their account may be reclaimed by the syndicate if such Shares are
repurchased by the syndicate in stabilizing or covering transactions. These
activities may stabilize, maintain or otherwise affect the market price of the
Common Stock which may be higher than the price that might otherwise prevail
in the open market.
Prior to the Offerings, there has been no public market for the Common
Stock. The Price to Public will be determined by negotiations between the
Company and the Representatives. Among the factors to be considered in
determining the Price to Public are prevailing market conditions, the market
values of publicly traded companies that the Underwriters believe to be
somewhat comparable to the Company, the demand for the Shares and for similar
securities of publicly traded companies that the Underwriters believe to be
somewhat comparable to the Company, the future prospects of the Company and
its industry in general, sales, earnings and certain other financial and
operating information of the Company in recent periods, and other factors
deemed relevant. There can be no assurance that the prices at which the Shares
will sell in the public market after the Offerings will not be lower than the
Price to Public.
LEGAL MATTERS
The validity of the Common Stock and certain other legal matters in
connection with the Common Stock offered hereby are being passed upon for the
Company by Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver,
Colorado 80203. The validity of the Common Stock is being passed upon for the
Underwriters by their counsel, Shearman & Sterling, 599 Lexington Avenue, New
York, NY 10022-6069.
EXPERTS
The financial statements and schedules of Qwest Communications International
Inc. as of December 31, 1996 and 1995, and for each of the years in the three-
year period ended December 31, 1996, have been included herein and in the
Registration Statement in reliance upon the report, dated February 19, 1997,
of KPMG Peat Marwick LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
81
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
ADDITIONAL INFORMATION
The Company is not currently subject to the information requirements of the
Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a
result of the Offerings, the Company will be required to file reports and other
information with the Securities and Exchange Commission (the
"Commission") pursuant to the informational requirements of the Exchange Act.
The Company intends to furnish its stockholders with Annual Reports containing
Consolidated Financial Statements audited by independent certified public
accountants and with quarterly reports containing unaudited financial
information for each of the first three quarters of each year.
The Company has filed with the Commission a Registration Statement on Form S-
1 under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus, which is a part of the
Registration Statement, omits certain information, exhibits, schedules and
undertakings set forth in the Registration Statement. For further information
pertaining to the Company and the securities offered hereby, reference is made
to such Registration Statement and the exhibits and schedules thereto.
Statements contained in this Prospectus as to the contents or provisions of any
documents referred to herein are not necessarily complete, and in each
instance, reference is made to the copy of the document filed as an exhibit to
the Registration Statement. The Company will issue annual and quarterly
reports. Annual reports will include audited financial statements prepared in
accordance with accounting principles generally accepted in the United States
and a report of its independent auditors with respect to the examination of
such financial statements. In addition, the Company will issue to its
securityholders such other unaudited quarterly or other interim reports as it
deems appropriate.
The Registration Statement may be inspected without charge at the office of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the
Registration Statement may be obtained from the Commission at prescribed rates
from the Public Reference Section of the Commission at such address, and at the
Commission's regional offices located at 7 World Trade Center, 13th Floor, New
York, New York 10048, and at Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly
available through the Commission's site on the Internet's World Wide Web,
located at http://www.sec.gov.
82
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UN-
DERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS
GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SO-
LICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS
NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICI-
TATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 10
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Dilution................................................................. 19
Capitalization........................................................... 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Industry Overview........................................................ 34
Business................................................................. 38
Regulation............................................................... 50
Management............................................................... 56
Principal Stockholder.................................................... 68
Certain Transactions..................................................... 68
Description of Capital Stock............................................. 70
Shares Eligible for Future Sale.......................................... 72
Description of Certain Indebtedness...................................... 73
Certain United States Federal Tax Consequences to Non-United States
Holders................................................................. 76
Underwriting............................................................. 79
Legal Matters............................................................ 81
Experts.................................................................. 81
Additional Information................................................... 82
Index to Consolidated Financial Statements............................... F-1
Glossary................................................................. G-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
13,500,000 SHARES
QWEST COMMUNICATIONS INTERNATIONAL INC.
COMMON STOCK
($.01 PAR VALUE)
[LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE]
SALOMON BROTHERS INTERNATIONAL LIMITED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
GOLDMAN SACHS INTERNATIONAL
MERRILL LYNCH INTERNATIONAL
PROSPECTUS
DATED JUNE , 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses (other than underwriting discounts and commissions) payable in
connection with the sale of the Common Stock offered hereby (including the
Common Stock which may be issued pursuant to the over-allotment option) are as
follows:
<TABLE>
<CAPTION>
AMOUNT
-----------
<S> <C>
SEC registration fee........................................ $ 87,121.21
NASD filing fee............................................. 25,000.00
Nasdaq National Market listing fee.......................... 50,000.00
Printing and engraving expenses............................. 600,000.00
Legal fees and expenses..................................... 200,000.00
Accounting fees and expenses................................ 125,000.00
Blue Sky fees and expenses (including legal fees and
expenses).................................................. 25,000.00
Transfer agent and registrar fees and expenses.............. 10,00.00
Miscellaneous............................................... 25,878.79
-----------
Total................................................... $ 1,148,000
===========
</TABLE>
All of the above expenses are estimated except for the SEC registration fee,
NASD filing fee and Nasdaq National Market listing fee.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other
than an action by or in the right of such corporation), by reason of the fact
that such person is or was an officer or director of such corporation, or is
or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise. The indemnity may include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding, if
such officer or director acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe such officer's or director's conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by or
in the right of the corporation under the same conditions, except that no
indemnification is permitted without judicial approval if the officer or
director is adjudged to be liable to the corporation in the performance of his
duty. Where an officer or director is successful on the merits or otherwise in
the defense of any action referred to above, the corporation must indemnify
such officer or director against the expenses which such officer or director
actually and reasonably incurred.
In accordance with Section 102(b)(7) of the DGCL, the Company's Certificate
of Incorporation provides that directors shall not be personally liable for
monetary damages for breaches of their fiduciary duty as directors except for
(i) breaches of their duty of loyalty to the Company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, (iii) certain transactions under Section 174 of the
DGLC (unlawful payment of
II-1
<PAGE>
dividends or unlawful stock purchases or redemptions) or (iv) transactions
from which a director derives an improper personal benefit. The effect of this
provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any actions involving gross negligence.
The Certificate of Incorporation and the By-laws of the Company provide for
indemnification of the Company's officers and directors to the fullest extent
permitted by applicable law, except that the By-laws provide that the Company
is required to indemnify an officer or director in connection with a
proceeding initiated by such person only if the proceeding was authorized by
the Board of Directors of the Company. In addition, the Company maintains
insurance policies which provide coverage for its officers and directors in
certain situations where the Company cannot directly indemnify such officers
or directors.
The Underwriting Agreements provide for indemnification of directors and
officers of the Company by the Underwriters against certain liabilities.
Pursuant to Section 145 of the DGCL and the Certificate of Incorporation and
the By-laws of the Company, the Company maintains directors' and officers'
liability insurance coverage.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this Registration Statement, the
registrant has issued the following securities that were not registered under
the Securities Act of 1933, as amended (the "Securities Act"):
(a) $250,000,000 aggregate principal amount of the registrant's 10 7/8%
Senior Notes Due 2007 (the "Notes") sold to each of Salomon Brothers Inc,
Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co.
(the "Initial Purchasers"), at an aggregate discount from par value of 2.750%.
The Notes have been resold by the Initial Purchasers only to institutional
investors that are "qualified institutional buyers" within the meaning of Rule
144A under the Securities Act or "accredited investors" within the meaning of
Rule 501(a)(1), (2), (3) or (7) under the Securities Act; and
(b) the issuance, upon formation of the registrant, of 10,000 shares of its
Common Stock, at its par value of $.01 per share, to its sole stockholder.
(c) Warrant issued, in consideration for $2.3 million in cash, May 23, 1997
for 4,300,000 shares of Common Stock at an exercise price of $28.00 per share,
subject to adjustment as provided in the Warrant.
Such issuances were made in reliance upon an exemption from the registration
provisions of the Securities Act set forth in Section 4(2) thereof relative to
transactions by an issuer not involving any public offering or the rules and
regulations thereunder. All of such shares of Common Stock are deemed
restricted securities within the meaning of Rule 144 under the Securities Act.
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement
3.1 --Form of Amended and Restated Certificate of Incorporation of the
Company, to be in effect as of the Effective Date
3.2* --By-laws of the Company
4.1* --Indenture dated as of March 31, 1997 with Bankers Trust Company
(including form of the Company's 10 7/8% Senior Notes Due 2007 as an
exhibit thereto) (previously filed as Exhibit 4.2)
4.2* --Registration Agreement dated March 31, 1997 with Salomon Brothers
Inc relating to the Company's 10 7/8% Senior Notes Due 2007
(previously filed as Exhibit 4.3)
5.1 --Opinion of Holme Roberts & Owen LLP as to the validity of the shares
of Common Stock being offered
10.1* --Growth Share Plan, as amended, effective October 1, 1996
10.2* --Employment Agreement dated December 21, 1996 with Joseph P. Nacchio
10.3* --Employment Agreement dated July 15, 1994 with Robert S. Woodruff
10.4* --Settlement Agreement, General Release and Covenant Not to Sue dated
as of November 11, 1996 with Douglas H. Hanson
10.5* --IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
10.6* --IRU Agreement dated as of February 26, 1996 with WorldCom Network
Services, Inc.
10.7* --IRU Agreement dated as of May 2, 1997 with GTE
11.1 --Statement re Computation of Per Share Earnings
21.1* --Subsidiaries of the Registrant
23.1 --Consent of KPMG Peat Marwick LLP
23.2 --Consent of Holme Roberts & Owen LLP (included in Exhibit 5.1)
24.1* --Powers of Attorney (see signature page on page II-4 of initial
filing of Registration Statement)
27.1* --Financial Data Schedule
99.1 --Consent of nominee director
99.2 --Consent of nominee director
</TABLE>
- --------
*Previously filed
(b) FINANCIAL STATEMENT SCHEDULES:
<TABLE>
<CAPTION>
SCHEDULE
NO. DESCRIPTION
-------- -----------
<C> <S>
I --Condensed Information as to the Financial Position of the
Registrant
II --Valuation and Qualifying Accounts
</TABLE>
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
Underwriters at the closing specified in the Underwriting Agreements,
certificates in such denominations and registered in such names as required by
the Underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective; and (3) that for the
purpose of determining any liability under the Securities Act, each post-
effective amendment that contains a form of prospectus shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Company has duly caused this Amendment No. 2 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Denver, State of Colorado on May 23, 1997.
Qwest Communications International
Inc.
*
By: _________________________________
Joseph P. Nacchio
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
--------- -------- ----
<S> <C> <C>
* Chairman of the Board May 23, 1997
____________________________________
Philip F. Anschutz
* Director, President and Chief May 23, 1997
____________________________________ Executive Officer (Principal
Executive Officer)
Joseph P. Nacchio
/s/ Robert S. Woodruff Director and Executive Vice May 23, 1997
____________________________________ President - Finance and
Robert S. Woodruff Chief Financial Officer and
Treasurer (Principal Financial
Officer)
* Vice President and Controller May 23, 1997
____________________________________ (Principal Accounting Officer)
Richard L. Smith
* Director May 23, 1997
____________________________________
Cannon Y. Harvey
* Director May 23, 1997
____________________________________
Richard T. Liebhaber
* Director May 23, 1997
____________________________________
Douglas L. Polson
* Director May 23, 1997
____________________________________
Craig D. Slater
</TABLE>
- --------
<TABLE>
* By power-of-attorney
<S> <C> <C>
/s/ Robert S. Woodruff
____________________________________
Robert S. Woodruff
Attorney-in-Fact
</TABLE>
II-4
<PAGE>
When the transactions referred to in note 2 of the notes to the financial
statement schedules have become effective, we will be in a position to render
the following report.
KPMG Peat Marwick LLP
Independent Auditors' Report
----------------------------
The Board of Directors
Qwest Communications International Inc.:
Under date of February 19, 1997, except as to note 1 paragraph (i) and note 18,
which are as of June___, 1997, we reported on the consolidated balance sheets of
Qwest Communications International Inc. and subsidiaries as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholder's
equity, and cash flows for each of the years in the three-year period ended
December 31, 1996 which are included in the prospectus. In connection with our
audits of the aforementioned consolidated financial statements, we also audited
the related consolidated financial statement schedules in the registration
statement. These financial statement schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present fairly,
in all material respects, the information set forth therein.
Denver, Colorado
February 19, 1997,
except as to note 2,
which is as of
June___, 1997
<PAGE>
Schedule 1
----------
Page 1 of 4
QWEST COMMUNICATIONS INTERNATIONAL INC.
Condensed Information as to the Financial Position of the Registrant
December 31, 1996
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets
- ------
Current asset - short-term advances to Qwest Corporation $ 19,138
Investment in Qwest Corporation 9,442
------
Total assets $ 28,580
======
Liability and Stockholder's Equity
- ----------------------------------
Current liability - advances from Anschutz Company (the "Parent") $ 19,138
Stockholder's equity:
Preferred stock, $.01 par value. Authorized 25,000,000 shares.
No shares issued and outstanding. (note 2) -
Common stock, $.01 par value. Authorized 400,000,000 shares.
Issued and outstanding 86,500,000 shares. (note 2) 865
Additional paid-in capital (note 2) 55,027
Accumulated deficit (46,450)
------
Total stockholder's equity 9,442
------
Total liability and stockholder's equity $ 28,580
======
</TABLE>
See accompanying notes to financial statement schedules.
<PAGE>
Schedule 1
----------
Page 2 of 4
QWEST COMMUNICATIONS INTERNATIONAL INC.
Condensed Information as to the Operations of the Registrant
Year Ended December 31, 1996
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Equity in loss of Qwest Corporation $(6,967)
-----
Net loss $(6,967)
=====
</TABLE>
See accompanying notes to financial statement schedules.
<PAGE>
Schedule 1
----------
Page 3 of 4
QWEST COMMUNICATIONS INTERNATIONAL INC.
Condensed Information as to the Cash Flows of the Registrant
Year Ended December 31, 1996
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Cash flows from operating activities -
Net loss $ (6,967)
Adjustments to reconcile net loss to net cash used by
operating activities -
Equity in loss of Qwest Corporation 6,967
------
Net cash used in operating activities -
------
Cash flows from investing activities -
Repayments from Qwest Corporation, net of advances and expenses
incurred by Parent on Qwest Corporation's behalf 18,047
------
Net cash used in investing activities 18,047
------
Cash flows from financing activities -
Repayments to Parent, net of advances (19,069)
Expenses incurred by Parent on Qwest Corporation's behalf 1,022
------
Net cash provided by financing activities (18,047)
------
Net increase in cash and cash equivalents -
Cash and cash equivalents, beginning of year -
------
Cash and cash equivalents, end of year $ -
======
Supplemental disclosure of significant non-cash financing activity-Reduction in
additional paid-in capital attributable to effect of
cancellation of income tax benefit receivable from Parent $ 11,088
======
</TABLE>
See accompanying notes to financial statement schedules.
<PAGE>
Schedule 1
----------
Page 4 of 4
QWEST COMMUNICATIONS INTERNATIONAL INC.
Notes to Financial Statement Schedules
December 31, 1996
- --------------------------------------------------------------------------------
(1) Organization
Qwest Communications International Inc. (the "Company") is wholly-owned by
Anschutz Company (the "Parent"). The Company became the sole owner of Qwest
Corporation and the ultimate holding company of Qwest Communications Corporation
and subsidiaries through a merger in 1996 with another wholly-owned subsidiary
of the Parent. The merger was accounted for as a business combination of
entities under common control using carryover basis.
(2) Securities Offering
In May 1997, the Company filed a registration statement with the Securities
and Exchange Commission for an initial public offering (the Offering) of
13,500,000 shares of Common Stock. On May___, 1997, the Board of Directors
approved a change in the Company's capital stock to authorize 400,000,000 shares
of $.01 par value Common Stock, of which shares 10,000,000 are reserved for
issuance under the equity incentive plan (described in the following paragraph),
2,000,000 are reserved for issuance under the Growth Share Plan and 4,300,000
are reserved for issuance upon exercise of warrants (as described below), and
25,000,000 shares of $.01 par value Preferred Stock. On June___, 1997, the
Company distributed a stock dividend to the existing shareholder of 86,490,000
shares of Common Stock, which is accounted for as a stock split. All shares and
per share information included in the accompanying financial statements has been
adjusted to give retroactive effect to the change in capitalization.
On May___, 1997, the Board of Directors and the stockholder of the Company
approved an equity incentive plan. Under this plan, stock options, stock
appreciation rights, restricted stock awards, stock units and other stock grants
may be granted (with respect to up to 10,000,000 shares of Common Stock) to
eligible participants who significantly contribute to the Company's growth and
profitability.
On May 23, 1997, the Company sold to an affiliate (the Affiliate) of the
Parent for $2,300,000 in cash, a three year warrant to acquire 4,300,000 shares
of Common Stock at an exercise price of $28 per share, exercisable on May 23,
2000. The warrant is not transferable. Stock issued upon exercise of the warrant
will be subject to restrictions on sale or transfer for two years after
exercise.
<PAGE>
Schedule II
-----------
QWEST COMMUNICATIONS INTERNATIONAL INC.
AND SUBSIDIARIES
Valuation and Qualifying Accounts
Years Ended December 31, 1996, 1995 and 1994
(Amounts in Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Additions Deductions
-------------------------- --------------
Balance at Charged Write-offs, Balance
beginning of to profit net of at end of
year and loss Other (1) recoveries year
---- -------- --------- ------------ ----
<S> <C> <C> <C> <C> <C>
Description
Year ended December 31, 1996:
Allowance for doubtful
receivables - trade $ 2,621 2,841 - (1,793) 3,669
===== ===== ==== ===== =====
Year ended December 31, 1995:
Allowance for doubtful
receivables - trade $ 1,253 1,758 646 (1,036) 2,621
===== ===== === ===== =====
Year ended December 31, 1994:
Allowance for doubtful
receivables - trade $ 1,510 735 - (992) 1,253
===== ===== ==== === =====
</TABLE>
Note (1): Represents additions resulting from acquisitions.
<PAGE>
EXHIBIT 1.1
================================================================================
QWEST COMMUNICATIONS INTERNATIONAL INC.
Common Stock
($.01 par value)
U.S. UNDERWRITING AGREEMENT
Dated: [ ], 1997
---------
================================================================================
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
Common Stock
($.01 par value)
U.S. Underwriting Agreement
New York, New York
[ ], 1997
--------------
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
As U.S. Representatives of the several U.S. Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
Qwest Communications International Inc., a Delaware corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto (the
"U.S. Underwriters"), for whom you (the "U.S. Representatives") are acting as
representatives, [________] shares of Common Stock, $.01 par value ("Common
Stock"), of the Company, (the "U.S. Underwritten Securities"). The Company also
proposes to grant to the U.S. Underwriters an option to purchase up to [______]
additional shares of Common Stock (the "U.S. Option Securities"; the U.S. Option
Securities, together with the U.S. Underwritten Securities, being hereinafter
called the "U.S. Securities"). It is understood that the Company is
concurrently entering into an International Underwriting Agreement dated the
date hereof (the "International Underwriting Agreement") providing for the sale
by the Company of an aggregate of [______] shares of Common Stock (said shares
to be sold by the Company pursuant to the International Underwriting Agreement
being hereinafter called the "International Underwritten Securities"), outside
the United States and Canada through arrangements with certain underwriters
outside the United States and Canada (the "International Underwriters"), for
whom Salomon Brothers International Limited, Donaldson, Lufkin & Jenrette
Securities Corporation, Goldman Sachs International and Merrill Lynch
International are acting as representatives (the "International
Representatives"), and providing for the grant to the International Underwriters
of an option to purchase from the Company up to [_____] additional shares of
Common Stock (the "International Option Securities"; the International Option
Securities, together with the International Underwritten Securities, being
<PAGE>
hereinafter called the "International Securities"; and the U.S. Securities,
together with the International Securities, being hereinafter called the
"Securities"). It is further understood and agreed that the U.S. Underwriters
and the International Underwriters have entered into an Agreement Between U.S.
Underwriters and International Underwriters dated the date hereof (the
"Agreement Between U.S. Underwriters and International Underwriters"), pursuant
to which, among other things, the International Underwriters may purchase from
the U.S. Underwriters a portion of the U.S. Securities to be sold pursuant to
the U.S. Underwriting Agreement and the U.S. Underwriters may purchase from the
International Underwriters a portion of the International Securities to be sold
pursuant to the International Underwriting Agreement.
The Company and the U.S. Underwriters agree that up to 675,000 shares
of U.S. Underwritten Securities to be purchased by the U.S. Underwriters (the
"Directed Shares") shall be reserved for sale by the U.S. Underwriters to
persons who are directors, officers or employees of, or otherwise associated
with, the Company and who have advised the Company of their desire to purchase
such securities, as part of the distribution of the U.S. Underwritten Securities
by the U.S. Underwriters, subject to the terms of this Agreement, the applicable
rules, regulations and interpretations of the National Association of Securities
Dealers, Inc. and all other applicable laws, rules and regulations. To the
extent that such Directed Shares are not so purchased by such persons, such
Directed Shares may be offered to the public as part of the public offering
contemplated hereby.
In this Agreement, unless otherwise specified, all reference to
"dollars" or "$" are to the currency of the United States.
1. Representations and Warranties. The Company represents and
------------------------------
warrants to, and agrees with, each U.S. Underwriter as set forth below in this
Section 1. Certain terms used in this Section 1 are defined in paragraph (ee)
hereof.
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement (file number 333-25391) on Form S-1,
including related preliminary prospectuses, for the registration under the
Securities Act of 1933, as amended (the "Act") of the offering and sale of the
Securities. The Company may have filed one or more amendments thereto, including
the related preliminary prospectuses, each of which has previously been
furnished to you. The Company will next file with the Commission either (A)
prior to effectiveness of such registration statement, a further amendment to
such registration statement (including the form of final prospectuses) or (B)
after effectiveness of such registration statement, final prospectuses in
accordance with Rules 430A and 424(b)(1) or (4). In the case of clause (B), the
Company has included in such registration statement, as amended at the Effective
Date, all information (other than Rule 430A Information) required by the Act and
the rules and regulations thereunder to be included in the Prospectuses with
respect to the Securities and the offering thereof. As filed, such amendment and
form of final prospectuses, or such final prospectuses, shall contain all Rule
430A Information, together with all other such required information, with
respect to the Securities and the offering thereof and, except to the extent the
U.S. Representatives shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the Execution Time
or, to the extent not completed at the Execution Time, shall contain only such
specific additional information and other changes (beyond that contained in the
latest U.S. Preliminary Prospectus) as the Company has advised you, prior to the
Execution Time, will be included or made therein. Upon your request, but not
without your agreement, the Company also will file with the Commission a Rule
462(b) Registration Statement in accordance with Rule 462(b).
It is understood that two (2) forms of prospectus are to be used in
connection
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with the offering and sale of the Securities: one form of prospectus relating to
the U.S. Securities, which are to be offered and sold to United States and
Canadian Persons (as defined herein) which for purposes of distribution to
Canadian Persons shall have a Canadian "wrap-around" (the "Canadian Offering
Memorandum"), and one form of prospectus relating to the International
Securities, which are to be offered and sold to persons other than United States
and Canadian Persons. The two forms of prospectus are identical except for the
outside front cover page, the discussion under the headings "Underwriting" and
"Certain United States Tax Considerations for Non-United States Holders" and the
outside back cover page. Such form of prospectus relating to the U.S. Securities
as first filed with the Commission pursuant to Rule 424(b) or, if no filing
pursuant to Rule 424(b) is made, such form of prospectus included in the
Registration Statement at the Effective Date is hereinafter called the "U.S.
Prospectus"; such form of prospectus relating to the International Securities as
first filed with the Commission pursuant to Rule 424(b) or, if no filing
pursuant to Rule 424(b) is made, such form of prospectus included in the
Registration Statement at the Effective Date is hereinafter called the
"International Prospectus"; and the U.S. Prospectus and the International
Prospectus are hereinafter collectively called the "Prospectuses". Insofar as
they relate to offers or sales of Securities in Canada, all references herein to
the U.S. Preliminary Prospectus (as defined in paragraph (ix) below) and the
U.S. Prospectus shall include the Canadian Offering Memorandum.
(b) On the Effective Date, the Registration Statement, any post-
effective amendment or amendments thereto and any Rule 462(b) Registration
Statement did or will, and when the Prospectuses are first filed (if required)
in accordance with Rule 424(b) and on the Closing Date (as defined herein) and
on any date on which shares sold in respect of the U.S. Underwriters' over-
allotment option are purchased, if such date is not the Closing Date (a
"Settlement Date"), the Prospectuses (and any supplements thereto) will comply
in all material respects with the applicable requirements of the Act and the
rules and regulations thereunder; on the Effective Date, the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading;
and, on the Effective Date, the Prospectuses, if not filed pursuant to Rule
424(b), did not or will not, and on the date of any filing pursuant to Rule
424(b) and on the Closing Date and any Settlement Date, the Prospectuses
(together with any supplement thereto) will not, include any untrue statement of
a material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; provided, however, that the Company makes no
-------- -------
representations or warranties as to the information contained in or omitted from
the Registration Statement or the Prospectuses (or any supplement thereto) in
reliance upon and in conformity with information furnished in writing to the
Company by or on behalf of any U.S. Underwriter through the U.S. Representatives
specifically for inclusion in the Registration Statement or the U.S. Prospectus
(or any supplement thereto).
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<PAGE>
(c) Each of the Company and its subsidiaries (defined below) has been
duly incorporated, is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has full power (corporate and
other) to own or lease its properties and conduct its business as described in
the Prospectuses, and is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction which requires such
qualification wherein it owns or leases material properties or conducts material
business, except where the failure to be qualified would not have a material
adverse effect on the Company or any of its subsidiaries.
(d) The Company has full power (corporate and other) to enter into
and to perform its obligations under this Agreement and the International
Underwriting Agreement.
(e) The Securities to be purchased by the U.S. Underwriters and the
International Underwriters from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters pursuant to this Agreement and the
International Underwriters pursuant to the International Underwriting Agreement,
respectively, and, when issued and delivered by the Company pursuant to this
Agreement and the International Underwriting Agreement, respectively, against
payment of the consideration set forth herein and in the International
Underwriting Agreement, respectively, will be validly issued, fully paid and
non-assessable; the Common Stock conforms to all statements relating thereto
contained in the Prospectuses and such description conforms to the rights set
forth in the instruments defining the same; no holder of the Securities will be
subject to personal liability by reason of being such a holder; and the issuance
of the Securities is not subject to the preemptive or other similar rights of
any securityholder of the Company.
(f) The Securities have been duly authorized for listing, subject to
official notice of issuance, on the Nasdaq Stock Market's National Market
("Nasdaq").
(g) The issued shares of capital stock of each of the Company's
subsidiaries have been duly authorized and validly issued, are fully paid and
nonassessable and, except as otherwise set forth in the Prospectuses, are owned
beneficially by the Company free and clear of any security interests, liens,
encumbrances, equities or claims.
(h) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectuses.
(i) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Prospectuses fairly
present the financial position of the Company and its consolidated subsidiaries
and the results of operations and changes in financial condition as of the dates
and for the periods therein specified. Such financial statements and schedules
have been prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as otherwise noted
4
<PAGE>
therein). The selected financial data set forth under the caption "Selected
Consolidated Financial Data" in the Prospectuses fairly present, on the basis
stated in the Prospectuses, the information included therein.
(j) KPMG Peat Marwick LLP, who have certified certain financial
statements of the Company and its consolidated subsidiaries and delivered their
report with respect to the audited consolidated financial statements and
schedules included in the Prospectuses, are independent public accountants
within the meaning of the Act and the applicable rules and regulations
thereunder.
(k) This Agreement has been duly authorized, executed, and delivered
by the Company.
(l) No legal or governmental proceedings are pending to which the
Company or any of its subsidiaries is a party or to which the property of the
Company or any of its subsidiaries is subject that are not described in the
Prospectuses, and no such proceedings have been threatened against the Company
or any of its subsidiaries or with respect to any of their respective
properties, except in each case for such proceedings that, if the subject of an
unfavorable decision, ruling or finding, would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company and its
subsidiaries.
(m) The issuance, offering and sale of the U.S. Securities by the
Company pursuant to this Agreement, the performance by the Company of its
obligations under this Agreement and the International Underwriting Agreement,
the consummation of the transactions herein and therein contemplated and the
application of proceeds from the sale of the Securities as described in the
Prospectuses do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority, except such
as have been obtained and such as may be required under state securities or blue
sky laws and except as may be required under the Act and the rules and
regulations thereunder with respect to the Registration Agreement and
transactions contemplated thereunder or (ii) conflict with or result in a breach
or violation of any of the terms and provisions of, or constitute a default
under, any indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries or any of their respective
properties are bound, or the charter documents or by-laws of the Company or any
of its subsidiaries, or any statute or any judgment, decree, order, rule or
regulation of any court or other governmental authority or any arbitrator
applicable to the Company or any of its subsidiaries.
(n) The Company has not (i) taken, directly or indirectly, any action
designed to cause or to result in, or that has constituted or which might
reasonably be expected to constitute, the stabilization or manipulation of the
price of any security of the Company to
5
<PAGE>
facilitate the sale of the Securities or (ii) paid or agreed to pay to any
person any compensation for soliciting another to purchase any securities of the
Company (except for the sale of the Securities pursuant to this Agreement and
the International Underwriting Agreement).
(o) Subsequent to the respective dates as of which information is
given in the Prospectuses, (i) the Company and its subsidiaries have not
incurred any material liability or obligation, direct or contingent, nor entered
into any material transaction whether or not in the ordinary course of business;
(ii) the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on its
capital stock; (iii) there has not been any material change in the capital
stock, short-term debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case as described in or contemplated by the
Prospectuses; and (iv) there has not been any material adverse change in the
condition (financial or otherwise), earnings, business affairs or business
prospects of the Company and its consolidated subsidiaries whether or not
arising in the ordinary course of business.
(p) The Company and each of its subsidiaries own or hold all items of
property owned or held by each of them free and clear of any security interests,
liens, encumbrances, equities, claims and other defects, except such as do not
materially and adversely affect the value of such property and do not interfere
with the use made or proposed to be made of such property by the Company or such
subsidiary, and any real property and buildings held under lease by the Company
or any such subsidiary are held under valid, subsisting and enforceable leases,
with such exceptions as are not material and do not interfere with the use made
or proposed to be made of such property and buildings by the Company or such
subsidiary, in each case except as described in or contemplated by the
Prospectuses.
(q) No labor dispute with the employees of the Company or any of its
subsidiaries exists or is threatened or imminent that could result in a material
adverse change in the condition (financial or otherwise), business prospects,
net worth or results of operations of the Company and its subsidiaries, except
as described in or contemplated by the Prospectuses.
(r) The Company and its subsidiaries own or possess all material
patents, patent applications, trademarks, service marks, trade names, licenses,
copyrights and proprietary or other confidential information currently employed
by them in connection with their respective businesses, and neither the Company
nor any such subsidiary has received any notice of infringement of or conflict
with asserted rights of any third party with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectuses.
6
<PAGE>
(s) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in such
amounts as are prudent and customary in the businesses in which they are
engaged; neither the Company nor any such subsidiary has been refused any
insurance coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the condition
(financial or otherwise), business prospects, net worth or results of operations
of the Company and its subsidiaries, except as described in or contemplated by
the Prospectuses.
(t) No subsidiary of the Company is currently prohibited, directly or
indirectly, from paying any dividends to the Company, from making any other
distribution on such subsidiary's capital stock, from repaying to the Company
any loans or advances to such subsidiary from the Company or from transferring
any of such subsidiary's property or assets to the Company or any other
subsidiary of the Company, except as described in or contemplated by the
Prospectuses.
(u) The Company and its subsidiaries possess all certificates,
orders, permits, licenses, authorizations, consents and approvals of and from,
and have made all filings and registrations with, the appropriate federal, state
or foreign regulatory authorities necessary to own, lease, license and use their
properties and assets and to conduct their respective businesses, and neither
the Company nor any such subsidiary is in violation of or has received any
notice of proceedings relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations, consents or approvals,
or the qualification or rejection of any such filing or registration which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling or
finding, would result in a material adverse change in the condition (financial
or otherwise), business prospects, net worth or results of operations of the
Company and its subsidiaries, except as described in or contemplated by the
Prospectuses.
(v) The Company has filed all foreign, federal, state and local tax
returns that are required to be filed or has requested extensions thereof and
has paid all taxes required to be paid by it and any other assessment, fine or
penalty levied against it, to the extent that any of the foregoing is due and
payable, except for any such tax, assessment, fine or penalty that is currently
being contested in good faith or as described in or contemplated by the
Prospectuses.
(w) Neither the Company nor any of its subsidiaries is in violation
of any federal or state law or regulation relating to occupational safety and
health or to the storage, handling or transportation of hazardous or toxic
materials and the Company and its subsidiaries have received all permits,
licenses or other approvals required of them under
7
<PAGE>
applicable federal and state occupational safety and health and environmental
laws and regulations to conduct their respective businesses, and the Company and
each such subsidiary is in compliance with all terms and conditions of any such
permit, license or approval, except any such violation of law or regulation,
failure to receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or approvals
which would not, singly or in the aggregate, result in a material adverse change
in the condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as described
in or contemplated by the Prospectuses.
(x) Each certificate signed by any officer of the Company and
delivered to the U.S. Representatives or Counsel for the U.S. Underwriters shall
be deemed to be a representation and warranty by the Company (and not
individually by such officer) to the U.S. Underwriters as to the matters covered
thereby.
(y) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance that (i)
transactions are executed in accordance with management's general or specific
authorizations; (ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally accepted
accounting principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or specific
authorization; and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable and appropriate intervals and appropriate
action is taken with respect to any differences.
(z) No default exists, and no event has occurred which, with notice
or lapse of time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage, deed
of trust, lease or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which the Company or any of its subsidiaries
or any of their respective properties is bound or may be affected in any
material adverse respect with regard to property, business or operations of the
Company and its subsidiaries.
(aa) The Company is not, and upon the issuance and sale of the
Securities as contemplated herein and in the International Underwriting
Agreement and the application of the net proceeds therefrom as described in the
Prospectuses will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended (the "Investment Company Act"),
without taking account of any exemption arising out of the number of holders of
the Company's securities.
(bb) The Company will conduct its operations in a manner that will not
subject it to registration as an investment company under the Investment Company
Act.
8
<PAGE>
(cc) There are no contracts or documents of a character that would be
required to be described in the Prospectuses that are not described as required
by Form S-1 under the Act.
(dd) The information in Schedule II to this Agreement is correct and
fully describes all the rights of the individuals listed in such Schedule II to
acquire Common Stock of the Company under the Company's Growth Share Plan.
(ee) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "Effective Date" shall mean each date that the
Registration Statement, any post-effective amendment or amendments thereto and
any Rule 462(b) Registration Statement became or become effective. "Execution
Time" shall mean the date and time that this Agreement is executed and delivered
by the parties hereto. The "U.S. Preliminary Prospectus" and the "International
Preliminary Prospectus", respectively, shall mean any preliminary prospectus
with respect to the offering of the U.S. Securities and the International
Securities, as the case may be, referred to in paragraph (i) above and any
preliminary prospectus with respect to the offering of the U.S. Securities and
the International Securities, as the case may be, included in the Registration
Statement at the Effective Date that omits Rule 430A Information; and the U.S.
Preliminary Prospectus and the International Preliminary Prospectus are
hereinafter collectively called the "Preliminary Prospectuses". "Registration
Statement" shall mean the registration statement referred to in paragraph (i)
above, including exhibits and financial statements, as amended at the Execution
Time (or, if not effective at the Execution Time, in the form in which it shall
become effective) and, in the event any post-effective amendment thereto or any
Rule 462(b) Registration Statement becomes effective prior to the Closing Date
(as hereinafter defined), shall also mean such registration statement as so
amended or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A. "Rule 424", "Rule 430A", and "Rule
462" refer to such rules under the Act. "Rule 430A Information" means
information with respect to the Securities and the offering thereof permitted to
be omitted from the Registration Statement when it becomes effective pursuant to
Rule 430A. "Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the initial registration statement (file number 333-
25391). "United States or Canadian Person" shall mean any person who is a
national or resident of the United States or Canada, any corporation,
partnership, or other entity created or organized in or under the laws of the
United States or Canada or of any political subdivision thereof, or any estate
or trust the income of which is subject to United States or Canadian federal
income taxation, regardless of its source (other than any non-United States or
non-Canadian branch of any United States or Canadian Person), and shall include
any United States or Canadian branch of a person other than a United States or
Canadian Person. "U.S." or "United States" shall mean the United States of
America (including the states thereof and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction.
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2. Purchase and Sale. (a) Subject to the terms and conditions and
-----------------
in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each U.S. Underwriter, and each U.S. Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of $[____] per share, the amount of the U.S. Underwritten Securities set
forth opposite such U.S. Underwriter's name in Schedule I hereto, plus any
additional number of Securities which such U.S. Underwriter may be obligated to
purchase pursuant to Section 9 of this Agreement. It is understood that the
Company is not obligated to sell, and the U.S. Underwriters are not obligated to
purchase, any U.S. Underwritten Securities, unless all the International
Underwritten Securities are contemporaneously purchased by the International
Underwriters.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Company hereby grants an
option to the several U.S. Underwriters to purchase, severally and not jointly,
up to [______] shares of the U.S. Option Securities at the same purchase price
per share as the U.S. Underwriters shall pay for the U.S. Underwritten
Securities. Said option may be exercised only to cover over-allotments in the
sale of the U.S. Underwritten Securities by the U.S. Underwriters. Said option
may be exercised in whole or in part at any time (but not more than once) on or
before the 30th day after the date of the U.S. Prospectus upon written notice by
the U.S. Representatives to the Company setting forth the number of shares of
the U.S. Option Securities as to which the several U.S. Underwriters are
exercising the option and, subject to Section 3 hereof, the Settlement Date.
The Settlement Date may be the same as the Closing Date but not earlier than the
Closing Date nor later than ten (10) business days after the date of such
notice. Delivery of certificates for the shares of U.S. Option Securities by
the Company and payment therefor to the Company shall be made as provided in
Section 3 hereof. The number of shares of the U.S. Option Securities to be
purchased by each U.S. Underwriter shall be the same percentage of the total
number of shares of the U.S. Option Securities to be purchased by the several
U.S. Underwriters as such U.S. Underwriter is purchasing of the U.S.
Underwritten Securities, subject to such adjustments as you in your absolute
discretion shall make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the U.S.
--------------------
Underwritten Securities and the U.S. Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the second
business day prior to the Closing Date) shall be made at 10:00 a.m., New York
City time, on [_________], 1997, or such later date (not later than [________],
1997) as the U.S. Representatives and the International Representatives shall
designate, which date and time may be postponed by agreement among the U.S.
Representatives, the International Representatives and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
U.S. Securities being herein called the "Closing Date"). Delivery of the U.S.
Securities shall be made to the U.S. Representatives for the respective accounts
of the several U.S. Underwriters against payment by the several U.S.
Underwriters through the U.S. Representatives of the purchase price
10
<PAGE>
thereof to or upon the order of the Company by wire transfer of New York
Clearing House same day funds. Delivery of the U.S. Underwritten Securities and
the U.S. Option Securities shall be made at such location as the U.S.
Representatives shall reasonably designate at least one (1) business day in
advance of the Closing Date and payment for such U.S. Securities shall be made
at the offices of Shearman & Sterling, counsel to the U.S. Underwriters and the
International Underwriters, at 599 Lexington Avenue, New York, New York or at
such location as may be agreed to by the U.S. Representatives and the Company.
Certificates for the U.S. Securities shall be registered in such names and in
such denominations as the U.S. Representatives may request not less than two (2)
full business days in advance of the Closing Date.
The Company agrees to have the U.S. Securities available for inspection,
checking and packaging by the U.S. Representatives in New York, New York, not
later than 1:00 p.m. on the business day prior to the Closing Date.
If the option provided for in Section 2(b) hereof is exercised after the
second business day prior to the Closing Date, the Company will deliver (at the
expense of the Company) to the U.S. Representatives, at Seven World Trade
Center, New York, New York or at such location as may be agreed to by the U.S.
Representatives and the Company, on the date specified by the U.S.
Representatives (which shall be within three (3) business days after exercise of
said option), certificates for the U.S. Option Securities in such names and
denominations as the U.S. Representatives shall have requested against payment
of the purchase price thereof to or upon the order of the Company by wire
transfer of New York Clearing House same day funds. If settlement for the U.S.
Option Securities occurs after the Closing Date, the Company will deliver to the
U.S. Representatives on the Settlement Date for the U.S. Option Securities, and
the obligation of the U.S. Underwriters to purchase the U.S. Option Securities
shall be conditioned upon receipt of, supplemental opinions, certificates and
letters confirming as of such date the opinions, certificates and letters
delivered on the Closing Date pursuant to Section 6 hereof.
It is understood and agreed that the Closing Date shall occur
simultaneously with the "Closing Date" under the International Underwriting
Agreement, and that the Settlement Date, if any, shall occur simultaneously with
the "Settlement Date" under the International Underwriting Agreement.
4. Offering by U.S. Underwriters. It is understood that the several U.S.
-----------------------------
Underwriters propose to offer the U.S. Securities for sale to the public as set
forth in the U.S. Prospectus.
5. Agreements. (a) The Company agrees with the several U.S. Underwriters
----------
that:
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(i) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment thereof to
become effective. Prior to the termination of the offering of the Securities,
the Company will not file any amendment to the Registration Statement,
supplement to the Prospectuses or any Rule 462(b) Registration Statement without
your prior consent. Subject to the foregoing sentence, if the Registration
Statement has become or becomes effective pursuant to Rule 430A, or filing of
the Prospectuses is otherwise required under Rule 424(b), the Company will cause
the Prospectuses, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule 424(b) within
the time period prescribed and will provide evidence satisfactory to the U.S.
Representatives of such timely filing. Upon your request, the Company will cause
the Rule 462(b) Registration Statement, completed in compliance with the Act and
the applicable rules and regulations thereunder, to be filed with the Commission
pursuant to Rule 462(b) and will provide evidence satisfactory to the U.S.
Representatives of such filing. The Company will promptly advise the U.S.
Representatives (A) when the Registration Statement, if not effective at the
Execution Time, and any amendment thereto, shall have become effective, (B) when
the Prospectuses, any supplement thereto or any Rule 462(b) Registration
Statement, shall have been filed (if required) with the Commission pursuant to
Rule 424(b), (C) when, prior to termination of the offering of the Securities,
any amendment to the Registration Statement shall have been filed or become
effective, (D) of any request by the Commission for any amendment to the
Registration Statement, or any Rule 462(b) Registration Statement, or supplement
to the Prospectuses or for any additional information, (E) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or the institution or threatening of any proceeding for
that purpose and (F) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of any
such stop order and, if issued, to obtain as soon as possible the withdrawal
thereof.
(ii) The Company will comply with the Act and the regulations under the Act
so as to permit the completion of the distribution of the Securities as
contemplated in this Agreement, the International Underwriting Agreement and the
Prospectuses. If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
either of the Prospectuses as then supplemented would include any untrue
statement of a material fact or omit to state any material fact necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading, or if it shall be necessary to amend the Registration
Statement or supplement either of the Prospectuses to comply with the Act or the
rules and regulations thereunder, the Company promptly will (i) prepare and file
with the Commission, subject to the second sentence of paragraph (a) of this
Section 5,
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an amendment or supplement which will correct such statement or omission or
effect such compliance and (ii) supply any supplemented Prospectuses to you in
such quantities as you may reasonably request.
(iii) As soon as practicable, the Company will make generally available to
its security holders and to the U.S. Representatives an earnings statement or
statements of the Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(iv) The Company will furnish to the U.S. Representatives and counsel for
the U.S. Underwriters, without charge, signed copies of the Registration
Statement (including exhibits thereto) and to each other U.S. Underwriter a copy
of the Registration Statement (without exhibits thereto) and, so long as
delivery of a prospectus by a U.S. Underwriter or dealer may be required by the
Act or otherwise required, as many copies of each of the U.S. Preliminary
Prospectus and the U.S. Prospectus and any supplement thereto as the U.S.
Representatives may reasonably request. The Company will furnish or cause to be
furnished to the U.S. Representatives copies of all reports on Form SR required
by Rule 463 under the Act. The Company will pay the expenses of printing or
other production of all documents relating to the offering.
(v) The Company will endeavor, in good faith, in cooperation with the
U.S. Representatives to arrange for the qualification of the Securities for sale
under the laws of such jurisdictions as the U.S. Representatives may designate,
will maintain such qualifications in effect so long as required for the
distribution of the Securities; provided, however, that the Company shall not be
-------- -------
required to qualify as a foreign corporation or file a general consent to
service of process in any such jurisdiction; and will pay the fee of the
National Association of Securities Dealers, Inc., in connection with its review
of the offering.
(vi) The Company will not, for a period of 180 days following the
Execution Time, without the prior written consent of Salomon Brothers Inc,
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any other shares of Common Stock or any
securities convertible into, or exchangeable for, shares of Common Stock;
provided, however, that the Company may issue and sell Common Stock pursuant to
- -------- -------
any employee stock option plan of the Company in effect at the Execution Time
and the Company may issue Common Stock pursuant to the Company's Growth Share
Plan but only if the individuals listed in Schedule II hereto execute an
agreement substantially in the form of Exhibit A hereto.
(vii) The Company will use the net proceeds received by it from the sale
of the Securities in the manner specified in the Prospectuses under "Use of
Proceeds."
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(viii) The Company will use its best efforts to effect and maintain the
quotation of the Securities on Nasdaq and will file with Nasdaq all documents
and notices required by Nasdaq of companies that have securities that are
traded in the over-the-counter market and quotations for which are reported
by Nasdaq.
(ix) The Company, during the period when the Prospectuses are
required to be delivered under the Act or the Securities Exchange Act of 1934
(the "Exchange Act"), will file all documents required to be filed with the
Commission pursuant to the Exchange Act within the time periods required by
the Exchange Act and the rules and regulations of the Commission thereunder.
(x) The Company confirms as of the date hereof that it is in
compliance with all provisions of Section 517.075, Florida Statutes, relating
to issuers doing business with the Government of Cuba or with any person or
affiliate located in Cuba, and the Company further agrees that if it
commences engaging in business with the Government of Cuba or with any person
or affiliate located in Cuba, after the date the Registration Statement
becomes or has become effective with the Commission or with the Florida
Department of Banking and Finance (the "Department"), whichever date is
later, or if the information reported in the Prospectuses, if any, concerning
the Company's business with Cuba or with any person or affiliate located in
Cuba changes in any material way, the Company will provide the Department
notice of such business or change, as appropriate, in a form acceptable to
the Department.
(b) Each U.S Underwriter agrees with the Company that (i) it is not
purchasing any of the U.S. Securities for the account of anyone other than a
United States or Canadian Person, (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any of the U.S. Securities or distribute
any U.S. Prospectus to any person outside of the United States or Canada, or to
anyone other than a United States or Canadian Person, and (iii) any dealer to
whom it may sell any of the U.S. Securities will represent that it is not
purchasing for the account of anyone other than a United States or Canadian
Person and agree that it will not offer or resell, directly or indirectly, any
of the U.S. Securities outside of the United States or Canada, or to anyone
other than a United States or Canadian Person or to any other dealer who does
not so represent and agree; provided, however, that the foregoing shall not
-------- -------
restrict (A) purchases and sales between the U.S. Underwriters on the one hand
and the International Underwriters on the other hand pursuant to the Agreement
Between U.S. Underwriters and International Underwriters, (B) stabilization
transactions contemplated under the Agreement Between U.S. Underwriters and
International Underwriters, conducted through Salomon Brothers Inc (or through
the U.S. Representatives and the International Representatives) as part of the
distribution of the Securities, and (C) sales to or through (or distributions of
U.S Prospectuses or U.S. Preliminary Prospectuses to) United States or Canadian
Persons who are investment advisors, or who otherwise exercise investment
discretion, and who are purchasing for the account of anyone other than a United
States or
14
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Canadian Person.
(c) The agreements of the U.S. Underwriters set forth in paragraph
(b) of this Section 5 shall terminate upon the earlier of the following events:
(i) a mutual agreement of the U.S. Representatives and the
International Representatives to terminate the selling restrictions set forth
in paragraph (b) of this Section 5 and in Section 5(b) of the International
Underwriting Agreement; or
(ii) the expiration of a period of 30 days after the Closing Date,
unless (A) the International Representatives shall have given notice to the
Company and the U.S. Representatives that the distribution of the
International Securities by the International Underwriters has not yet been
completed or (B) the U.S. Representatives shall have given notice to the
Company and the International Underwriters that the distribution of the U.S.
Securities by the U.S. Underwriters has not yet been completed. If such
notice by the U.S. Representatives or the International Representatives is
given, the agreements set forth in such paragraph (b) shall survive until the
earlier of (1) the event referred to in clause (i) of this subsection (c) or
(2) the expiration of an additional period of 30 days from the date of any
such notice.
6. Conditions to the Obligations of the U.S. Underwriters. The
------------------------------------------------------
obligations of the U.S. Underwriters to purchase the U.S. Underwritten
Securities and the U.S. Option Securities, as the case may be, shall be subject
to the accuracy of the representations and warranties on the part of the Company
contained herein as of the Execution Time, the Closing Date and any Settlement
Date pursuant to Section 3 hereof, to the accuracy of the statements of the
Company made in any certificates pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the U.S. Representatives and the International
Representatives agree in writing to a later time, the Registration Statement
will become effective not later than (i) 5:30 p.m., New York City time, on the
date of determination of the public offering price, if such determination
occurred at or prior to 3:00 p.m., New York City time on such date or (ii) 12:00
noon on the business day following the day on which the public offering price
was determined, if such determination occurred after 3:00 p.m., New York City
time, on such date; if filing of either of the Prospectuses, or any supplement
thereto, is required pursuant to Rule 424(b), the Prospectuses, and any such
supplement, will be filed in the manner and within the time period required by
Rule 424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) The Company shall have furnished to the Representatives the
opinion of
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Holme Roberts & Owen LLP, counsel for the Company, dated the Closing Date, to
the effect that :
(i) each of the Company, Qwest Corporation ("QC"), Qwest
Communications Corporation ("QCC") and Qwest Transmission Inc. ("QTI")
(collectively, the "Subsidiaries" and individually, a "Subsidiary") has been
duly incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is organized, with full
corporate power and authority to own its properties and conduct its business
as described in the Prospectuses, and is duly qualified to do business as a
foreign corporation and is in good standing under the laws of each
jurisdiction that requires such qualification in which it owns or leases
material properties or conducts material business, except for such
jurisdictions where the failure to so qualify or to be in good standing would
not, singly or in the aggregate, have a material adverse effect on the
Company and the Subsidiaries, and the Company has full corporate power and
authority to enter into and perform its obligations under this Agreement and
the International Underwriting Agreement;
(ii) all of the outstanding shares of capital stock of the Company and
each of the Subsidiaries have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise set forth in the
Prospectuses, all outstanding shares of capital stock of the Subsidiaries are
owned by the Company either directly or through a wholly owned Subsidiary,
free and clear of (to the best of such counsel's knowledge after due inquiry)
any security interests and any other claims, liens or encumbrances;
(iii) the authorized, issued and outstanding capital stock of the
Company is as set forth in the Prospectuses in the column entitled "Actual"
under the caption "Capitalization" (except for subsequent issuances, if any,
pursuant to this Agreement and the International Underwriting Agreement or
pursuant to reservations, agreements or employee benefit plans referred to in
the Prospectuses); the Securities have been duly authorized, and, when issued
and delivered to and paid for by the U.S. Underwriters pursuant to this
Agreement and by the International Underwriters pursuant to the International
Underwriting Agreement, will be validly issued, fully paid and nonassessable;
and none of the outstanding shares of capital stock of the Company was issued
in violation of the preemptive (to the best of such counsel's knowledge after
due inquiry) or other similar rights of any securityholder of the Company;
(iv) the Securities to be purchased by the U.S. Underwriters and the
International Underwriters from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters and the International Underwriters
pursuant to this Agreement and the International Underwriting Agreement,
respectively, and, when
16
<PAGE>
issued and delivered by the Company pursuant to this Agreement and the
International Underwriting Agreement, respectively, against payment of the
consideration set forth in this Agreement and the International Underwriting
Agreement, will be validly issued and fully paid and non-assessable and no
holder of the Securities is or will be subject to personal liability by
reason of being such a holder;
(v) the issuance of the Securities is not subject to the preemptive or
(to the best of such counsel's knowledge after due inquiry) other similar rights
of any securityholder of the Company;
(vi) the Registration Statement, including any Rule 462(b) Registration
Statement, has become effective under the Act; any required filing of the
Prospectuses, and any supplements thereto, pursuant to Rule 424(b) has been made
in the manner and within the time period required by Rule 424(b); to the best
knowledge of such counsel, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been issued
and no proceedings for that purpose have been instituted or threatened;
(vii) the Registration Statement, including any Rule 462(b) Registration
Statement, the information included in any such Registration Statement that was
omitted from such registration statement at the time it became effective but
that is deemed to be part of such registration statement at the time it became
effective pursuant to Rule 430A or Rule 434 of the regulations under the Act, as
applicable, the Prospectuses and each amendment or supplement to the
Registration Statement and the Prospectuses as of their respective effective or
issue dates (other than the financial statements, including the notes thereto,
and supporting schedules or other financial and accounting data included therein
or omitted therefrom, as to which such counsel need express no opinion) complied
as to form in all material respects with the requirements of the Act and the
regulations under the Act;
(viii) if Rule 434 has been relied upon, the Prospectuses were not
"materially different", as such term is used in Rule 434, from the prospectuses
included in the Registration Statement at the time it became effective;
(ix) the form of certificate used to evidence the Common Stock complies
in all material respects with all applicable statutory requirements, with any
applicable requirements of the charter and by-laws of the Company and the
requirements of Nasdaq;
(x) this Agreement and the International Underwriting Agreement have
been duly authorized, executed and delivered by the Company;
17
<PAGE>
(xi) no filing with, or consent, approval, authorization or order of any
court or governmental agency or body (other than such as may be required under
the applicable securities laws of the various jurisdictions in which the
Securities will be offered or sold, as to which such counsel expresses no
opinion) is required in connection with the due authorization, execution and
delivery of this Agreement or the International Underwriting Agreement or for
the offering, issuance, sale or delivery of the Securities in accordance with
this Agreement and the International Underwriting Agreement;
(xii) the issue and sale of the Securities, the execution and delivery of
this Agreement and the International Underwriting Agreement, the consummation of
the transactions contemplated by this Agreement and the International
Underwriting Agreement and the application of proceeds from the sale of the
Securities as described in the Prospectuses and the compliance by the Company
with its obligations under this Agreement and the International Underwriting
Agreement will not conflict with, result in a breach or violation of, or
constitute a default under any applicable law or the charter or by-laws of the
Company or any of the Subsidiaries or the terms of any indenture or other
agreement or instrument known to such counsel to which the Company or any of the
Subsidiaries is a party or bound or any judgment, order or decree known to such
counsel to be applicable to the Company or any of the Subsidiaries of any court,
regulatory body, administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of the Subsidiaries;
(xiii) the Company is not an "investment company" within the meaning of
the Investment Company Act of 1940 without taking account of any exemption
arising out of the number of holders of the Company's securities;
(xiv) no legal or governmental proceedings are pending to which the
Company or any of its Subsidiaries is a party or to which the property of the
Company or any of its Subsidiaries is subject, as would be required to be
described in the Prospectuses, that are not described in the Prospectuses and,
to the best of such counsel's knowledge after due inquiry, no such proceedings
have been threatened against the Company or any of its Subsidiaries or with
respect to any of their respective properties; there is no franchise, contract
or other document of a character required to be described or referred to in the
Registration Statement or the Prospectuses or to be filed or incorporated by
reference as an exhibit to the Registration Statement, which is not described or
filed as required, and the descriptions thereof or references thereto are
correct in all material respects; and the statements in the Prospectuses under
the caption "Business--Legal Proceedings" present the information called for
with respect to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
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<PAGE>
(xv) to the best of such counsel's knowledge, there are no statutes
or regulations that are required to be described in the Prospectuses that are
not described as required;
(xvi) to the best of such counsel's knowledge, neither the Company
nor any Subsidiary is in violation of its charter or by-laws and no default
by the Company or any Subsidiary exists in the due performance or observance
of any material obligation, agreement, covenant or condition contained in any
contract or other document that is described or referred to in the
Registration Statement or the Prospectuses or filed or incorporated by
reference as an exhibit to the Registration Statement;
(xvii) the information contained in the Prospectuses under the
headings "Certain Transactions", "Description of Capital Stock", "Shares
Eligible for Future Sale" and "Description of Certain Indebtedness" and the
information contained in the International Prospectus under the heading
"Certain United States Federal Income Tax Consequences to Non-United States
Holders" fairly summarizes in all material respects the matters therein
described and to the extent that such statements purport to describe certain
provisions of U.S. federal laws, rules or regulations, and the Company's
charter and by-laws, have been reviewed by such counsel and are correct as to
legal matters in all material respects; and
(xviii) to the best of such counsel's knowledge, there are no persons
with registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise registered by
the Company under the Act.
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
New York, the State of Colorado, the United States or the General Corporation
Law of the State of Delaware to the extent such counsel deems proper and as
specified in such opinion, upon the opinion of other counsel (including internal
counsel) of good standing whom such counsel believes to be reliable and who are
satisfactory to counsel for the U.S. Underwriters and (B) as to matters of fact,
to the extent deemed proper, on certificates of responsible officers of the
Company and public officials. References to the Prospectuses in this paragraph
(b) include any supplements thereto at the Closing Date.
In addition, such counsel shall state that nothing has come to such
counsel's attention that leads such counsel to believe that the Registration
Statement or any amendment thereto (including the information included in the
Registration Statement that was omitted from such Registration Statement at the
time it became effective but that is deemed to be part of such Registration
Statement at the time it became effective pursuant to Rule 430A or Rule 434 of
the regulations under the Act, as applicable) at the time the Registration
Statement became
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<PAGE>
effective (other than the financial statements, including the notes thereto, and
supporting schedules or other financial and accounting data contained therein,
as to which such counsel need not comment) contained any untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary in order to make the statements therein not misleading, or
that the Prospectuses (other than the financial statements, including the notes
thereto, and supporting schedules or other financial and accounting data
contained therein, as to which such counsel need not comment) contained or
contain, as of their respective dates or as of the Closing Date, any untrue
statement of a material fact or omit to state a material fact necessary in order
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
(c) The Company shall have furnished to the Representatives the
opinion of Morrison & Foerster LLP, special federal regulatory counsel for the
Company, dated the Closing Date, to the effect that:
(i) (A) the execution and delivery of this Agreement and the
International Underwriting Agreement by the Company and the issue and sale
of the Securities contemplated hereby and thereby do not violate (1) the
Communications Act of 1934 (the "Communications Act"), (2) the
Telecommunications Act of 1996 (the "Telecom Act of 1996") or (3) any rules
or regulations of the Federal Communications Commission (the "FCC")
applicable to the Company or its Subsidiaries, and (B) no authorization of
or filing with the FCC is necessary for the execution and delivery of this
Agreement and the International Underwriting Agreement by the Company and
the issue and sale of the Securities contemplated hereby and thereby in
accordance with the terms hereof and thereof;
(ii) QCC is a nondominant carrier authorized by the FCC to provide
domestic interstate interexchange telecommunications services as described
in such opinion without any further order, license, permit or other
authorization by the FCC. QCC also has been granted Section 214 authority
by the FCC to provide international switched resale telecommunications
services as described in such opinion. QCC has on file with the FCC tariffs
applicable to its domestic interstate and international services. No other
FCC authority is required, and no other tariffs are required to be filed
under the rules and regulations of the FCC, for the conduct of QCC's
telecommunications business as described in the Prospectuses;
(iii) QTI is a microwave carrier authorized by the FCC and holds the
licenses listed in such opinion. In addition, the licenses listed in such
opinion were held by Qwest Communications, Inc., control of which was
transferred by order of the FCC from MCI Communications Corporation to
Southern Pacific Telecommunications Corporation, QCC's predecessor, on
December 27, 1994. Qwest Communications, Inc.'s name was subsequently
changed to QTI on April 6, 1995. The FCC Files do not reflect any other
licensee name for the licenses listed in such opinion. No further FCC
20
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authority is required for the conduct of QTI's microwave telecommunications
business as described in the Prospectuses, except to the extent that the absence
of any such authority, singly or in the aggregate, would not have a material
adverse effect on the business or operations of the Company or its Subsidiaries
taken as a whole;
(iv) FSI Acquisition Corp. is a private carrier not subject to Title II
common carrier regulation under the Communications Act, as amended by the
Telecom Act of 1996;
(v) (A) QCC and QTI in all material respects (1) have made all reports
and filings, and paid all fees, required by the FCC; and (2) have all
certificates, orders, permits, licenses, authorizations, consents and approvals
of and from, and have made all filings and registrations with, the FCC necessary
to own, lease, license and use their properties and assets and to conduct their
business in the manner described in the Prospectuses; and (B) to the best of
such counsel's knowledge, neither QCC nor QTI has received any notice of
proceedings relating to the revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration, the effect of
which, singly or in the aggregate, would have a material adverse effect on the
business or operations of the Company and its Subsidiaries taken as a whole as
described in the Prospectuses;
(vi) to the best of such counsel's knowledge, neither QCC nor QTI is in
violation of, or in default under, the Communications Act, as amended by the
Telecom Act of 1996, or the rules or regulations of the FCC, the effect of
which, singly or in the aggregate, would have a material adverse effect on the
business or operations of the Company and its Subsidiaries taken as a whole as
described in the Prospectuses;
(vii) (A) no decree or order of the FCC is outstanding against QCC or QTI
and (B) to the best of such counsel's knowledge, no formal litigation,
proceeding, inquiry or investigation has been commenced or threatened, and no
formal notice of violation or order to show cause has been issued, against QCC
or QTI before or by the FCC [* (except for the Application for Review filed by
Microwave Acquisition Corporation on January 27, 1995, which, if the subject of
an unfavorable decision, would not have a material adverse effect on the
business or operations of the Company and its Subsidiaries taken as a whole as
described in the Prospectuses) *]; and
(viii) the statements in the Prospectuses under the captions "Risk
Factors--Regulation Risks" and "Regulation", insofar as such statements
constitute a summary of the legal matters, documents or proceedings of the FCC
with respect to the telecommunications regulation referred to therein, are
accurate in all material respects and fairly summarize all matters referred to
therein.
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(d) (A) The Company shall have furnished to the Representatives the
opinion of Goodin, MacBride, Squeri, Schlotz & Ritchie, LLP, special state
regulatory counsel for the Company for the State of California, dated the
Closing Date, to the effect that:
(i) (x) the execution and delivery of this Agreement and the
International Underwriting Agreement by the Company and the issue and sale
of the Securities contemplated hereby and thereby do not violate (1) any
laws administered by, rules, regulations or published policies of, the
California Public Utilities Commission (the "California PUC") ("PUC Laws")
or any other state laws governing the provision of telecommunications
services in the State of California ("Telecommunications Laws") applicable
to the Company or its Subsidiaries, or (2) any decree from any California
court relating to telecommunications matters, and (y) no authorization of
or filing with the California PUC in the State of California is necessary
for the execution and delivery of this Agreement or the International
Underwriting Agreement by the Company and the issue and sale of the
Securities contemplated hereby and thereby in accordance with the terms
hereof and thereof;
(ii) QCC is certified, registered or otherwise authorized, or is not
required to obtain authority, to provide intrastate interexchange
telecommunications services in the State of California. QCC has a tariff on
file in the State of California and no further tariffs are required to be
filed by QCC or the Company in the State of California to conduct the
Company's telecommunications business as described in the Prospectuses;
(iii) (x) QCC and the Company (1) have made all reports and filings,
and paid all fees, required by the California PUC in the State of
California; and (2) have all certificates, orders, permits, licenses,
authorizations, consents and approvals of and from, and have made all
filings and registrations with, the California PUC in the State of
California necessary to own, lease, license and use their properties and
assets and to conduct their business in the manner described in the
Prospectuses; and (y) neither QCC nor the Company has received any notice
of proceedings relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations, consents or
approvals, or the qualification or rejection of any such filing or
registration, the effect of which, singly or in the aggregate, would have a
material adverse effect on the Company's, and its Subsidiaries' taken as a
whole, telecommunications business or operations, as described in the
Prospectuses;
(iv) neither the Company nor QCC is in violation of, or in default
under, any PUC Laws or any Telecommunications Laws, the effect of which,
singly or in the aggregate, would have a material adverse effect on the
Company's, and its Subsidiaries' taken as a whole, telecommunications
business or operations, as described in the Prospectuses; and
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(v) (x) no decree or order of the California PUC in the State of
California is outstanding against the Company or any of its Subsidiaries
and (y) no formal litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no notice of violation or order to show cause
has been issued, against the Company or any of its Subsidiaries before or
by the California PUC or any other regulatory agency in the State of
California.
(B) The Company shall have furnished to the Representatives the
opinion of Bickerstaff, Heath Smiley, Pollan, Kever & McDaniel LLP, special
state regulatory counsel for the Company for the State of Texas, dated the
Closing Date, to the effect that:
(i) (x) the execution and delivery of this Agreement and the
International Underwriting Agreement by the Company and the issue and sale
of the Securities do not violate any telecommunications laws of the State
of Texas applicable to the Company or QCC or, to the best of such counsel's
knowledge, any decree from any court of the State of Texas relating to the
telecommunications operations of the Company or QCC, and (y) no
authorization of or filing with the Public Utility Commission of Texas (the
"Texas PUC") is necessary for the execution and delivery of this Agreement
or the International Underwriting Agreement by the Company or the issue and
sale of the Securities contemplated hereby and thereby in accordance with
the terms hereof and thereof;
(ii) QCC is duly registered with the Texas PUC and authorized to
provide intrastate telecommunications services in Texas and no further
authority is required to be obtained by QCC or the Company from the Texas
PUC to conduct the Company's telecommunications business as described in
the Prospectuses. QCC has a registration and price list on file in Texas
and no further tariffs are required to be filed by QCC or the Company with
the Texas PUC to conduct the Company's telecommunications business as
described in the Prospectuses;
(iii) (x) QCC and the Company (1) have made all reports and filings
required by the Texas PUC; and (2) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from, and have made
all filings and registrations with, the Texas PUC necessary to own, lease,
license and use their properties and assets and to conduct the Company's
telecommunications business in the manner described in the Prospectuses;
and (y) neither QCC nor the Company has received any notice of proceedings
from the Texas PUC relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations, consents or
approvals, or the qualification or rejection of any such filing or
registration, the effect of which, singly or in the aggregate, would have a
material adverse effect on the business or operations of the Company and
its Subsidiaries taken as a whole as described in the Prospectuses;
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(iv) neither QCC nor the Company is in violation of, or in default
under, the telecommunications laws of the State of Texas, the effect of
which, singly or in the aggregate, would have a material adverse effect on
the business or operations of the Company and its Subsidiaries taken as a
whole as described in the Prospectuses; and
(v) (x) no decree or order of the Texas PUC is outstanding against
QCC or the Company and (y) no formal litigation, proceeding, inquiry or
investigation has been commenced or threatened, and no formal notice of
violation or order to show cause has been issued, against QCC or the
Company before or by the Texas PUC.
(e) The Company shall have furnished to the Representatives the
opinion of Joseph Garrity, internal counsel for the Company, dated the Closing
Date, to the effect that:
(i) (A) the execution and delivery of this Agreement and the
International Underwriting Agreement by the Company and the issuance and
sale of the Securities contemplated hereby and thereby do not violate (1)
any state telecommunications laws or regulations ("State Telecommunications
Laws") applicable to the Company or QCC, QTI or FSI Acquisition Corp.
(together, the "Operating Subsidiaries") or (2) any decree from any court
relating to the telecommunications operations of the Company or the
Operating Subsidiaries, and (B) no authorization of or filing with any
Public Utilities Commission or other state regulatory authority ("State
Regulatory Agency") is necessary for the execution and delivery of this
Agreement or the International Underwriting Agreement by the Company and
the issuance and sale of the Securities contemplated hereby and thereby in
accordance with the terms hereof and thereof;
(ii) QCC is certified, registered or otherwise authorized, or is not
required to obtain authority to provide, intrastate interexchange
telecommunications services in the respective states listed in such
opinion. No further authority is required to be obtained by the Company or
any of the Operating Subsidiaries from any such state to conduct the
telecommunications business as described in the Prospectuses. QCC has a
tariff or price list on file in each of the states requiring such a filing
as identified in such opinion. No further tariffs are currently required to
be filed by the Company or any of the Operating Subsidiaries in any such
state to conduct the telecommunications business as described in the
Prospectuses;
(iii) except to the extent that the following would not have, singly
or in the aggregate, a material adverse effect on the business or
operations of the Company and its Subsidiaries as described in the
Prospectuses: (A) the Company and QCC (1) have made all reports and
filings, and paid all fees, required by State Regulatory Agencies; and (2)
have all certificates, orders, permits, licenses, authorizations, consents
and approvals of and from, and have made all filings and registrations
with, State Regulatory Authorities necessary to own, lease, license and use
their properties and
24
<PAGE>
assets and to conduct business in the manner described in the Prospectuses;
and (B) neither the Company nor QCC has received any notice of proceedings
relating to the revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents or approvals, or the
qualification or rejection of any such filing or registration;
(iv) to the best of such counsel's knowledge, neither the Company nor
QCC is in violation of, or in default under, any State Telecommunications
Law, the effect of which, singly or in the aggregate, would have a material
adverse effect on the business or operations of the Company and its
Subsidiaries as described in the Prospectuses;
(v) (A) no decree or order of any State Regulatory Agency is
outstanding against the Company or any of the Operating Subsidiaries and
(B) no formal litigation, proceeding, inquiry or investigation has been
commenced or, to such counsel's knowledge, threatened, and no formal notice
of violation or order to show cause has been issued, against the Company or
any of the Operating Subsidiaries before or by any State Regulatory Agency,
the effect of which, singly or in the aggregate, would have a material
adverse effect on the business or operations of the Company and its
Subsidiaries as described in the Prospectuses; and
(vi) the statements in the Prospectuses under the captions "Risk
Factors--Regulation Risks" and "Regulation," insofar as such statements
constitute a summary of the legal matters, documents or proceedings of the
FCC and State Regulatory Agencies with respect to telecommunications
regulation referred to therein, are accurate in all material respects and
fairly summarize all matters referred to therein, as of the date of
publication of the Prospectuses.
(f) The U.S. Representatives shall have received from Shearman &
Sterling, counsel for the U.S. Underwriters, such opinion or opinions, dated the
Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectuses (together with any supplement thereto)
and such other related matters as the U.S. Representatives may reasonably
require, and the Company shall have furnished to such counsel such documents as
they request for the purpose of enabling them to pass upon such matters.
(g) The Company shall have furnished to the U.S. Representatives a
certificate of the Company, signed by (1) the Chairman of the Board and Chief
Executive Officer or the President and Chief Operating Officer and (2) the Vice
President, Finance, Treasurer and Chief Financial Officer of the Company, dated
the Closing Date, to the effect that the signers of such certificate have
carefully examined the Registration Statement, the Prospectuses, any supplements
to the Prospectuses, this Agreement and the International Underwriting Agreement
and that:
25
<PAGE>
(i) the representations and warranties of the Company in this
Agreement and the International Underwriting Agreement are true and correct
in all material respects on and as of the Closing Date with the same effect
as if made on the Closing Date and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Prospectuses (exclusive of any supplement thereto), there has been
no material adverse change in the condition (financial or otherwise),
earnings, business affairs or business prospects or properties of the
Company and its subsidiaries, whether or not arising from transactions in
the ordinary course of business, except as set forth in or contemplated in
the Prospectuses (exclusive of any supplement thereto).
(h) At the Execution Time and at the Closing Date, KPMG Peat Marwick
LLP shall have furnished to the U.S. Representatives a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form and
substance satisfactory to the U.S. Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and that they have performed a review
of the unaudited financial information for the [* three *] months ended [* March
31 *], 1997 in accordance with Statement of Auditing Standards No. 71 and
stating in effect that:
(i) in their opinion the audited financial statements and financial
statement schedule included in the Registration Statement and the
Prospectuses and reported on by them comply in form in all material
respects with the applicable accounting requirements of the Act and the
related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited financial
statements made available by the Company and its subsidiaries; carrying out
certain specified procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the stockholders,
directors and compensation and audit committees of the Company and the
subsidiaries; and inquiries of certain officials of the Company who have
responsibility for financial and accounting matters of the Company and its
subsidiaries as to transactions and events subsequent to December 31, 1996,
nothing came to their attention which caused them to believe that:
26
<PAGE>
(1) any unaudited financial statements included in the
Registration Statement and the Prospectuses do not comply in form in all
material respects with applicable accounting requirements of the Act and
with the published rules and regulations of the Commission with respect to
registration statements on Form S-1; and said unaudited financial
statements are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that of the
audited financial statements included in the Registration Statement and the
Prospectuses;
(2) with respect to the period subsequent to [* March 31 *], 1997,
there were any changes, at a specified date not more than five (5) business
days prior to the date of the letter, in the long-term liabilities of the
Company and its subsidiaries or capital stock of the Company and its
subsidiaries or decreases in the total stockholder's equity of the Company
as compared with the amounts shown on the [* March 31 *], 1997 consolidated
balance sheet included in the Registration Statement and the Prospectuses;
or for the period from [* March 31 *], 1997 to such specified date there
were any decreases, as compared with the corresponding period in the
preceding year, in telecommunications revenue or increases in net losses or
in total or per share amounts of net losses of the Company and its
subsidiaries or in total operating expenses, except in all instances for
changes or decreases set forth in such letter, in which case the letter
shall be accompanied by an explanation by the Company as to the
significance thereof unless said explanation is not deemed necessary by the
U.S. Representatives; or
(3) the information included in the Registration Statement and the
Prospectuses in response to Regulation S-K, Item 301 (Selected Financial
Data), Item 302 (Supplementary Financial Information) and Item 402
(Executive Compensation) is not in conformity with the applicable
disclosure requirements of Regulation S-K; and
(iii) they have performed certain other specified procedures as a result
of which they determined that certain information of an accounting, financial or
statistical nature (which is limited to accounting, financial or statistical
information derived from the general accounting records of the Company and its
subsidiaries) set forth in the Registration Statement and the Prospectuses,
including the information set forth under the captions "Prospectus Summary",
"Risk Factors", "Use of Proceeds", "Capitalization", "Selected Consolidated
Financial and Other Data", "Management's Discussion and Analysis of Financial
Condition and Results of Operations", "Business", "Management", and "Certain
Transactions" in the Prospectuses, agrees with the accounting records of the
Company and its subsidiaries, excluding any questions of legal interpretation.
27
<PAGE>
References to the Prospectuses in this paragraph (h) include any
supplement thereto at the date of the letter.
The U.S. Representatives shall have also received from KPMG Peat
Marwick LLP a letter stating that the Company's system of internal accounting
controls taken as a whole is sufficient to meet the broad objectives of internal
accounting control insofar as those objectives pertain to the prevention or
detection of errors or irregularities in amounts that would be material in
relation to the financial statements of the Company and its subsidiaries.
(i) At the Closing Date, the Company's $250,000,000 10 7/8% Senior
Notes Due 2007 (the "Notes") shall be rated at least B+ by Standard & Poor's
Corporation and B2 by Moody's Investor Service Inc. and since the date of this
Agreement there shall not have occurred a downgrading in the rating assigned to
the Notes by any "nationally recognized statistical rating agency," as that term
is defined by the Commission for purposes of Rule 436(g)(2) under the Act, and
no such organization shall have publicly announced that it has its rating of the
Notes under surveillance or review.
(j) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectuses (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (h) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the business or
properties of the Company and its subsidiaries the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the judgment of the U.S.
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectuses (exclusive of any supplement thereto).
(k) At the Execution Time, the Company shall have furnished to the
U.S. Representatives a letter substantially in the form of Exhibit A hereto from
the principal stockholder of the Company and the individuals listed in Schedule
II hereto and any other holder of one percent (1%) or more of outstanding shares
of Common Stock of the Company addressed to the U.S. Representatives, in which
each such person agrees not to offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce an offering of, any shares of
Common Stock beneficially owned by such person or any securities convertible
into, or exchangeable for, shares of Common Stock for a period of 180 days
following the Execution Time without the prior written consent of Salomon
Brothers Inc, other than shares of Common Stock disposed of as bona fide gifts.
(l) Prior to the Closing Date, the Company shall have furnished to
the U.S. Representatives such further information, certificates and documents as
the U.S. Representatives may reasonably request.
28
<PAGE>
(m) The closing of the purchase of the International Underwritten
Securities to be issued and sold by the Company pursuant to the International
Underwriting Agreement shall occur concurrently with the closing described
herein.
(n) The Securities shall be duly authorized for listing, subject to
official notice of issuance, on Nasdaq.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the U.S. Representatives and counsel for the U.S. Underwriters,
this Agreement and all obligations of the U.S. Underwriters hereunder may be
canceled at, or at any time prior to, the Closing Date by the U.S.
Representatives. Notice of such cancellation shall be given to the Company in
writing, by facsimile or by telephone confirmed in writing.
The documents required to be delivered by this Section 6 shall be
delivered at the offices of Shearman & Sterling, 599 Lexington Avenue, New York,
New York, on the Closing Date or such other place as the U.S. Representatives
and the Company shall mutually agree.
7. Reimbursement of U.S. Underwriters' Expenses. If the sale of the
--------------------------------------------
Securities provided for herein is not consummated because any condition to the
obligations of the U.S. Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the U.S. Underwriters, the Company will reimburse the U.S.
Underwriters severally upon demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
them in connection with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
--------------------------------
indemnify and hold harmless each U.S. Underwriter, the directors, officers,
employees and agents of each U.S. Underwriter and each person who controls any
U.S. Underwriter within the meaning of either the Act or the Exchange Act
against any and all losses, claims, damages or liabilities, joint or several, to
which they or any of them may become subject under the Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the registration statement for the
registration of the Securities as originally filed or in any amendment thereof,
or in any U.S. or International Preliminary Prospectus or in either of the
Prospectuses, or in any amendment thereof or supplement thereto, or arise out
29
<PAGE>
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that (i) the Company will not be liable
-------- -------
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any U.S. Underwriter through the U.S. Representatives specifically for inclusion
therein and (ii) with respect to any untrue statement or omission of a material
fact made in any U.S. Preliminary Prospectus, the indemnity agreement contained
in this Section 8(a) shall not inure to the benefit of any U.S. Underwriter (or
any of the directors, officers, employees and agents of such U.S. Underwriter or
any controlling person of such U.S. Underwriter) from whom the person asserting
any such loss, claim, damage or liability purchased the Securities concerned, to
the extent that any such loss, claim, damage or liability of such U.S.
Underwriter occurs under the circumstances where it shall have been determined
by a court of competent jurisdiction by final and nonappealable judgment that
(w) the Company had previously furnished copies of the U.S. Prospectus to the
U.S. Underwriters, (x) delivery of the U.S. Prospectus was required by the Act
to be made to such person, (y) the untrue statement or omission of a material
fact contained in the U.S. Preliminary Prospectus was corrected in the U.S.
Prospectus and (z) there was not sent or given to such person, at or prior to
the written confirmation of the sale of such Securities to such person, a copy
of the U.S. Prospectus. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) Each U.S. Underwriter severally agrees to indemnify and hold harmless
the Company, each of its directors, each of its officers who signs the
Registration Statement, and each person who controls the Company within the
meaning of either the Act or the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each U.S. Underwriter, but only with
reference to written information relating to such U.S. Underwriter furnished to
the Company by or on behalf of such U.S. Underwriter through the U.S.
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any U.S. Underwriter may otherwise have. The Company
acknowledges that the statements set forth in the last paragraph of the cover
page and in the second, sixth, seventh, eighth, twelfth and thirteenth
paragraphs under the heading "Underwriting" in any U.S. Preliminary Prospectus
and the U.S. Prospectus constitute the only information furnished in writing by
or on behalf of the several U.S. Underwriters for inclusion in any U.S.
Preliminary Prospectus or the U.S. Prospectus, and you, as the U.S.
Representatives, confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under this Section 8 of
notice of the commencement of any action, such indemnified party will, if a
claim in respect
30
<PAGE>
thereof is to be made against the indemnifying party under this Section 8,
notify the indemnifying party in writing of the commencement thereof; but the
failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
-------- -------
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b) of
this Section 8 is unavailable to or insufficient to hold harmless an indemnified
party for any reason, the Company and the U.S. Underwriters agree to contribute
to the aggregate losses, claims, damages and liabilities (including legal or
other expenses reasonably incurred in connection with investigating or defending
same) (collectively "Losses") to which the Company and one or more of the U.S.
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Company and by the U.S. Underwriters from the
offering of the U.S. Securities; provided, however, that in no case shall any
-------- -------
U.S. Underwriter (except as may be provided in any agreement among underwriters
31
<PAGE>
relating to the offering of the U.S. Securities) be responsible for any amount
in excess of the underwriting discount or commission applicable to the
Securities purchased by such U.S. Underwriter hereunder. If the allocation
provided by the immediately preceding sentence is unavailable for any reason,
the Company and the U.S. Underwriters shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Company and of the U.S. Underwriters in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the total net proceeds from the offering (before deducting
expenses), and benefits received by the U.S. Underwriters shall be deemed to be
equal to the total underwriting discounts and commissions, in each case as set
forth on the cover page of the U.S. Prospectus. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company or the U.S. Underwriters. The
Company and the U.S. Underwriters agree that it would not be just and equitable
if contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each person
who controls a U.S. Underwriter within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of a U.S.
Underwriter shall have the same rights to contribution as such U.S. Underwriter,
and each person who controls the Company within the meaning of either the Act or
the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to the applicable
terms and conditions of this paragraph (d).
9. Default by a U.S. Underwriter. If any one or more U.S.
-----------------------------
Underwriters shall fail to purchase and pay for any of the U.S. Securities
agreed to be purchased by such U.S. Underwriter or U.S. Underwriters hereunder
and such failure to purchase shall constitute a default in the performance of
its or their obligations under this Agreement, the remaining U.S. Underwriters
shall be obligated severally to take up and pay for (in the respective
proportions which the amount of U.S. Securities set forth opposite their names
in Schedule I hereto bears to the aggregate amount of U.S. Securities set forth
opposite the names of all the remaining U.S. Underwriters) the U.S. Securities
which the defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase; provided, however, that in the event that the aggregate amount of U.S.
-------- -------
Securities which the defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of U.S. Securities
set forth in Schedule I hereto, the remaining U.S. Underwriters shall have the
right to purchase all, but shall not be under any obligation to purchase any, of
the U.S. Securities, and if such nondefaulting U.S. Underwriters do not purchase
all the U.S. Securities, this Agreement will terminate without liability to any
nondefaulting U.S. Underwriter or the Company. In the event of a default by any
U.S. Underwriter as set forth in this Section 9, the
32
<PAGE>
Closing Date shall be postponed for such period, not exceeding seven (7) days,
as the U.S. Representatives shall determine in order that the required changes
in the Registration Statement and the Prospectuses or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting U.S. Underwriter of its liability, if any, to the Company and any
nondefaulting U.S. Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in
-----------
the absolute discretion of the U.S. Representatives, by notice given to the
Company prior to delivery of and payment for the U.S. Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended by
the Commission or Nasdaq or trading in securities generally on the New York
Stock Exchange or Nasdaq shall have been suspended or limited or minimum prices
shall have been established on the New York Stock Exchange or Nasdaq, (ii) a
banking moratorium shall have been declared either by federal or New York state
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the judgment of the U.S. Representatives, impracticable or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the U.S. Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
------------------------------------------
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the U.S. Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of any U.S. Underwriter or the Company or
any of the officers, directors or controlling persons referred to in Section 8
hereof, and will survive delivery of and payment for the U.S. Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the U.S. Representatives, will be
mailed, delivered or telecopied and confirmed to them care of Salomon Brothers
Inc, at Seven World Trade Center, New York, New York, 10048, attention: Legal
Department; or, if sent to the Company, will be mailed, delivered or telecopied
and confirmed to it at 555 Seventeenth Street, Suite 1000, Denver, Colorado
80202, attention of Joseph T. Garrity, Esq.
13. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed
--------------
in
33
<PAGE>
accordance with the laws of the State of New York.
15. Business Day. For purposes of this Agreement, "business day"
------------
means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a day on
which banking institutions in The City of New York, New York are authorized or
obligated by law, executive order or regulation to close.
16. Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
34
<PAGE>
If the foregoing is in accordance with your understanding of our agreement,
please sign and return to us the enclosed duplicate hereof, whereupon this
letter and your acceptance shall represent a binding agreement among the Company
and the several U.S. Underwriters.
Very truly yours,
Qwest Communications International Inc.
By:
-----------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: Salomon Brothers Inc
By:
----------------------
Name:
Title:
For themselves and the other several
U.S. Underwriters named in Schedule I
to the foregoing Agreement.
35
<PAGE>
SCHEDULE I
to the U.S. Underwriting Agreement
Number of Shares of U.S.
Underwritten Securities
U.S. Underwriters To Be Purchased
- ----------------- ---------------
Salomon Brothers Inc.................................
Donaldson, Lufkin & Jenrette Securities Corporation..
Goldman, Sachs & Co..................................
Merrill Lynch, Pierce, Fenner & Smith Incorporated...
---------------
Total...........................................
===============
36
<PAGE>
SCHEDULE II
to the U.S. Underwriting Agreement
Lock-up
Please refer to Endnotes attached hereto.
1. Holders of growth shares under the Company's Growth Share Plan in effect as
of November 1, 1993 (growth shares vest in annual increments of 20%,
beginning on the initial vesting dates shown):
<TABLE>
<CAPTION>
Holder Number of Shares Initial Vesting Date
------ ---------------- --------------------
<S> <C> <C>
Robert S. Woodruff 40,000 August 8, 1995
Daniel I. O'Callaghan 35,000 November 1, 1994
A. Dean Wandry 35,000 November 1, 1995
Anthony J. Brodman 25,000 November 1, 1994
Douglas L. Polson 4,000 November 1, 1994
Craig D. Slater 4,000 November 1, 1994
<CAPTION>
2. Holders of growth shares under the Company's Growth Share Plan in effect
as of May 1, 1996 (growth shares vest in annual increments of 20%, beginning
on the initial vesting dates shown):
Holder Number of Shares Initial Vesting Date
------ ---------------- --------------------
<S> <C> <C>
Douglas L. Polson 3,500 May 1, 1997/1/
Craig D. Slater 3,500 May 1, 1997
<CAPTION>
3. Holders of growth shares under the Company's Growth Share Plan in effect as
of October 1, 1996 (growth shares shall vest in annual increments of 20%,
beginning on the initial vesting dates shown):
Holder Number of Shares Initial Vesting Date
------ ---------------- --------------------
<S> <C> <C>
Joseph P. Nacchio 300,000 January 1, 1998/2/
Stephen M. Jacobsen 30,000 March 24, 1998
</TABLE>
/1/ Mr. Polson's growth shares will become 100% vested on November 1, 1998.
/2/ Under certain circumstances, Mr. Nacchio's growth shares may vest on a
monthly basis. Upon a change in control of the Company, Mr. Nacchio's growth
shares will vest only if his employment is terminated without cause or if Mr.
Nacchio terminates his employment under circumstances as set forth in his
employment agreement.
37
<PAGE>
<TABLE>
<S> <C> <C>
Craig D. Slater 12,500 October 1, 1997
Michael M. Murphy 10,000 April 1, 1998
Richard T. Liebhaber 10,000 December 1, 1997
Anthony J. Brodman 2,500 October 1, 1997
</TABLE>
38
<PAGE>
SCHEDULE II
to the U.S. Underwriting Agreement
Endnotes
--------
1. Growth shares issued under all three of the Plans become 100% vested in the
event of a change in control of the Company, the termination of the Plan, or
the death, disability or retirement of the growth-share holder.
2. Growth shares issued under the November 1, 1993 and May 1, 1996 Plans may be
settled in cash, if the Company is not public, or in cash or Company stock,
if the Company is public, as determined by the Company in its sole
discretion. Growth shares issued under the October 1, 1996 Plan may be
settled either in cash or in shares of Company stock, if the Company is not
public, and must be settled in shares of Company stock if the Company is
public.
3. Growth shares issued under the November 1, 1993 Plan and the May 1, 1996
Plan become 100% vested in the event of an initial public offering of the
Company's common stock ("IPO") and an IPO is a "triggering event" requiring
payment for such growth shares. The growth shares issued under the October
1, 1996 Plan do not become 100% vested in the event of an IPO and an IPO is
not a triggering event.
39
<PAGE>
EXHIBIT A
[LETTERHEAD OF EXECUTIVE OFFICER, DIRECTOR OR OTHER INDIVIDUAL, OR STOCKHOLDER
OF QWEST COMMUNICATIONS INTERNATIONAL INC.]
Qwest Communications International Inc.
Public Offering of Common Stock
, 1997
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Salomon Brothers International Limited
Goldman Sachs International
Merrill Lynch International
As U.S. and International Representatives
of the several U.S. and International Underwriters
c/o Salomon Brothers Inc
Seven World Trade Center
New York, NY 10048
Dear Sirs:
This letter is being delivered to you in connection with the proposed
U.S. and International Underwriting Agreements (the "Underwriting Agreements"),
to be entered into between Qwest Communications International Inc., a Delaware
corporation (the "Company"), and you as representatives of a group of U.S. and
International Underwriters named in the Underwriting Agreements, relating to an
underwritten public offering of common stock, $.01 par value (the "Common
Stock"), of the Company.
In order to induce you and the other U.S. and International
Underwriters to enter into the Underwriting Agreements, the undersigned agrees
not to offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock beneficially
owned by the undersigned or any securities convertible into, or exchangeable
for, shares of Common Stock for a period of 180 days following the day on which
the Underwriting Agreements are executed without the prior written consent of
Salomon Brothers Inc, other than shares of Common Stock disposed of as bona fide
gifts.
If for any reason the Underwriting Agreements shall be terminated
prior to the Closing Date (as defined in the Underwriting Agreements), the
agreement set forth above shall likewise be terminated.
<PAGE>
Yours very truly,
[Signature of executive officer,
director or other individual, or stockholder]
[Name and address of executive officer,
director or other individual, or stockholder]
A-2
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
QWEST COMMUNICATIONS INTERNATIONAL INC.
Qwest Communications International Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), hereby certifies as follows:
1. The name of the Corporation is Qwest Communications International Inc.
2. The date of filing of the Corporation's original Certificate of
Incorporation with the Secretary of State of Delaware was February 18, 1997.
3. The Board of Directors of the Corporation, by unanimous written consent
dated May 23, 1997, duly adopted resolutions, in accordance with Section 141(f)
of the General Corporation Law of the State of Delaware, approving this Amended
and Restated Certificate of Incorporation, and declaring the same to be
advisable.
4. The holder of one-hundred percent (100%) of the outstanding shares of
the common stock of the Corporation entitled to vote, acting by means of written
consent pursuant to Section 228(a) of the General Corporation Law of the State
of Delaware, on May 23, 1997 duly adopted and approved this Amended and Restated
Certificate of Incorporation, including the following amendment set forth
herein:
FOURTH: (a) Authorized Shares. The total number of shares of stock
-----------------
that the Corporation shall have authority to issue is 425,000,000
shares, divided into the following classes: (i) 400,000,000 shares of
common stock, par value $.01 per share ("Common Stock") and (ii)
25,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock").
5. This Amended and Restated Certificate of Incorporation was duly adopted
in accordance with the provisions of Sections 242 and 245 of the General
Corporation Law of the State of Delaware.
6. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated to read as herein set forth in full:
FIRST: The name of the corporation is Qwest Communications
International Inc. (the "Corporation").
<PAGE>
SECOND: The address of the Corporation's registered office in the
State of Delaware is 1209 Orange Street, in the City of Wilmington, County of
New Castle 19801. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD: The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activities for which corporations may
be organized under the General Corporation Law of the State of Delaware.
FOURTH: (a) Authorized Shares. The total number of shares of stock
-----------------
that the Corporation shall have authority to issue is 425,000,000 shares,
divided into the following classes: (i) 400,000,000 shares of common stock,
par value $.01 per share ("Common Stock") and (ii) 25,000,000 shares of
preferred stock, par value $.01 per share ("Preferred Stock").
(b) Common Stock. Each holder of Common Stock shall be entitled to one
------------
vote for each share of such stock held, on all matters presented to
stockholders. Cumulative voting shall not be allowed in the election of
directors or for any other purpose.
(c) Preferred Stock. The Board of Directors is authorized, subject to
---------------
any limitations prescribed by law, to provide from time to time for the issuance
of the shares of Preferred Stock in series, and by filing a certificate pursuant
to the applicable law of the State of Delaware, to establish the characteristics
of each series, including the following:
(i) the number of shares of that series, which may subsequently be
increased or decreased (but not below the number of shares of that
series then outstanding) by resolution of the Board of Directors,
and the distinctive designation thereof;
(ii) the voting powers, full or limited, if any, of the shares of
that series and the number of votes per share;
(iii) the rights in respect of dividends on the shares of that
series, whether dividends shall be cumulative and, if so, from
which date or dates and the relative rights or priority, if any, of
payment of dividends on shares of that series and any limitations,
restrictions or conditions on the payment of dividends;
(iv) the relative amounts, and the relative rights or priority, if
any, of payment in respect of shares of that series, which the
2
<PAGE>
holders of the shares of that series shall be entitled to receive
upon any liquidation, dissolution or winding up of the Corporation;
(v) the terms and conditions (including the price or prices, which
may vary under different conditions and at different redemption
dates), if any, upon which all or any part of the shares of that
series may be redeemed, and any limitations, restrictions or
conditions on such redemption;
(vi) the terms, if any, of any purchase, retirement or sinking fund
to be provided for the shares of that series;
(vii) the terms, if any, upon which the shares of that series shall
be convertible into or exchangeable for shares of any other class,
classes or series, or other securities, whether or not issued by
the Corporation;
(viii) the restrictions, limitations and conditions, if any, upon
issuance of indebtedness of the Corporation so long as any shares
of that series are outstanding; and
(ix) any other preferences and relative, participating, optional or
other rights and limitations not inconsistent with law, this
ARTICLE FOURTH or any resolution of the Board of Directors pursuant
to this ARTICLE FOURTH.
(d) Foreign Ownership. (i) Notwithstanding any other provision of this
-----------------
Certificate and for so long as Section 310 of the Communications Act of 1934, as
amended, or any successor provision of law ("Section 310") remains in effect,
the provisions of paragraph (d) of this ARTICLE FOURTH shall apply. For
purposes of such paragraph (d), "Alien" shall mean "aliens," "their
representatives," "a foreign government or representatives thereof" or "any
corporation organized under the laws of a foreign country" as such terms are
used in Section 310(b)(4) of the Communications Act of 1934, as amended, or any
successor provision of law.
(ii) The Corporation may by written notice require a holder of record
of capital stock of the Corporation or any person that the Corporation knows
3
<PAGE>
to have, or has reasonable cause to believe has, beneficial ownership of capital
stock to certify that, to their knowledge:
(x) No shares of capital stock as to which they have record
ownership or beneficial ownership are beneficially owned by Aliens;
or
(y) The number and class or series of shares of capital stock owned
of record or beneficially owned by them that are owned of record or
beneficially owned by persons that are Aliens are as set forth in
such certificate.
(iii) With respect to any capital stock identified in response to
clause (ii) above, the Corporation may require the notified person to provide
such further information as the Corporation may reasonably require to implement
the provisions of this ARTICLE FOURTH.
(iv) For purposes of applying paragraph (d) of this ARTICLE FOURTH with
respect to any capital stock, if any person fails to provide the certificate or
other information to which the Corporation is entitled under clause (ii) or
(iii), the Corporation, in its sole discretion may presume that the shares of
capital stock in question are, or are not, beneficially owned by Aliens.
FIFTH: No shareholder of the Corporation shall have any preemptive
or similar right to acquire or subscribe for any additional unissued shares of
stock, or other securities of any class, or rights, warrants or options to
purchase stock or scrip, or securities of any kind convertible into stock or
carrying stock purchase warrants or privileges.
SIXTH: To the fullest extent permitted by the General Corporation
Law of the State of Delaware, as the same exists or may hereafter be amended, a
director of the corporation shall not be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.
Any repeal or modification of this ARTICLE SIXTH by the stockholders of the
corporation shall be prospective only and shall not adversely affect any right
or protection of a director of the corporation existing at the time of such
repeal or modification.
4
<PAGE>
SEVENTH: Each person who is or was a director or officer of the
Corporation, and each such person who is or was serving at the request of the
Corporation as a director or officer of another corporation, or in a similar
capacity of a partnership, joint venture, trust or other enterprise, including
service with respect to employee benefit plans maintained or sponsored by the
Corporation (including the heirs, executors, administrators and estate of such
person), shall be indemnified by the Corporation, in accordance with the
procedures specified in the Bylaws of the Corporation, to the fullest extent
permitted from time to time by the General Corporation Law of the State of
Delaware. The Corporation may, to the extent authorized from time to time by
the Board of Directors, grant rights to indemnification and to the advancement
of expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this ARTICLE SEVENTH with respect to the indemnification and
advancement of expenses of directors and officers of the Corporation. Without
limiting the generality of the foregoing, the Corporation may enter into one or
more agreements with any person that provide for indemnification and advancement
of expenses greater or different than that provided in this ARTICLE SEVENTH. No
amendment or repeal of this ARTICLE SEVENTH shall adversely affect any right or
protection existing under or pursuant to this ARTICLE SEVENTH immediately before
the amendment or repeal.
EIGHTH: Except as otherwise required by law or provided in the Bylaws
of the Corporation, and subject to the rights of the holders of any class or
series of shares issued by the Corporation having a preference over the Common
Stock as to dividends or upon liquidation to elect directors in certain
circumstances, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors pursuant to a resolution approved by the
affirmative vote of not less than a majority of the directors then in office or
by holders of not less than 25 percent of the votes of the outstanding shares of
stock of the Corporation entitled to vote generally in the election of directors
voting together as a single class.
NINTH: The Board of Directors shall have the power to adopt, alter,
amend or repeal the Bylaws of the Corporation by vote of not less than a
majority of the directors then in office.
TENTH: Elections of directors need not be by written ballot unless
the Bylaws of the Corporation so provide.
***[Signature page follows]***
5
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused its official seal to be affixed
hereto and this Amended and Restated Certificate of Incorporation to be signed
by its Chairman and attested to by its Secretary, duly authorized to certify on
behalf of the Corporation as to the veracity of the facts set forth herein, on
this __ day of June, 1997.
QWEST COMMUNICATIONS INTERNATIONAL INC.
___________________________
Mr. Philip F. Anschutz
Chairman of the Board
[SEAL]
Attest: _____________________
Joseph T. Garrity, Esq.
Secretary
6
<PAGE>
Exhibit 5.1
May 23, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Qwest Communications International Inc.
Form S-1 Registration Statement, as Amended
(SEC File No. 333-25391)
Ladies and Gentlemen:
As counsel for Qwest Communications International Inc., a
Delaware corporation (the "Company"), we have examined the above-
referenced Registration Statement on Form S-1 under the Securities Act
of 1933, as amended (the "Registration Statement"), which the Company
has filed covering the sale of the Company's Common Stock, $.01 par
value ("Common Stock").
We have examined the Company's Amended and Restated Certificate
of Incorporation, By-Laws and the record of its corporate proceedings
and have made such other investigation as we have deemed necessary in
order to express the opinions set forth below.
Based on such investigation, it is our opinion that the shares of
Common Stock, when sold as described in the prospectus included in the
Registration Statement, will be legally issued, fully paid and non-
assessable.
We hereby consent to all references to us in the Registration
Statement and all amendments to the Registration Statement. We
further consent to the use of this opinion as an exhibit to the
Registration Statement.
HOLME ROBERTS & OWEN LLP
By: __________________________
Martha Dugan Rehm
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
AND SUBSIDIARIES Exhibit 11.1
Computation of Loss Per Share
(In Thousands Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
---------------------------------------------------
Three Months Ended Year Ended
March 31, December 31,
---------------------------------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net loss to common stockholders $ (4,776) (9,979) (6,967) (25,131) (6,898)
Weighted average number of shares of
common stock outstanding:
Total number of shares of common
stock outstanding 86,500 86,500 86,500 86,500 86,500
Common stock issuable under
Growth Share Plan 1,658 1,658 1,658 1,658 1,658
------------------ -------------------------
Weighted average number of shares
of common stock outstanding 88,158 88,158 88,158 88,158 88,158
Net loss per share $ (0.05) (0.11) (0.08) (0.29) (0.08)
</TABLE>
<PAGE>
When the transactions referred to in note 18 of the notes to the consolidated
financial statements have become effective, we will be in a position to render
the following consent.
KPMG Peat Marwick LLP
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
Qwest Communications International Inc.:
We consent to the use of our reports dated February 19, 1997, except as to
note 1, paragraph (i) and note 18, which are as of June ___, 1997, included in
the registration statement No. 333-25391 on Form S-1 (as amended) and to the
reference to our firm under the headings "Summary Consolidated Financial and
Operating Data," "Selected Consolidated Financial Data" and "Experts" in the
prospectus.
Denver, Colorado
June ___, 1997
<PAGE>
Exhibit 99.1
Consent of Nominee
to the
Board of Directors
of
Qwest Communications International Inc.
(the "Corporation")
I, W. Thomas Stephens, hereby consent to being named as a nominee to the
Board in the Registration Statement on Form S-1 (Registration No. 333-25391)
that the Corporation has filed with the Securities and Exchange
Commission.
_____________________
W. Thomas Stephens
_____________________
Date: May 22, 1997
<PAGE>
Exhibit 99.2
Consent of Nominee
to the
Board of Directors
of
Qwest Communications International Inc.
(the "Corporation")
I, Jordan L. Haines, hereby consent to being named as a nominee to the
Board in the Registration Statement on Form S-1 (Registration No. 333-25391)
that the Corporation has filed with the Securities and Exchange
Commission.
_____________________
Jordan L. Haines
_____________________
Date: May 22, 1997
