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PROSPECTUS
QWEST COMMUNICATIONS INTERNATIONAL INC. [LOGO OF QWEST COMMUNICATIONS
OFFER TO EXCHANGE INTERNATIONAL INC. APPEARS HERE]
10 7/8% SERIES B SENIOR NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING 10
7/8% SENIOR NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY,
AUGUST 13, 1997, UNLESS EXTENDED; PROVIDED IT MAY NOT BE EXTENDED BEYOND
SEPTEMBER 2, 1997.
Qwest Communications International Inc., a Delaware corporation ("Qwest" or the
"Company"), hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and the accompanying Letter of Transmittal (which
together constitute the "Exchange Offer"), to exchange $1,000 principal amount
of its 10 7/8% Series B Senior Notes Due 2007 (the "Exchange Notes") for each
$1,000 principal amount of its outstanding 10 7/8% Senior Notes Due 2007 (the
"Old Notes") of which $250 million in aggregate principal amount are
outstanding as of the date hereof, which exchange has been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
registration statement of which this Prospectus is a part (the "Registration
Statement"). The form and terms of the Exchange Notes will be identical in all
material respects to the form and terms of the Old Notes except that (i) the
exchange will have been registered under the Securities Act and therefore the
Exchange Notes will not bear legends restricting the transfer thereof, (ii) the
interest and interest rate step-up provisions will be modified or eliminated as
appropriate and (iii) holders of the Exchange Notes will not be entitled to
certain rights of holders of the Old Notes under the Registration Agreement (as
defined herein), which rights with respect to Old Notes will terminate upon the
consummation of the Exchange Offer. See "Description of the Notes--Exchange
Offer; Registration Rights." The Exchange Notes will evidence the same debt as
the Old Notes (which they replace) and will be entitled to the benefits of an
Indenture to be dated the date of closing of the Exchange Offer governing the
Exchange Notes (the "Indenture"), the form of which will be identical in all
material respects to the Indenture dated as of March 31, 1997 governing the Old
Notes (except as aforesaid). The Old Notes and the Exchange Notes are sometimes
referred to herein collectively as the "Notes." See "The Exchange Offer" and
"Description of the Notes."
The Company will accept for exchange any and all validly tendered Old Notes not
withdrawn prior to 5:00 p.m., New York City time, on Wednesday, August 13, 1997
("Expiration Date"); provided, however, that if the Company, in its sole
discretion, has extended the period of time for which the Exchange Offer is
open, the term "Expiration Date" means the latest time and date to which the
Exchange Offer is extended; provided further, that in no event will the
Exchange Offer be extended beyond September 2, 1997. Tenders of Old Notes may
be withdrawn at any time prior to the Expiration Date. Old Notes may be
tendered only in integral multiples of $1,000.
The Exchange Notes will mature on April 1, 2007. The Exchange Notes will be
issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and integral multiples thereof. The Exchange Notes will
be subject to redemption at the option of the Company, in whole or in part, at
any time on or after April 1, 2002, upon not less than 30 nor more than 60
days' prior notice, at the redemption prices set forth herein, plus accrued and
unpaid interest thereon (if any) to the redemption date. In addition, at any
time prior to April 1, 2000, the Company may redeem up to 35% of the originally
issued principal amount of the Exchange Notes at a redemption price equal to
110.875% of the principal amount of the Exchange Notes plus accrued and unpaid
interest thereon (if any) to the redemption date, with the net proceeds of one
or more Public Equity Offerings (as defined) resulting in gross proceeds of at
least $100.0 million in the aggregate. Within 30 days of the occurrence of a
Change of Control (as defined), the Company will be required to make an Offer
to Purchase (as defined) all outstanding Exchange Notes at a price in cash
equal to 101% of the principal amount of the Exchange Notes plus accrued and
unpaid interest thereon and premium, if any, to the purchase date. The Company
may not have the financial resources necessary to satisfy its obligations to
repurchase the Exchange Notes and other debt that may become repayable upon a
Change of Control. See "Description of the Notes--Optional Redemption" and "--
Certain Covenants--Change of Control."
The Exchange Notes will be senior unsecured obligations of the Company ranking
pari passu in right of payment with all other existing and future senior
unsecured indebtedness of the Company, and will be senior in right of payment
to all existing and future subordinated indebtedness of the Company. See
"Capitalization" and "Description of the Notes--General."
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS TO
BE CONSIDERED BY HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
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.
The date of this Prospectus is July 14, 1997.
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The Old Notes were sold by the Company on March 31, 1997 to Salomon Brothers
Inc, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs &
Co. (the "Initial Purchasers") pursuant to a Purchase Agreement dated March
25, 1997 by and among the Company and the Initial Purchasers (the "Purchase
Agreement"). Pursuant to the Purchase Agreement, the Company and the Initial
Purchasers entered into a Registration Agreement dated as of March 31, 1997
("Registration Agreement") which granted the holders of the Old Notes certain
exchange and registration rights. The Exchange Offer is being made to satisfy
certain of the Company's obligations under the Registration Agreement.
Based upon no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission") to third parties, the Company believes
that the Exchange Notes issued pursuant to the Exchange Offer in exchange for
Old Notes would in general be freely transferable after the Exchange Offer
without further registration under the Securities Act if the holder of the
Exchange Notes represents (i) that it is not an "affiliate," as defined in
Rule 405 of the Securities Act, of the Company, (ii) that it is acquiring the
Exchange Notes in the ordinary course of its business and (iii) that it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes;
provided that, in the case of broker-dealers, a prospectus meeting the
requirements of the Securities Act be delivered as required. However, the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. Each broker-
dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer, where it acquired the Old Notes exchanged for such Exchange
Notes for its own account as a result of market-making or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with the resale of such Exchange Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not
be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Old Notes where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of one
year after consummation of the Exchange Offer, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. A
broker-dealer that delivers such a prospectus to purchasers in connection with
such resales will be subject to certain of the civil liability provisions
under the Securities Act, and will be bound by the provisions of the
Registration Agreement (including certain indemnification and contribution
rights and obligations). See "The Exchange Offer--Resale of the Exchange
Notes" and "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer and will
pay all of its expenses incident thereto. Tenders of Old Notes pursuant to the
Exchange Offer may be withdrawn at any time prior to the Expiration Date. In
the event that the Company terminates the Exchange Offer and does not accept
for exchange any Old Notes, the Company will promptly return the Old Notes to
the holders thereof. See "The Exchange Offer."
Prior to this Exchange Offer, there has been no public market for the Notes.
The Company does not intend to list the Exchange Notes on any securities
exchange or to seek approval for quotation through any automated quotation
system. There can be no assurance that an active market for the Exchange Notes
will develop. To the extent that a market for the Exchange Notes does develop,
the market value of the Exchange Notes will depend upon many factors,
including prevailing interest rates, market conditions, yields on alternative
investments, general economic conditions, the Company's financial condition
and results of operations and other conditions. Such conditions might cause
the Exchange Notes, to the extent that they are actively traded, to trade at a
significant discount from face value. See "Risk Factors--Absence of Public
Market."
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The Exchange Notes will bear interest at the same rate and on the same terms
as the Old Notes. Consequently, interest on the Exchange Notes will accrue at
the rate of 10 7/8% per anum and will be payable semiannually in arrears on
April 1 and October 1 of each year, commencing October 1, 1997. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the surrendered Old Note or, if no interest has been paid
on such Old Note, from the date of issuance of the Old Notes. Consequently,
holders whose Old Notes are accepted for exchange will be deemed to have
waived the right to receive any accrued but unpaid interest on the Old Notes.
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ADDITIONAL INFORMATION
The Company is required to file reports and other information with the
Securities and Exchange Commission (the "Commission") pursuant to the
information requirements of the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). The Company intends to furnish the holders of
the Exchange Notes with annual reports containing consolidated financial
statements audited by independent certified public accountants following the
end of each fiscal year and with quarterly reports containing unaudited
financial information for each of the first three quarters of each fiscal year
following the end of such quarter.
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act with respect to the Exchange Offer. 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 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.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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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 5,800 route miles of conduit in place, consisting of
approximately 900 route miles of lit fiber systems, one
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in California (the "Cal-Fiber" system) carrying traffic between Los Angeles and
Sacramento, and the other in Texas connecting Dallas and Houston, approximately
3,200 route miles of dark fiber installed in conduit, and approximately 1,700
route miles of vacant conduit; (ii) right-of-way agreements in place for
approximately 5,300 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
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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 6,100 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 570 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 45% 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.
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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 $400.0 million as of May 31, 1997. The Company
anticipates remaining total cash outlays for these purposes of approximately
$500.0 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 $100.0 million had been expended as of
May 31, 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 $286.0
million had already been paid and $733.0 million remained to be paid at May 31,
1997; (ii) $90.0 million of vendor financing; (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 Old Notes remaining after repayment of certain existing debt;
and (iv) approximately $320.0 million in net proceeds from the sale (the
"Initial Public Offering") on June 27, 1997 of 15,525,000 shares of the
Company's common stock (the "Common Stock").
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 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.
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THE EXCHANGE OFFER
The Exchange Offer........ The Company is offering to exchange $1,000
principal amount of Exchange Notes for each $1,000
principal amount of Old Notes that is properly
tendered and accepted. The form and terms of the
Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the exchange will
have been registered under the Securities Act and
therefore the Exchange Notes will not bear legends
restricting the transfer thereof, (ii) the interest
and interest rate step-up provisions will be
modified or eliminated as appropriate and (iii)
holders of the Exchange Notes will not be entitled
to certain rights of holders of the Old Notes under
the Registration Agreement (as defined herein),
which rights with respect to Old Notes will
terminate upon the consummation of the Exchange
Offer. See "--The Exchange Notes." The issuance of
the Exchange Notes is intended to satisfy certain
obligations of the Company contained in the
Registration Agreement. Subject to certain
conditions, a holder who wishes to tender must
transmit a properly completed and duly executed
Letter of Transmittal to Bankers Trust Company (the
"Exchange Agent") on or prior to the Expiration
Date. For procedures for tendering, see "The
Exchange Offer."
Based upon no-action letters issued by the staff of
the Commission to third parties, the Company
believes that the Exchange Notes issued pursuant to
the Exchange Offer in exchange for Old Notes would
in general be freely transferable after the
Exchange Offer without further registration under
the Securities Act if the holder of the Exchange
Notes represents (i) that it is not an "affiliate,"
as defined in Rule 405 of the Securities Act, of
the Company, (ii) that it is acquiring the Exchange
Notes in the ordinary course of its business and
(iii) that it has no arrangement or understanding
with any person to participate in the distribution
(within the meaning of the Securities Act) of the
Exchange Notes; provided that, in the case of
broker-dealers, a prospectus meeting the
requirements of the Securities Act be delivered as
required. However, the Commission has not
considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that
the staff of the Commission would make a similar
determination with respect to the Exchange Offer as
in such other circumstances. Holders of Old Notes
wishing to accept the Exchange Offer must represent
to the Company that such conditions have been met.
Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer,
where it acquired the Old Notes exchanged for such
Exchange Notes for its own account as a result of
market-making or other trading activities, may be
deemed to be an "underwriter" within the meaning of
the Securities Act and must acknowledge that it
will deliver a prospectus in connection with the
resale of such Exchange
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Notes. See "The Exchange Offer--Resale of the
Exchange Notes" and "Plan of Distribution."
Registration Agreement.... The Old Notes were sold by the Company on March 31,
1997 to the Initial Purchasers pursuant to the
Purchase Agreement. Pursuant to the Purchase
Agreement, the Company and the Initial Purchasers
entered into the Registration Agreement. This
Exchange Offer is intended to satisfy certain
obligations of the Company contained in the
Registration Agreement, which terminate upon the
consummation of the Exchange Offer. The holders of
the Exchange Notes are not entitled to any exchange
or registration rights with respect to the Exchange
Notes. The Old Notes are subject to the payment of
additional interest under certain circumstances if
the Company is not in compliance with its
obligations under the Registration Agreement. See
"Description of the Notes--Exchange Offer;
Registration Rights."
Expiration Date; The Exchange Offer will expire at 5:00 p.m., New
Withdrawal............... York City time, on the "Expiration Date." As used
herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on Wednesday, August 13, 1997;
provided, however, that if the Company, in its sole
discretion, has extended the period of time for
which the Exchange Offer is to remain open, the
term "Expiration Date" means the latest time and
date to which the Exchange Offer is extended;
provided further that in no event will the Exchange
Offer be extended beyond September 2, 1997. Tenders
of Old Notes pursuant to the Exchange Offer may be
withdrawn at any time prior to the Expiration Date
by sending a written notice of withdrawal to the
Exchange Agent.
Any Old Notes so withdrawn will be deemed not to
have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes not
accepted for exchange for any reason will be
returned without expense to the tendering holder
thereof as promptly as practicable after the
expiration or termination of the Exchange Offer.
See "The Exchange Offer--Terms of the Exchange
Offer; Period for Tendering Old Notes."
Certain Conditions to the
Exchange Offer........... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See
"The Exchange Offer--Certain Conditions to the
Exchange Offer."
Federal Income Tax
Consequences............. In the opinion of counsel to the Company, the
exchange of the Old Notes for Exchange Notes
pursuant to the Exchange Offer should not
constitute a taxable exchange for federal income
tax purposes. See "Certain United States Federal
Income Tax Considerations."
Use of Proceeds........... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer.
Exchange Agent............ Bankers Trust Company is serving as Exchange Agent
in connection with the Exchange Offer.
9
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legends thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws. Accordingly, such Old Notes may only
be offered, sold, pledged or otherwise transferred (A)(i) to a person whom the
seller reasonably believes is a qualified institutional buyer within the
meaning of Rule 144A under the Securities Act ("Rule 144A") in a transaction
meeting the requirements of Rule 144A, (ii) in an offshore transaction meeting
the requirements of Rule 903 or Rule 904 of Regulation S under the Securities
Act, or (iii) pursuant to an exemption from registration under the Securities
Act provided by Rule 144 thereunder (if available) and (B) in accordance with
all applicable securities laws of the states of the United States. The Company
does not anticipate that it will register the Old Notes under the Securities
Act. See "Risk Factors--Consequences of Failure to Exchange Old Notes" and "The
Exchange Offer--Consequences of Failure to Exchange."
THE EXCHANGE NOTES
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Old Notes except that (i) the exchange
will have been registered under the Securities Act and therefore the Exchange
Notes will not bear legends restricting the transfer thereof, (ii) the interest
and interest rate step-up provisions will be modified or eliminated as
appropriate and (iii) holders of the Exchange Notes will not be entitled to
certain rights of holders of the Old Notes under the Registration Agreement,
which rights with respect to Old Notes will terminate upon the consummation of
the Exchange Offer. See "Exchange Offer; Registration Rights." The Exchange
Notes will evidence the same debt as the Old Notes (which they replace) and
will be issued under, and be entitled to the benefits of, the Indenture. See
"Description of the Notes" for further information and for definitions of
certain capitalized terms used below.
In the Exchange Offer, the holders of Old Notes will receive Exchange Notes
with the same interest rate as the interest rate on the Old Notes. Interest on
each Exchange Note will accrue from the last interest payment date on which
interest was paid on the surrendered Old Note or, if no interest has been paid
on such Old Note, from the date of issuance of the Old Notes. Consequently,
holders whose Old Notes are accepted for exchange will be deemed to have waived
the right to receive any accrued but unpaid interest on the Old Notes.
Maturity Date............. April 1, 2007.
Interest.................. Interest on the Notes will accrue at a rate of 10
7/8% per annum and will be payable semiannually in
arrears on April 1 and October 1 of each year,
commencing October 1, 1997.
Ranking................... The Notes will be senior unsecured obligations of
the Company, ranking pari passu in right of payment
with all existing and future senior unsecured
indebtedness of the Company, and will be senior in
right of payment to all existing and future
subordinated indebtedness of the Company. On March
31, 1997, Qwest issued the Old Notes in the
principal amount of $250.0 million, receiving net
proceeds of approximately $242.0 million. Qwest
10
<PAGE>
applied a portion of such proceeds to repay certain
indebtedness of its subsidiaries. On a pro forma
basis, after giving effect to the Initial Public
Offering and the sale of the Old Notes and
application of a portion of the net proceeds
therefrom to repay certain indebtedness of
subsidiaries, the Company would have had
approximately $267.0 million of long-term debt
(including the current portion thereof),
approximately $324.6 million of stockholder's
equity and a debt-to-equity ratio of 0.82 to 1.0 at
March 31, 1997. The Notes effectively will be
subordinated to all existing and future third-party
indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). As of
March 31, 1997, after giving effect to the sale of
the Old Notes and the application of a portion of
the proceeds thereof to repay certain indebtedness
of the Company's subsidiaries, the total
liabilities of the Company's subsidiaries (after
the elimination of loans and advances by the
Company to its subsidiaries) would have been
approximately $142.8 million, of which
approximately $17.0 million in indebtedness would
have been secured by certain assets of the
borrowing subsidiaries. See "Description of Certain
Indebtedness." Any rights of the Company and its
creditors, including the holders of Notes, to
participate in the assets of any of the Company's
subsidiaries upon any liquidation or reorganization
of any such subsidiary will be subject to the prior
claims of that subsidiary's creditors (including
trade creditors).
Sinking Fund.............. None.
Optional Redemption....... The Notes will be subject to redemption at the
option of the Company, in whole or in part, at any
time or from time to time on or after April 1,
2002, upon not less than 30 nor more than 60 days'
prior notice, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon
(if any) to the redemption date. In addition, prior
to April 1, 2000, the Company may redeem up to 35%
of the originally issued principal amount of the
Notes at a redemption price equal to 110.875% of
the principal amount of the Notes plus accrued and
unpaid interest thereon (if any) to the redemption
date, with the net proceeds of one or more Public
Equity Offerings (as defined) resulting in gross
proceeds of at least $100.0 million in the
aggregate; provided that at least 65% of the
originally issued principal amount of the Notes
would remain outstanding immediately after giving
effect to such redemption.
Change of Control......... Within 30 days of the occurrence of a Change of
Control (as defined), the Company will be required
to make an Offer to Purchase (as defined) all
outstanding Notes at a price in cash equal to 101%
of the principal amount of the Notes plus accrued
and unpaid interest thereon and premium, if any, to
the purchase date. The Company may not have the
financial resources
11
<PAGE>
necessary to satisfy its obligations to repurchase
the Notes and other debt that may become repayable
upon a Change of Control. See "Description of the
Notes--Certain Covenants-- Change of Control."
Certain Covenants......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its subsidiaries to incur additional
indebtedness, issue stock of subsidiaries, pay
dividends or make other distributions, repurchase
equity interests or subordinated indebtedness,
engage in sale and leaseback transactions, create
certain liens, enter into certain transactions with
affiliates, sell assets of the Company and its
subsidiaries, and enter into certain mergers and
consolidations. The covenants contained in the
Indenture are subject to certain significant
exceptions. See "Description of the Notes--Certain
Covenants."
RISK FACTORS
Prospective participants in the Exchange Offer should consider all the
information contained in this Prospectus in connection with the Exchange Offer.
In particular, prospective participants should consider the factors set forth
herein under "Risk Factors."
12
<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
Ratio of earnings to
fixed charges(11)...... -- 5.68 -- -- -- -- --
</TABLE>
13
<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(12)....... 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
Initial Public 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, $1.8 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) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings (loss) before income taxes, plus fixed
charges excluding capitalized interest. Fixed charges consist of interest
expensed and capitalized, plus amortization of deferred financing costs,
plus the portion of rent expense under operating leases deemed by the
Company to be representative of the interest factor, plus preferred stock
dividends on preferred stock of QCC (increased to an amount representing
the pre-tax earnings which would be required to cover such dividend
requirements). The Company had a deficiency of earnings to fixed charges
of $8.9 million and $15.8 million in the three month periods ended March
31, 1997 and 1996, respectively, and $12.6 million, $40.3 million, $11.0
million and $14.5 million in 1996, 1995, 1994 and 1992, respectively.
Excluding the effect of the gains arising from the sale of contract rights
in 1997, telecommunications service agreements in 1996 and the 1993
Capacity Sale, the deficiency of earnings would have been $16.7 million in
the three month period ended March 31, 1997, and $18.7 million and $27.6
million in 1996 and 1993, respectively.
(12) Represents total minutes of use for the year ended December 31, 1996 and
the three months ended March 31, 1997.
14
<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 participating in the Exchange Offer.
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.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
The Exchange Notes will be issued in exchange for Old Notes only after
timely receipt by the Exchange Agent of such Old Notes, a properly completed
and duly executed Letter of Transmittal and all other required documents.
Therefore, holders of Old Notes desiring to tender such Old Notes in exchange
for Exchange Notes should allow sufficient time to ensure timely delivery.
Neither the Exchange Agent nor the Company is under any duty to give
notification of defects or irregularities with respect to tenders of Old Notes
for exchange. Holders of Old Notes who do not exchange their Old Notes for
Exchange Notes pursuant to the Exchange Offer will continue to be subject to
the restrictions on transfer of such Old Notes as set forth in the legends
thereon as a consequence of the issuance of the Old Notes pursuant to
exemption from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act and applicable securities laws of states and
other jurisdictions. In addition, any holder of Old Notes who tenders in the
Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or any other trading
activities, may be deemed to be an "underwriter" within the meaning of the
Securities Act and must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See "Plan of Distribution,"
"Description of the Notes--Exchange Offer; Registration Rights," and "The
Exchange Offer--Consequences of Failure to Exchange."
ABSENCE OF PUBLIC MARKET
The Exchange Notes are being offered to the holders of the Old Notes. The
Old Notes were resold by the Initial Purchasers to qualified institutional
buyers as defined in Rule 144A under the Securities Act and to institutional
accredited investors within the meaning of Rule 501(a) (1), (2), (3) or (7)
under the Securities Act, and are trading in the Private Offerings, Resales
and Trading through Automated Linkages ("PORTAL") Market, the National
Association of Securities Dealers' screen based, automated market for trading
of securities eligible for resale under Rule 144A. The Exchange Notes
15
<PAGE>
are new securities for which there currently is no market and the Exchange
Offer is not conditioned upon any minimum or maximum aggregate principal
amount of Notes being tendered for exchange. Although the Initial Purchasers
are making a market in the Old Notes and have advised the Company that they
currently intend to make a market in the Exchange Notes, they are not
obligated to do so and may discontinue such market making at any time without
notice. The Company does not currently intend to apply for listing of the Old
Notes or the Exchange Notes on a national securities exchange or automated
quotation system. Accordingly, no assurance can be given that an active market
will develop for any of the Notes or as to the liquidity of the trading market
for any of the Notes. If a trading market does not develop or is not
maintained, holders of the Notes may experience difficulty in reselling such
Notes or may be unable to sell them at all. If a market for the Notes
develops, any such market may be discontinued at any time. To the extent that
a market for the Notes does develop, the market value of the Notes will depend
upon many factors, including prevailing interest rates, market conditions,
yields on alternative investments, general economic conditions, the Company's
financial condition and results of operations and other conditions.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. There can be no assurance that, if a market
for the Notes were to develop, such a market would not be subject to similar
disruptions.
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 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
16
<PAGE>
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.
HIGH LEVERAGE; ABILITY TO SERVICE 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 Initial Public Offering and after
giving effect to the application of net proceeds from the sale of the Old
Notes, the Company would have had approximately $267.0 million of long-term
debt (including the current portion thereof), approximately $324.6 million of
stockholders' equity and a debt-to-equity ratio of 0.82 to 1.0 at March 31,
1997. 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 ability to pay the principal of and interest on its
indebtedness will depend upon the Company's future performance, which is
subject to a variety of factors, uncertainties and contingencies, many of
which are beyond the Company's control, and there can be no assurance that the
Company will generate sufficient cash flow in the future to enable it to meet
its anticipated debt service requirements (including those with respect to the
Notes). Although the Company currently anticipates that it will repay the
Notes at maturity with cash flow from operations, there can be no assurance in
this regard. 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, including the payment obligations under the Notes. 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."
The Company's leverage could result in adverse consequences to the holders
of the Notes. Such consequences may include, among other things: (i) the cash
generated by the Company's operations may be insufficient to meet the payment
obligations on the Notes, in addition to paying other indebtedness and
obligations of the Company and its subsidiaries as they become due; (ii) the
Company's ability to obtain any necessary financing in the future for
completion of the Qwest Network or other purposes may be impaired; (iii)
certain of the future borrowings by Qwest or its subsidiaries may be at
variable rates of interest that could cause Qwest to be vulnerable to
increases in interest rates; (iv) future indebtedness of Qwest's subsidiaries
may mature prior to the maturity of the Notes; (v) the Company may be more
leveraged than certain of its competitors, which may be a competitive
disadvantage; and (vi) the Company's vulnerability to the effects of general
economic downturns or to delays or increase in costs of constructing the Qwest
Network will be increased. In addition, the Indenture and other debt
instruments governing existing and future indebtedness contain, or may
contain, covenants that limit the operating and financial flexibility of the
Company and its subsidiaries.
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HOLDING COMPANY STRUCTURE; EFFECTIVE SUBORDINATION OF THE NOTES
Qwest is a holding company with no material assets other than the stock of
its subsidiaries, and the Notes will be obligations exclusively of Qwest. The
Notes are unsecured and rank pari passu in right of payment with all existing
and future senior unsecured indebtedness and trade payables of Qwest. Because
Qwest's operations are conducted through its subsidiaries, Qwest's cash flow
and its ability to meet its own obligations, including payment of interest and
principal obligations on the Notes, are dependent upon the earnings of such
subsidiaries and the distributions of those earnings to Qwest, or upon loans
or other payments of funds made by such subsidiaries to Qwest. Existing debt
agreements of Qwest's subsidiaries impose, and future debt instruments of
Qwest's subsidiaries likely will impose, significant restrictions that affect,
among other things, the ability of Qwest's subsidiaries to pay dividends or
make other distributions or loans and advances to Qwest. The ability of
Qwest's subsidiaries to pay dividends and make other distributions also will
be subject to, among other things, applicable state laws. See "Description of
Certain Indebtedness."
The operating assets of the Company are owned by Qwest's subsidiaries,
effectively subordinating the Notes to all existing and future indebtedness,
trade payables and other obligations of Qwest's subsidiaries. Therefore,
Qwest's rights and the rights of its creditors, including the holders of the
Notes, to participate in the assets of any subsidiary upon the subsidiary's
liquidation or reorganization will be subject to the prior claims of such
subsidiary's creditors, except to the extent that Qwest may itself be a
creditor with recognized claims against the subsidiary, in which case the
claims of Qwest would still be effectively subordinated to any security
interests in or mortgages or other liens on the assets of such subsidiary and
would be subordinate to any indebtedness of such subsidiary senior to that
held by Qwest. As of March 31, 1997, on a pro forma basis after giving effect
to the issuance of the Old Notes and the application of a portion of the
proceeds thereof to repay certain indebtedness of Qwest's subsidiaries, the
total liabilities of Qwest's subsidiaries (after elimination of loans and
advances by Qwest to its subsidiaries) would have been approximately $142.8
million, of which approximately $17.0 million in indebtedness would have been
secured by certain assets of the borrowing subsidiaries. In addition, the
Company has future obligations of $38.3 million under long-term non-cancelable
operating leases, capacity service agreements and right-of-way agreements
requiring future minimum lease payments through the year 2029, assuming the
Company exercises its option, relative to certain rights-of-way, to make
discounted lump-sum payments in lieu of the annual payments the Company is
currently making. If the Company were to continue making such annual payments,
the total amount of payments for the minimum commitment would increase by
approximately $61.4 million. The Indenture limits, but does not prohibit, the
incurrence of additional indebtedness by Qwest and its subsidiaries.
Therefore, both Qwest and its subsidiaries will retain the ability to incur
substantial additional indebtedness and lease obligations, and the Company
expects that it or its subsidiaries will incur substantial additional
indebtedness in the future. See "Description of the Notes--Certain Covenants."
A portion of the assets of Qwest's subsidiaries is encumbered by mortgages
or other security interests or liens, including purchase money equipment
financings. Qwest expects that future indebtedness incurred by its
subsidiaries also may be secured. As a result, any claims of Qwest against its
subsidiaries will be effectively subordinated to indebtedness secured by the
mortgages or other security interests or liens on the assets of such
subsidiaries, which could have material consequences to holders of the Notes.
Such security may include substantially all of the fixed assets of Qwest's
subsidiaries. The value of a substantial portion of such fixed assets is
derived from employing such assets in a telecommunications business. These
assets are highly specialized and, taken individually, can be expected to have
limited marketability. Consequently, in the event of a realization by secured
creditors on the assets of Qwest's subsidiaries, creditors would likely seek
to sell the business as a going concern in order to maximize the proceeds
realized. The price obtained upon any such sale could be adversely affected by
the necessity to obtain approval of the sale from the applicable regulatory
authorities and compliance with other applicable governmental regulations.
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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, including its ability to pay the principal of and
interest on the Notes. See "--Rapid Technological Changes."
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
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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 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, including its ability to pay the
principal of and interest on the Notes.
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
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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, including
its ability to pay the principal of and interest on the Notes.
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
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expose the Company to claims or actions that could have a material adverse
effect on the Company. See "Regulation."
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
Philip F. Anschutz, a Director and Chairman of the Company, beneficially
owns approximately 84.8% of the outstanding Common Stock. As a result, Mr.
Anschutz has the power to elect all the directors of the Company and to
control the vote on all other matters, including significant corporate
actions. Certain conflicts may arise between the interests of the holders of
the Notes and other indebtedness of the Company and Mr. Anschutz, as principal
holder of the Company's common stock. 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" and "--
High Leverage; Ability to Service Indebtedness."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on March 31, 1997 to the Initial
Purchasers pursuant to the Purchase Agreement. The Initial Purchasers resold
the Old Notes to qualified institutional buyers as defined in Rule 144A under
the Securities Act and to institutional accredited investors within the
meaning of Rule 501(a) (1), (2), (3) or (7) under the Securities Act. As a
condition to the sale of the Old Notes, the Company and the Initial Purchasers
entered into the Registration Agreement as of March 31, 1997. Pursuant to the
Registration Agreement, the Company agreed that it would (i) file with the
Commission a Registration Statement under the Securities Act with respect to
the Exchange Notes by June 30, 1997; (ii) use its best efforts to cause such
Registration Statement to be declared effective under the Securities Act by
August 28, 1997; and (iii) consummate an offer of the Exchange Notes in
exchange for surrender of the Old Notes by September 29, 1997. A copy of the
Registration Agreement has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The Registration Statement of
which this Prospectus is a part is intended to satisfy certain of the
Company's obligations under the Registration Agreement and the Purchase
Agreement.
RESALE OF THE EXCHANGE NOTES
Based upon no-action letters issued by the staff of the Commission to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes
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would in general be freely transferable after the Exchange Offer without
further registration under the Securities Act if the holder of the Exchange
Notes represents (i) that it is not an "affiliate," as defined in Rule 405 of
the Securities Act, of the Company, (ii) that it is acquiring the Exchange
Notes in the ordinary course of its business and (iii) that it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes;
provided that, in the case of broker-dealers, a prospectus meeting the
requirements of the Securities Act be delivered as required. However, the
Commission has not considered the Exchange Offer in the context of a no-action
letter and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances. Holders of Old Notes wishing to accept the Exchange Offer
must represent to the Company that such conditions have been met. Each broker-
dealer that receives Exchange Notes for its own account pursuant to the
Exchange Offer, where it acquired the Old Notes exchanged for such Exchange
Notes for its own account as a result of market-making or other trading
activities, may be deemed to be an "underwriter" within the meaning of the
Securities Act and must acknowledge that it will deliver a prospectus in
connection with the resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Old Notes where such
Old Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period of one year after consummation of the Exchange Offer, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act, and will be bound by the provisions of
the Registration Agreement (including certain indemnification and contribution
rights and obligations). See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange any and all Old Notes
which are properly tendered on or prior to the Expiration Date and not
withdrawn as permitted below. The Company will issue $1,000 principal amount
of Exchange Notes in exchange for each $1,000 principal amount of outstanding
Old Notes surrendered pursuant to the Exchange Offer. Old Notes may be
tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are the same as the form and terms
of the Old Notes except that (i) the exchange will be registered under the
Securities Act and hence the Exchange Notes will not bear legends restricting
their transfer, (ii) the interest and interest rate step-up provisions will be
modified or eliminated as appropriate and (iii) holders of the Exchange Notes
will not be entitled to certain rights of holders of Old Notes under the
Registration Agreement, which rights with respect to Old Notes will terminate
upon the consummation of the Exchange Offer. The Exchange Notes will evidence
the same debt as the Old Notes (which they replace) and will be issued under,
and be entitled to the benefits of, the Indenture.
As of the date of this Prospectus, an aggregate of $250 million in principal
amount of the Old Notes is outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about July 14, 1997, to all
holders of Old Notes known to the Company.
Holders of the Old Notes do not have any appraisal or dissenters' rights
under the Indenture in connection with the Exchange Offer. The Company intends
to conduct the Exchange Offer in accordance with the provisions of the
Registration Agreement and the applicable requirements of the
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Securities Act, the Exchange Act and the rules and regulations of the
Commission thereunder. See "Description of the Notes--Exchange Offer;
Registration Rights."
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving written
notice of such extension to the holders thereof as described below. During any
such extension, all Old Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Old Notes
not accepted for exchange for any reason will be returned without expense to
the tendering holder thereof as promptly as practicable after the expiration
of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer upon the occurrence of any of the conditions of the Exchange Offer
specified below under "--Certain Conditions of the Exchange Offer." The
Company will give written notice of any extension, amendment or nonacceptance
to the holders of the Old Notes as promptly as practicable, such notice in the
case of any extension to be issued by means of a press release or other public
announcement no later than 9:00 a.m., New York City time, on the next business
day after the previously scheduled Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Company of Old Notes by a holder thereof as set forth
below and the acceptance thereof by the Company will constitute a binding
agreement between the tendering holder and the Company upon the terms and
subject to the conditions set forth in this Prospectus and in the accompanying
Letter of Transmittal. Except as set forth below, a holder who wishes to
tender Old Notes for exchange pursuant to the Exchange Offer must transmit a
properly completed and duly executed Letter of Transmittal, including all
other documents required by such Letter of Transmittal, to the Exchange Agent
at one of the addresses set forth below under "--Exchange Agent" on or prior
to the Expiration Date. In addition, either (i) certificates for such Old
Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer (a "Book-
Entry Confirmation") of such Old Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility") pursuant to the procedure for book-entry transfer
described below, must be received by the Exchange Agent prior to the
Expiration Date, or (iii) the holder must comply with the guaranteed delivery
procedures described below.
THE METHOD OF DELIVERY OF OLD NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDERS. IF SUCH
DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD
BE ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES
SHOULD BE SENT TO THE COMPANY.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trustee or other nominee and who wishes to tender
should contact such registered holder of Old Notes promptly and instruct such
registered holder of Old Notes to tender on behalf of the beneficial owner. If
such beneficial owner wishes to tender on its own behalf, such beneficial
owner must, prior to completing and executing the Letter of Transmittal and
delivering its Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such beneficial owner's name or obtain a
properly completed power of attorney from the registered holder of Old Notes.
The transfer of record ownership may take considerable time. If the Letter of
Transmittal is signed by a person or persons other than the registered holder
or holders of Old Notes, such Old Notes must be endorsed or accompanied by
appropriate powers of attorney, in either case signed exactly as the name or
names of the registered holder or holders that appear on the Old Notes.
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Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a registered holder of the Old Notes who
has not completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account of
an Eligible Institution (as defined herein below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, are required to be guaranteed, such guarantees must be by a firm which
is a member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trustee having an office or correspondent in the United States (collectively,
"Eligible Institutions"). If Old Notes are registered in the name of a person
other than a signer of the Letter of Transmittal, the Old Notes surrendered
for exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by the
Company in its sole discretion, duly executed by the registered holder with
the signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Company in its sole discretion, which determination shall be final and
binding. The Company reserves the absolute right to reject any and all tenders
of any particular Old Notes not properly tendered or not to accept any
particular Old Notes whose acceptance might, in the judgment of the Company or
its counsel, be unlawful. The Company also reserves the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Notes either before or after the Expiration Date (including
the right to waive the ineligibility of any holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Notes either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Company shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Company shall determine. Neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
If the Letter of Transmittal or any Old Notes or powers of attorney are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
By tendering, each holder will represent to the Company, among other things,
(i) that it is not an "affiliate," as defined in Rule 405 of the Securities
Act, of the Company, or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable, (ii) that it is acquiring the Exchange Notes in the
ordinary course of its business and (iii) at the time of the consummation of
the Exchange Offer it has no arrangement or understanding with any person to
participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes. If the holder is a broker-dealer that will receive
Exchange Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities,
the holder may be deemed to be an "underwriter" within the meaning of the
Securities Act and is required to acknowledge in the Letter of Transmittal
that it will deliver a prospectus in connection with any resale of such
Exchange Notes; however, by so acknowledging and by delivering a prospectus,
the holder will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
The Company will accept, promptly after the Expiration Date, all Old Notes
properly tendered and will issue the Exchange Notes promptly after acceptance
of the Old Notes. For purposes of the
25
<PAGE>
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if the Company has given oral or written
notice thereof to the Exchange Agent, with written confirmation of any oral
notice to be given promptly thereafter.
The Exchange Notes will bear interest at a rate equal to 10 7/8% per annum.
Interest on the Exchange Notes will be payable semiannually in arrears on
April 1 and October 1 of each year, commencing October 1, 1997. Holders of
Exchange Notes will receive interest on October 1, 1997 from the last interest
payment date on which interest was paid on the surrendered Old Notes or, if no
interest has been paid on such Old Notes, from the date of initial issuance of
the Old Notes to the date of exchange thereof for Exchange Notes.
Consequently, holders of Old Notes that are accepted for exchange for Exchange
Notes will be deemed to have waived the right to receive any interest accrued
on the Old Notes.
In all cases, the issuance of Exchange Notes for Old Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for such Old Notes or a timely
Book-Entry Confirmation of such Old Notes into the Exchange Agent's account at
the Book-Entry Transfer Facility, a properly completed and duly executed
Letter of Transmittal and all other required documents. If any tendered Old
Notes are not accepted for any reason set forth in the terms and conditions of
the Exchange Offer, or if Old Notes are submitted for a greater amount than
the holder desires to exchange, such unaccepted or non-exchanged Old Notes
will be returned without expense to the tendering holder thereof (or, in the
case of Old Notes tendered by book-entry procedures described below, such non
exchanged Old Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) designated by the tendering holder as promptly as
practicable after the expiration or termination of the Exchange Offer.
CERTAIN CONDITIONS OF THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to issue Exchange Notes in exchange
for, any Old Notes and may terminate or amend the Exchange Offer as provided
herein prior to the Expiration Date, if because of any changes in law, or
applicable interpretations thereof by the Commission, or because any action or
proceeding is instituted or threatened in any court or governmental agency
with respect to the Exchange Offer, the Company determines that it is not
permitted to effect the Exchange Offer.
Holders may have certain rights and remedies against the Company under the
Registration Agreement should the Company fail to consummate the Exchange
Offer, notwithstanding a failure of the conditions stated above. Such
conditions are not intended to modify those rights or remedies in any respect.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Old Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus, and
any financial institution that is a participant in the Book-Entry Transfer
Facility's systems may make book-entry delivery of Old Notes by causing the
Book-Entry Transfer Facility to transfer such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's procedures for transfer. However, although
delivery of Old Notes may be effected through book-entry transfer at the Book-
Entry Transfer Facility, the Letter of Transmittal or facsimile thereof, with
any required signature guarantees and any other required documents, must, in
any case, be transmitted to and received by the Exchange Agent at one of the
addresses set forth below under "--Exchange Agent" on or prior to the
Expiration Date or the guaranteed delivery procedures described below must be
complied with.
26
<PAGE>
GUARANTEED DELIVERY PROCEDURES
If a registered holder of the Old Notes desires to tender such Old Notes and
the Old Notes are not immediately available, or time will not permit such
holder's Old Notes or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is
made through an Eligible Institution, (ii) prior to the Expiration Date, the
Exchange Agent has received from such Eligible Institution a properly
completed and duly executed Letter of Transmittal (or a facsimile thereof) and
Notice of Guaranteed Delivery, substantially in the form provided by the
Company (by telegram, telex, facsimile transmission, mail or hand delivery),
setting forth the name and address of the holder of the Old Notes and the
amount of Old Notes, stating that the tender is being made thereby and
guaranteeing that within five trading days (on the Nasdaq Stock Market's
National Market (the "Nasdaq National Market")) after the date of execution of
the Notice of Guaranteed Delivery, the certificates for all physically
tendered Old Notes, in proper form for transfer, or a Book-Entry Confirmation,
as the case may be, and any other documents required by the Letter of
Transmittal will be deposited by the Eligible Institution with the Exchange
Agent, and (iii) the certificates for all physically tendered Old Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be,
and all other documents required by the Letter of Transmittal, are received by
the Exchange Agent within five Nasdaq National Market trading days after the
date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to the Expiration
Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at one of the addresses set forth below under
"--Exchange Agent." Any such notice of withdrawal must specify the name of the
person having tendered the Old Notes to be withdrawn, identify the Old Notes
to be withdrawn (including the amount of such Old Notes), and (where
certificates for Old Notes have been transmitted) specify the name in which
such Old Notes are registered, if different from that of the withdrawing
holder. If certificates for Old Notes have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such holder is an
Eligible Institution. If Old Notes have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Old Notes and otherwise comply with
the procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
the Company whose determination shall be final and binding on all parties. Any
Old Notes so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Notes which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the holder thereof without cost to such holder (or, in the case of
Old Notes tendered by book-entry transfer into the Exchange Agent's account at
the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Notes will be credited to an account with
such Book-Entry Transfer Facility specified by the holder) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to the Expiration Date.
EXCHANGE AGENT
Bankers Trust Company has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the addresses set forth
27
<PAGE>
below. Questions and requests for assistance, requests for additional copies
of this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
Delivery To: Bankers Trust Company, Exchange Agent
BY MAIL: BY HAND:
BT Services Tennessee, Inc. Bankers Trust Company
Reorganization Unit Corporate Trust and Agency Group
P.O. Box 292737 Receipt & Delivery Window
Nashville, TN 37229-2737 123 Washington Street, 1st Floor
New York, NY 10006
For information, call:
(800) 735-7777
Confirm: (615) 835-3572
Fax: (615) 835-3701
BY OVERNIGHT MAIL OR COURIER:
BT Services Tennessee, Inc.
Corporate Trust and Agency Group
Reorganization Unit
648 Grassmere Park Road
Nashville, TN 37211
DELIVERY OF A LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The estimated cash expenses to be incurred in connection with the Exchange
Offer of approximately $150,000 will be paid by the Company.
ACCOUNTING TREATMENT
For accounting purposes, the Company will recognize no gain or loss as a
result of the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith, except that holders who instruct
the Company to register Exchange Notes in the name of, or request that Old
Notes not tendered or not accepted in the Exchange Offer be returned to, a
person other than the registered tendering holder will be responsible for the
payment of any applicable transfer tax thereon.
REGULATORY MATTERS
The Company is not aware of any governmental or regulatory approvals that
are required in order to consummate the Exchange Offer.
28
<PAGE>
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions on what action to take. See "Certain United States Federal Income
Tax Considerations."
The Old Notes that are not exchanged for the Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Old Notes
may only be offered, sold, pledged or otherwise transferred (A)(i) to a person
whom the seller reasonably believes is a qualified institutional buyer within
the meaning of Rule 144A under the Securities Act ("Rule 144A") in a
transaction meeting the requirements of Rule 144A, (ii) in an offshore
transaction meeting the requirements of Rule 903 or Rule 904 of Regulation S
under the Securities Act, or (iii) pursuant to an exemption from registration
under the Securities Act provided by Rule 144 thereunder (if available) and
(B) in accordance with all applicable securities laws of the states of the
United States. Under certain circumstances, the Company is required to file a
Shelf Registration Statement. See "Description of the Notes--Exchange Offer;
Registration Rights."
PAYMENT OF ADDITIONAL INTEREST UPON REGISTRATION DEFAULT
In the event of a Registration Default (as hereinafter defined), additional
interest ("Liquidated Interest") will accrue on the Old Notes (in addition to
the stated interest on the Old 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 Old 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 Old 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. See "Description of the Notes--Exchange Offer;
Registration Rights."
USE OF PROCEEDS
The Company will not receive any proceeds from the issuance of the Exchange
Notes or the consummation of the Exchange Offer or any sale of Exchange Notes
to any broker-dealer.
29
<PAGE>
CAPITALIZATION
The following table sets forth as of March 31, 1997 (i) the historical
consolidated capitalization of the Company, and (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, borrowings
under the Company's revolving credit facility (after receipt of funds under
the GTE agreement) to repay all outstanding advances from the Company's
parent, payment of the Company's long-term debt from cash generated from
operations, and the capitalization as adjusted to reflect the foregoing and
the sale of 15,525,000 shares of Common Stock at $22.00 per share in the
Initial Public Offering and the application of the net proceeds therefrom.
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
----------------------
ACTUAL PRO FORMA
---------- ----------
(IN THOUSANDS)
<S> <C> <C>
Advances from parent............................... $ 27,952 $ --
Current portion of long-term debt.................. 24,859 15,815
---------- ----------
Total short-term debt.......................... $ 52,811 $ 15,815
========== ==========
Long-term debt..................................... $ 36,325 $ 1,213
Notes.............................................. 250,000 250,000
---------- ----------
Total long-term debt (excluding current
portion)...................................... 286,325 251,213
---------- ----------
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, actual; 102,025,000 shares issued
and outstanding pro forma(1).................... $ 865 $ 1,020
Additional paid-in capital....................... 55,027 374,781
Accumulated deficit.............................. (51,226) (51,226)
---------- ----------
Total stockholder's equity..................... 4,666 324,575
---------- ----------
Total capitalization......................... $ 290,991 $ 575,788
========== ==========
</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."
30
<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
Ratio of earnings to fixed charges(11).... -- 5.68 -- -- -- -- --
</TABLE>
31
<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, $1.8 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) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of earnings (loss) before income taxes, plus fixed
charges excluding capitalized interest. Fixed charges consist of interest
expensed and capitalized, plus amortization of deferred financing costs,
plus the portion of rent expense under operating leases deemed by the
Company to be representative of the interest factor, plus preferred stock
dividends on preferred stock of QCC (increased to an amount representing
the pre-tax earnings which would be required to cover such dividend
requirements). The Company had a deficiency of earnings to fixed charges
of $8.9 million and $15.8 million in the three month periods ended March
31, 1997 and 1996, respectively, and $12.6 million, $40.3 million, $11.0
million and $14.5 million in 1996, 1995, 1994 and 1992, respectively.
Excluding the effect of the gains arising from the sale of contract rights
in 1997, telecommunications service agreements in 1996 and the 1993
Capacity Sale, the deficiency of earnings would have been $16.7 million in
the three month period ended March 31, 1997, and $18.7 million and $27.6
million in 1996 and 1993, respectively.
32
<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
33
<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.
Operating Expenses. The Company's principal operating expenses consist of
expenses for network construction incurred by Network Construction Services,
telecommunications services, selling,
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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, although the Company does not intend to grant any more growth shares
under that plan. See "Management--Growth Share Plan." Growth Share Plan
expenses reflect the Company's estimate of compensation expense for the shares
outstanding. Currently, growth shares granted under the Growth Share Plan
generally 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
and, with respect to certain growth shares, an initial public offering. Upon
completion of the Initial Public Offering, certain growth shares vested in
full, which will result in additional compensation expense under the Growth
Share Plan to be recorded in the Company's financial statements for the second
quarter of 1997. The Company estimates that the additional compensation
expense accrual in the second quarter of 1997 will be approximately $58.0
million. In addition, as described in "Management--Growth Share Plan," the
number of shares of Common Stock issued to holders of growth shares in payment
therefor is subject to reduction as a result of certain elections by them for
tax withholdings
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and cash payments. Based upon withholdings and payments elected to date,
approximately $26.0 million of the accrued compensation has been paid or is
payable in cash by the Company. 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."
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.
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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.
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.
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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.
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
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<PAGE>
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.
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.
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<PAGE>
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.
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.
On June 27, 1997, the Company received approximately $320.0 in net proceeds
from the sale of 15,525,000 shares of Common Stock in the Initial Public
Offering.
In March 1997, the Company issued and sold $250.0 million in principal
amount of its Old 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
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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
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.
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.
In connection with the sale of the Old Notes, the Company agreed to make an
offer to exchange the Exchange Notes, registered under the Securities Act and
with terms identical in all material respects to the Old Notes, for the Old
Notes or, alternatively, to file a shelf registration statement under the
Securities Act with respect to the Old 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 Old 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 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
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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 funds 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 was repaid with cash generated from
operations.
The Company intends to terminate the latter two existing credit facilities
totalling $150.0 million as soon as practicable after completion of the
Initial Public Offering. 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 Initial Public Offering, 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--High Leverage; Ability to Service 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 $400.0 million as of May 31, 1997. The Company
anticipates remaining total cash outlays for these purposes of approximately
$500.0 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 $100.0 million had been
expended as of May 31, 1997. Estimated total expenditures for 1997 and 1998
together also include
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$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 $286.0
million had already been paid and $733.0 million remained to be paid at May
31, 1997; (ii) $90.0 million of vendor financing; (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; and (iv)
approximately $320.0 million in net proceeds from the Initial Public Offering.
The Company believes that these sources of cash 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.
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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 OF BROADBAND SERVICES NETWORK APPEARS HERE]
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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 6,100 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 570 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 45% 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 5,800 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 3,200 route miles
of dark fiber installed in conduit, and approximately 1,700 route miles of
vacant conduit; (ii) right-of-way agreements in place for approximately 5,300
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-/15/ 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 180 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 570 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 $400.0
million as of May 31, 1997. The Company anticipates remaining total cash
outlays for these purposes of approximately $500.0 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 $100.0 million had been expended as of May 31, 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 $286.0
million had already been paid and $733.0 million remained to be paid at May
31, 1997; (ii) $90.0 million of vendor financing; (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; and (iv)
approximately $320.0 million in net proceeds from the Initial Public Offering.
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 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 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.
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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.
. 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.
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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.
. 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.
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. 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 6,100
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 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.
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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 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."
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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. 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. 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 May 31, 1997, the Company employed approximately 950 employees of
which 110 perform corporate and administrative services, 570 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.
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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 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.
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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. On June 4, 1997, the FCC instituted a proceeding to, among
other things, 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
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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.
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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.
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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........ 48 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
Jordan L. Haines......... 70 Director
W. Thomas Stephens....... 54 Director
</TABLE>
Messrs. Haines and Stephens were appointed to serve as independent directors
effective immediately upon completion of the Initial Public Offering.
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
Gregory M. Casey........ 38 Senior Vice President--Carrier Markets
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.
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<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. degree from DePaul University College of Law.
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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 appointed a Director of Qwest effective immediately
upon completion of the Initial Public Offering. He 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 was appointed a Director of Qwest effective immediately
upon completion of the Initial Public Offering. He 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.
Gregory M. Casey became Senior Vice President--Carrier Markets of QCC in
June 1997. In this capacity, he is responsible for all of Qwest's carrier
marketing and sales programs. Prior to joining QCC, Mr. Casey was, since 1996,
Vice President of Carrier Relations and Regulatory Affairs at LCI
International, with responsibility for managing relationships with RBOCs and
LECs and negotiating interconnection arrangements and wholesale pricing for
resale of local service. From 1991 to 1996, he was employed by ONCOR
Communications Inc., where he served as Senior Vice President of Regulatory
Affairs and Telephone Company Relations. Prior to joining ONCOR, he was Senior
Vice President and General Counsel for Telesphere International Inc. Mr. Casey
holds a B.A. degree in political science from the University of Connecticut
and a J.D. degree from DePaul University College of Law.
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
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<PAGE>
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.
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 1996 152,333 30,000 -- 7,945(1)
President--Strategy and 1995 130,270 11,634 15,752(3) 7,163
Planning (QCC) 1994 112,140 -- 2,083(3) 62,602
A. Dean Wandry, Senior
Vice 1996 148,300 30,000 -- 7,725(1)
President--New Business 1995 141,866 14,000 -- 2,310
Development (QCC) 1994 45,141(4) -- -- --
Joseph DePetro, Vice
President-- 1996 130,083 -- 48,337(5) 7,203(1)
Sales and 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 1995 200,040 20,004 -- 8,240
Executive
Officer (QCC)(7) 1994 195,865 -- -- 79,001
Peter R. Geddis, former
Executive 1996 157,150 -- -- 24,147(10)
Vice President (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.
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<PAGE>
(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 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 has been 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 value of the growth shares is capped at a value generally
determined by the $22.00 per share price of the Common Stock in the Initial
Public Offering. The growth shares will vest in 20% increments on each January
1 beginning January 1, 1998, provided that the final 20% increment will vest
on the date in 2001 that ends the performance cycle, as determined by the
Company in its sole discretion. 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 Initial
Public Offering, 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.
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The Company has granted 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 price is $22.00 per share. The option will vest
20% per year beginning on December 31, 1997 and will become fully vested upon
Mr. Nacchio's death, disability or retirement. If Mr. Nacchio resigns for good
reason (as defined in the growth share agreement) or if the Company terminates
his employment other than for cause, he will vest in an amount of one-twelfth
of the 20% increment scheduled to vest for the year of termination for each
full month of employment with the Company during such year. If the Company
terminates his employment without cause or if he resigns for good reason (as
defined in the employment agreement, provided that for this purpose the
occurrence of a change in control by itself is not good reason), in each case
following a change in control, the option will become fully vested. 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 his employment is terminated for cause, he can exercise the
vested portion of the option only until the first to occur of (1) the date
that is six months after the day after his termination or (2) June 30, 2003.
He can exercise the vested portions of the option at any time before the
option expires. Generally, the option will terminate and expire on June 30,
2003.
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
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<PAGE>
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
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. Under the October 1996 amendment and
restatement, payment must 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
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<PAGE>
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 became 100% vested (if not previously vested) upon
completion of the Initial Public Offering and completion of the Initial public
Offering constituted a triggering event with respect to those growth shares,
which will result 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. The October 1996
amendment and restatement provides that payment must be made in shares of
Qwest's common stock if Qwest's stock is publicly traded; completion of the
Initial Public Offering, however, did not constitute a triggering event with
respect to growth shares issued thereunder.
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 shares of Common Stock issuable as payment for
the growth shares withheld or set aside for tax and other withholdings.
Growth shares granted under the October 1996 amendment and restatement are
not accelerated or triggered by completion of the Initial Public Offering. The
Company has entered into amendments to the growth share agreements with
participants who hold growth shares granted under the October 1996 amendment
and restatement. The amendments provide that (1) following completion of the
Initial Public Offering, the value of the growth shares is capped at a value
generally determined by the $22.00 per share price of the Common Stock in the
Initial Public Offering 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 has granted 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 following provisions apply to the options
granted to participants other than Mr. Nacchio (see "--CEO Employment
Agreement"). The exercise price is equal to the $22.00 price per share in the
Initial Public Offering. 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 or a change in control of the
Company. The options will become exercisable at the rate of 15% per year for
each of the first four years and 40% in the fifth year, in each case, on the
date of vesting. If the participant is terminated for cause, or if the
participant voluntarily terminates employment, he will forfeit all unvested
options and the vested portion that is not exercisable. The participant may
exercise the exercisable portion of the vested options at any time before the
options expire. The options will terminate and expire at the end of the 18-
month period following the vesting of the final 20% increment, provided that
if the participant is terminated for cause, the vested and exercisable options
will terminate and expire six months after the date of termination of
employment.
The Company does not intend to grant any more growth shares.
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>
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<PAGE>
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>
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 June 23, 1997.
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 May 31, 1997, there were approximately 950 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
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<PAGE>
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 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
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<PAGE>
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 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
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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 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.
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Audit Committee. The Board established an Audit Committee in May 1997 to:
(i) make recommendations concerning the engagement of independent public
accountants; (ii) review with Company management and the independent public
accountants the plans for, and scope of, the audit procedures to be utilized
and results of audits; (iii) approve the professional services provided by the
independent public accountants; (iv) review the adequacy and effectiveness of
the Company's internal accounting controls; and (v) perform any other duties
and functions required by any organization under which the Company's
securities may be listed. Cannon Y. Harvey, Jordan L. Haines and W. Thomas
Stephens are the members of the Audit Committee.
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 and the Equity Incentive 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
Anschutz Company, a Delaware corporation of which Mr. Philip F. Anschutz is
the direct, sole owner, owns approximately 84.8% 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. 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 $0.8 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.
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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
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.
Effective May 23, 1997, the Company sold to the Anschutz Family Investment
Company LLC, for $2.3 million in cash, a 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." Mr.
Liebhaber was granted an option to purchase 100,000 shares of Common Stock.
See "Management--Growth Share Plan" and "--Equity Incentive Plan".
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DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued under an indenture dated the date of
closing of the Exchange Offer (the "Indenture") between the Company and
Bankers Trust Company, as trustee under the Indenture (the "Trustee"). Copies
of the Indenture are available from the Company on request. For purposes of
this Description of the Notes, the term "Company" refers to Qwest
Communications International Inc. and does not include its subsidiaries except
for purposes of financial data determined on a consolidated basis. For
purposes of this Description of the Notes, the term "Notes" refers to the
Exchange Notes and the Old Notes collectively. The Exchange Notes and the Old
Notes are considered collectively to be a single class for all purposes under
the Indenture and the Indenture dated March 31, 1997, under which the Old
Notes were issued; including, without limitation, waivers, amendments,
redemptions and Offers to Purchase.
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act"), and to all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the Trust Indenture Act, as in effect on the date of
the Indenture. The definitions of certain capitalized terms used in the
following summary are set forth below under "--Certain Definitions."
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all existing and future senior unsecured
indebtedness of the Company, and will be senior in right of payment to all
existing and future subordinated indebtedness of the Company. On a pro forma
basis, at March 31, 1997, after giving effect to the Initial Public Offering
and after giving effect to the application of net proceeds from the sale of
the Old Notes, the Company would have had approximately $267.0 million of
long-term debt (including the current portion thereof).
The operations of the Company are conducted through its subsidiaries and,
therefore, the Company is dependent upon cash flow from those entities to meet
its obligations. The Company's subsidiaries will have no direct obligation to
pay amounts due on the Notes and currently have no obligation to guarantee the
Notes. As a result, the Notes effectively will be subordinated to all existing
and future third-party indebtedness and other liabilities of the Company's
subsidiaries (including trade payables). As of March 31, 1997, on a pro forma
basis after giving effect to the sale of the Old Notes and the application of
a portion of the proceeds thereof to repay certain indebtedness of Qwest's
subsidiaries, the total liabilities of Qwest's subsidiaries (after elimination
of loans and advances by Qwest to its subsidiaries) would have been
approximately $142.8 million, of which approximately $17.0 million in
indebtedness would have been secured by certain assets of the borrowing
subsidiaries. The Company expects that it or its subsidiaries will incur
additional indebtedness in the future. Any rights of the Company and its
creditors, including the holders of Notes, to participate in the assets of any
of the Company's subsidiaries upon any liquidation or reorganization of any
such subsidiary will be subject to the prior claims of that subsidiary's
creditors (including trade creditors). In addition, the Company's operations
have generated operating losses in recent years, and there can be no assurance
that the Company will be able to achieve or sustain operating profitability,
or generate sufficient positive cash flow to pay the principal of and interest
on the Notes. See "Risk Factors--Holding Company Structure; Effective
Subordination of the Notes," "Risk Factors--High Leverage; Ability to Service
Indebtedness," and "Risk Factors-- Operating Losses and Working Capital
Deficits."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be limited in aggregate principal amount to $250 million and
will mature on April 1, 2007. Interest on the Notes will accrue at the rate of
10 7/8% per annum and will be payable semiannually in arrears on April 1 and
October 1 of each year, commencing October 1, 1997. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months.
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Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes may be exchanged or transferred, at the office or agency of the
Company, which, unless otherwise provided by the Company, will be the offices
of the Trustee. At the option of the Company, interest may be paid by check
mailed to the registered holders at their registered addresses. The Notes will
be issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and integral multiples thereof. The Notes will be
issued only against payment in immediately available funds. No service charge
will be made for any registration of transfer or exchange of the Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith.
BOOK-ENTRY SYSTEM
All Exchange Notes will be represented by permanent Global Notes in fully
registered form without coupons (the "Global Notes"), which will be deposited
with the Trustee as custodian for the Depository and registered in the name of
the Depository or of a nominee of the Depository.
Upon issuance of a Global Note, the Depository will credit, on its internal
system, the respective amount of the individual beneficial interests in the
Global Note to persons who have accounts with the Depository ("Participants").
Such accounts initially were designated by or on behalf of the Initial
Purchasers. Ownership of beneficial interests in the Global Note will be shown
on, and the transfer of such beneficial interests will be effected only
through, records maintained by the Depository or its nominee (with respect to
interests of Participants) and the records of Participants (with respect to
interests of persons other than Participants). Holders may hold their
interests in the Global Note directly through the Depository if they are
Participants, or indirectly through organizations which are Participants.
So long as the Depository or its nominee is the registered owner of a Global
Note, the Depository or such nominee, as the case may be, will be considered
the sole owner of the Exchange Notes represented by the Global Note for all
purposes under the Indenture and the Exchange Notes. Accordingly, beneficial
owners of an interest in the Global Note must rely on the procedures of the
Depository, and if such person is not a participant, on the procedures of the
Participant through which such person owns its interest, to exercise any
rights and fulfill any obligations of a holder under the Indenture. No
beneficial owner of an interest in the Global Note will be able to transfer
that interest except in accordance with the Depository's applicable
procedures, in addition to those provided for in the Indenture.
Payments of the principal of, premium, if any, and interest on, the Global
Notes will be made to the Depository or its nominee, as the case may be, as
the registered owner thereof. Neither the Company, the Trustee or any paying
agent will have any responsibility or liability for any aspect of the records
relating to, or payments made on account of, beneficial interests in the
Global Notes or for maintaining, supervising or reviewing any records relating
to such beneficial interests. The Company expects that the Depository or its
nominee, upon receipt of any payment of principal, premium or interest in
respect of the Global Notes will credit Participants' accounts with payments
in amounts proportionate to such Participants' respective beneficial interests
in the principal amount of such Global Notes as shown on the records of the
Depository or its nominee. The Company also expects that payments by
Participants to owners of beneficial interests in the Global Notes held
through such Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such Participants.
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The Depository has advised the Company that it will take any action
permitted to be taken by a holder of Exchange Notes (including the
presentation of Old Notes for exchange as described below) only at the
direction of one or more Participants to whose accounts interests in the
Global Notes is credited and only in respect of such portion of the aggregate
principal amount of Exchange Notes, as the case may be, as to which such
Participant or Participants has or have given such direction.
The Depository has advised the Company as follows: The Depository is a
limited purpose trust company organized under the laws of the State of New
York, a "banking organization" within the meaning of New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "clearing agency" registered
pursuant to the provisions of Section 17A of the Exchange Act. The Depository
was created to hold securities for its Participants and facilitate the
clearance and settlement of securities transactions between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of certificates. Indirect access to
the Depository system is available to others such as banks, brokers, dealers
and trust companies that clear through or maintain a custodial relationship
with a Participant ("Indirect Participants").
Although the Depository and its Participants are expected to follow the
foregoing procedures in order to facilitate transfers of interests in the
Global Notes among Participants, they are under no obligation to perform or
continue to perform such procedures, and such procedures may be discontinued
at any time. Neither the Company, its paying agent or the Trustee will have
any responsibility for the performance by the Depository, Participants or
Indirect Participants of their respective obligations under the rules and
procedures governing their operations.
Owners of beneficial interests in the Global Notes will be entitled to
receive Exchange Notes in definitive form ("Definitive Notes") if the
Depository is at any time unwilling or unable to continue as, or ceases to be,
a "clearing agency" registered under Section 17A of the Exchange Act, and a
successor to the Depository registered as a "clearing agency" under Section
17A of the Exchange Act is not appointed by the Company within 90 days. Any
Definitive Notes issued in exchange for beneficial interests in the Global
Notes will be registered in such name or names as the Depository shall
instruct the Trustee. It is expected that such instructions will be based upon
directions received by the Depository from Participants with respect to
ownership of beneficial interests in the Global Notes.
In addition to the foregoing, on or after the occurrence of an Event of
Default under the Indenture, owners of beneficial interests in the Global
Notes will be entitled to request and receive Definitive Notes. Such
Definitive Notes will be registered in such name or names as the Depositary
shall instruct the Trustee.
OPTIONAL REDEMPTION
The Notes will be subject to redemption at the option of the Company, in
whole or in part, at any time or from time to time on or after April 1, 2002,
upon not less than 30 nor more than 60 days' prior notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest thereon (if any) to the redemption date, if
redeemed during the twelve months beginning April 1 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
---- ----------------
<S> <C>
2002........................ 105.438%
2003........................ 103.625%
2004........................ 101.813%
2005 and thereafter......... 100.000%
</TABLE>
In addition, prior to April 1, 2000, the Company may redeem up to 35% of the
originally issued principal amount of the Notes at a redemption price equal to
110.875% of the principal amount of the
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Notes so redeemed, plus accrued and unpaid interest thereon (if any) to the
redemption date, with the net proceeds of one or more Public Equity Offerings
resulting in gross proceeds of at least $100 million in the aggregate;
provided that at least 65% of the originally issued principal amount of the
Notes would remain outstanding immediately after giving effect to such
redemption.
MANDATORY REDEMPTION
Except as set forth under "--Certain Covenants--Change of Control" and "--
Certain Covenants--Limitation on Asset Dispositions," the Company is not
required to make mandatory redemption payments or sinking fund payments with
respect to the Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Consolidated Debt. (a) The Company may not, and may not permit
any Restricted Subsidiary to, Incur any Debt, unless, after giving effect to
the application of the proceeds thereof, no Default or Event of Default would
occur as a consequence of such Incurrence or be continuing following such
Incurrence and either (i) the ratio of (A) the aggregate consolidated
principal amount of Debt of the Company outstanding as of the most recent
available quarterly or annual balance sheet, after giving pro forma effect to
the Incurrence of such Debt and any other Debt Incurred or repaid since such
balance sheet date and the receipt and application of the proceeds thereof, to
(B) Consolidated Cash Flow Available for Fixed Charges for the four full
fiscal quarters next preceding the Incurrence of such Debt for which
consolidated financial statements are available, determined on a pro forma
basis as if any such Debt had been Incurred and the proceeds thereof had been
applied at the beginning of such four fiscal quarters, would be less than 5.5
to 1.0 for Debt Incurred on or prior to April 1, 2000 and 5.0 to 1.0 for Debt
Incurred thereafter, or (ii) the Company's Consolidated Capital Ratio as of
the most recent available quarterly or annual balance sheet, after giving pro
forma effect to the Incurrence of such Debt and any other Debt Incurred or
repaid since such balance sheet date and the receipt and application of the
proceeds thereof, is less than 2.0 to 1.0.
(b) Notwithstanding the foregoing limitation, the Company and any Restricted
Subsidiary may Incur any and all of the following (each of which shall be
given independent effect):
(i) Debt under the Notes, the Indenture and any Restricted Subsidiary
Guarantee;
(ii) (A) Debt Incurred subsequent to March 31, 1997 under Credit
Facilities in an aggregate principal amount at any time outstanding not to
exceed $150 million plus (B) Debt Incurred subsequent to March 31, 1997
under one or more Credit Facilities that are revolving credit facilities in
an aggregate principal amount at any time outstanding not to exceed the
greater of (x) $100 million or (y) 85% of Eligible Receivables;
(iii) Purchase Money Debt, provided that the amount of such Purchase
Money Debt does not exceed 100% of the cost of the construction,
installation, acquisition or improvement of the applicable
Telecommunications Assets;
(iv) Debt owed by the Company to any Restricted Subsidiary of the Company
or Debt owed by a Restricted Subsidiary of the Company to the Company or a
Restricted Subsidiary of the Company; provided, however, that upon either
(x) the transfer or other disposition by such Restricted Subsidiary or the
Company of any Debt so permitted to a Person other than the Company or
another Restricted Subsidiary of the Company or (y) the issuance (other
than directors' qualifying shares), sale, lease, transfer or other
disposition of shares of Capital Stock (including by consolidation or
merger) of such Restricted Subsidiary to a Person other than the Company or
another such Restricted Subsidiary, the provisions of this clause (iv)
shall no longer
be applicable to such Debt and such Debt shall be deemed to have been
Incurred by the issuer thereof at the time of such transfer or other
disposition;
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(v) Debt Incurred to renew, extend, refinance, defease or refund (each, a
"refinancing") the Notes or Debt of the Company Incurred pursuant to clause
(iii) of this paragraph (b), in an aggregate principal amount not to exceed
the aggregate principal amount of and accrued interest on the Debt so
refinanced plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Debt so refinanced or
the amount of any premium reasonably determined by the board of directors
of the Company as necessary to accomplish such refinancing by means of a
tender offer or privately negotiated repurchase, plus the expenses of the
Company Incurred in connection with such refinancing; provided, however,
that Debt the proceeds of which are used to refinance the Notes or Debt
which is pari passu to the Notes or Debt which is subordinate in right of
payment to the Notes shall only be permitted under this clause (v) if (A)
in the case of any refinancing of the Notes or Debt which is pari passu to
the Notes, the refinancing Debt is made pari passu to the Notes or
constitutes Subordinated Debt, and, in the case of any refinancing of
Subordinated Debt, the refinancing Debt constitutes Subordinated Debt and
(B) in any case, the refinancing Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued, (x) does not
provide for payments of principal of such Debt at stated maturity or by way
of a sinking fund applicable thereto or by way of any mandatory redemption,
defeasance, retirement or repurchase thereof by the Company (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of the
acceleration of any payment with respect to such Debt upon any event of
default thereunder), in each case prior to the time the same are required
by the terms of the Debt being refinanced and (y) does not permit
redemption or other retirement (including pursuant to an offer to purchase
made by the Company) of such Debt at the option of the holder thereof prior
to the time the same are required by the terms of the Debt being
refinanced, other than a redemption or other retirement at the option of
the holder of such Debt (including pursuant to an offer to purchase made by
the Company) which is conditioned upon a change of control pursuant to
provisions substantially similar to those described under "--Change of
Control";
(vi) Debt consisting of Permitted Interest Rate and Currency Protection
Agreements;
(vii) Debt secured by Receivables originated by the Company or any
Restricted Subsidiary and related assets, provided that such Debt is
nonrecourse to the Company and any of its other Restricted Subsidiaries and
provided further that Receivables shall not be available at any time to
secure Debt of the Company under this clause (vii) to the extent that they
are used at such time as the basis for the Incurrence of Debt in excess of
$100 million pursuant to clause (ii)(B)(y) of this paragraph (b); and
(viii) Debt not otherwise permitted to be Incurred pursuant to clauses
(i) through (vii) above, which, together with any other outstanding Debt
Incurred pursuant to this clause (viii), has an aggregate principal amount
not in excess of $25 million at any time outstanding.
Limitation on Debt and Preferred Stock of Restricted Subsidiaries. The
Company may not permit any Restricted Subsidiary that is not a Guarantor to
Incur any Debt or issue any Preferred Stock except any and all of the
following (each of which shall be given independent effect):
(i) Restricted Subsidiary Guarantees;
(ii) Debt of Restricted Subsidiaries under Credit Facilities permitted to
be Incurred pursuant to clause (ii) of paragraph (b) of "--Limitation on
Consolidated Debt";
(iii) Purchase Money Debt of Restricted Subsidiaries permitted to be
Incurred pursuant to clause (iii) of paragraph (b) of "--Limitation on
Consolidated Debt";
(iv) Debt owed by a Restricted Subsidiary of the Company to the Company
or a Restricted Subsidiary of the Company permitted to be Incurred pursuant
to clause (iv) of paragraph (b) of "--Limitation on Consolidated Debt";
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(v) Debt of Restricted Subsidiaries consisting of Permitted Interest Rate
and Currency Protection Agreements permitted to be Incurred pursuant to
clause (vi) of paragraph (b) of "--Limitation on Consolidated Debt";
(vi) Debt of Restricted Subsidiaries secured by Receivables originated by
the Company or any Restricted Subsidiary and related assets permitted to be
Incurred pursuant to clause (vii) of paragraph (b) of "--Limitation on
Consolidated Debt";
(vii) Debt of Restricted Subsidiaries permitted to be Incurred pursuant
to clause (viii) of paragraph (b) of "--Limitation on Consolidated Debt";
(viii) Preferred Stock issued to and held by the Company or a Restricted
Subsidiary;
(ix) Debt Incurred or Preferred Stock issued by a Person prior to the
time (A) such Person became a Restricted Subsidiary, (B) such Person merges
into or consolidates with a Restricted Subsidiary or (C) another Restricted
Subsidiary merges into or consolidates with such Person (in a transaction
in which such Person becomes a Restricted Subsidiary), which Debt or
Preferred Stock was not Incurred or issued in anticipation of such
transaction and was outstanding prior to such transaction; and
(x) Debt or Preferred Stock which is exchanged for, or the proceeds of
which are used to renew, extend, refinance, defease, refund or redeem any
Debt of a Restricted Subsidiary permitted to be Incurred pursuant to clause
(iii) of this paragraph or any Debt or Preferred Stock of a Restricted
Subsidiary permitted to be Incurred pursuant to clause (ix) hereof (or any
extension or renewal thereof) (for purposes hereof, a "refinancing"), in an
aggregate principal amount, in the case of Debt, or with an aggregate
liquidation preference, in the case of Preferred Stock, not to exceed the
aggregate principal amount of the Debt so refinanced or the aggregate
liquidation preference of the Preferred Stock so refinanced, plus the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Debt or Preferred Stock so
refinanced or the amount of any premium reasonably determined by the
Company as necessary to accomplish such refinancing by means of a tender
offer or privately negotiated repurchase, plus the amount of expenses of
the Company and the applicable Restricted Subsidiary Incurred in connection
therewith and provided the Debt or Preferred Stock Incurred or issued upon
such refinancing, by its terms, or by the terms of any agreement or
instrument pursuant to which such Debt or Preferred Stock is Incurred or
issued, (x) does not provide for payments of principal or liquidation value
at the stated maturity of such Debt or Preferred Stock or by way of a
sinking fund applicable to such Debt or Preferred Stock or by way of any
mandatory redemption, defeasance, retirement or repurchase of such Debt or
Preferred Stock by the Company or any Restricted Subsidiary (including any
redemption, retirement or repurchase which is contingent upon events or
circumstances, but excluding any retirement required by virtue of
acceleration of such Debt upon an event of default thereunder), in each
case prior to the time the same are required by the terms of the Debt or
Preferred Stock being refinanced and (y) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by the
Company or a Restricted Subsidiary) of such Debt or Preferred Stock at the
option of the holder thereof prior to the stated maturity of the Debt or
Preferred Stock being refinanced, other than a redemption or other
retirement at the option of the holder of such Debt or Preferred Stock
(including pursuant to an offer to purchase made by the Company or a
Restricted Subsidiary) which is conditioned upon the change of control of
the Company pursuant to provisions substantially similar to those contained
in the Indenture described under "--Change of Control," and provided
further that in the case of any exchange or redemption of Preferred Stock
of a Restricted Subsidiary, such Preferred Stock may only be exchanged for
or redeemed with Preferred Stock of such Restricted Subsidiary.
Limitation on Restricted Payments. The Company (i) may not, and may not
permit any Restricted Subsidiary to, directly or indirectly, declare or pay
any dividend, or make any distribution, in respect of its Capital Stock or to
the holders thereof, excluding any dividends or distributions which are made
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solely to the Company or a Restricted Subsidiary (and, if such Restricted
Subsidiary is not a Wholly Owned Subsidiary, to the other stockholders of such
Restricted Subsidiary on a pro rata basis) or any dividends or distributions
payable solely in shares of its Capital Stock (other than Disqualified Stock)
or in options, warrants or other rights to acquire its Capital Stock (other
than Disqualified Stock); (ii) may not, and may not permit any Restricted
Subsidiary to, purchase, redeem, or otherwise retire or acquire for value (x)
any Capital Stock of the Company, any Restricted Subsidiary or any Related
Person of the Company (other than a permitted refinancing) or (y) any options,
warrants or rights to purchase or acquire shares of Capital Stock of the
Company, any Restricted Subsidiary or any Related Person of the Company or any
securities convertible or exchangeable into shares of Capital Stock of the
Company, any Restricted Subsidiary or any Related Person of the Company (other
than a permitted refinancing), except, in any such case, any such purchase,
redemption or retirement or acquisition for value paid to the Company or a
Restricted Subsidiary (or, in the case of any such purchase, redemption or
other retirement or acquisition for value with respect to a Restricted
Subsidiary that is not a Wholly Owned Subsidiary, paid to the Company or a
Restricted Subsidiary, or to the other stockholders of such Restricted
Subsidiary that is not a Wholly Owned Subsidiary, on a pro rata basis); (iii)
may not make, or permit any Restricted Subsidiary to make, any Investment in,
or payment on a Guarantee of any obligation of, any Person, other than the
Company or a Restricted Subsidiary; and (iv) may not, and may not permit any
Restricted Subsidiary to, redeem, defease, repurchase, retire or otherwise
acquire or retire for value, prior to any scheduled maturity, repayment or
sinking fund payment, Debt of the Company which is subordinate in right of
payment to the Notes (other than a permitted refinancing) (each of clauses (i)
through (iv) being a "Restricted Payment") if: (1) an Event of Default, or an
event that with the passing of time or the giving of notice, or both, would
constitute an Event of Default, shall have occurred and be continuing, or (2)
upon giving effect to such Restricted Payment, the Company could not Incur at
least $1.00 of additional Debt pursuant to the terms of the Indenture
described in paragraph (a) of "--Limitation on Consolidated Debt" above, or
(3) upon giving effect to such Restricted Payment, the aggregate of all
Restricted Payments from March 31, 1997 exceeds the sum of: (a) 50% of
cumulative Consolidated Net Income (or, in the case that Consolidated Net
Income shall be negative, 100% of such negative amount) since the end of the
last full fiscal quarter prior to March 31, 1997 through the last day of the
last full fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment, (b) plus $5 million, (c) less, in the case of any
Designation with respect to a Restricted Subsidiary that was made after March
31, 1997, an amount equal to the Designation Amount with respect to such
Restricted Subsidiary, (d) plus, in the case of any Revocation made after
March 31, 1997, an amount equal to the lesser of the Designation Amount with
respect to the Subsidiary with respect to which such Designation was made or
the Fair Market Value of the Investment of the Company and its Restricted
Subsidiaries in such Subsidiary at the time of Revocation; provided, however,
that the Company or a Restricted Subsidiary of the Company may make any
Restricted Payment with the aggregate net cash proceeds received after March
31, 1997 as capital contributions to the Company or from the issuance (other
than to a Subsidiary) of Capital Stock (other than Disqualified Stock) of the
Company and warrants, rights or options on Capital Stock (other than
Disqualified Stock) of the Company and the principal amount of Debt of the
Company that has been converted into Capital Stock (other than Disqualified
Stock and other than by a Subsidiary) of the Company after March 31, 1997.
Notwithstanding the foregoing limitation, (i) the Company and any Restricted
Subsidiary may make Permitted Investments; (ii) the Company may pay any
dividend on Capital Stock of any class of the Company within 60 days after the
declaration thereof if, on the date when the dividend was declared, the
Company could have paid such dividend in accordance with the foregoing
provisions; (iii) the Company may repurchase any shares of its Common Stock or
options to acquire its Common Stock from Persons who were formerly directors,
officers or employees of the Company or any of its Subsidiaries or Affiliates,
provided that the aggregate amount of all such repurchases made pursuant to
this clause (iii) shall not exceed $1 million in any twelve-month period; (iv)
the Company and any Restricted Subsidiary may refinance any Debt otherwise
permitted by clause (v) of paragraph (b) under
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"--Limitation on Consolidated Debt" above or clause (x) under "--Limitation on
Debt and Preferred Stock of Restricted Subsidiaries" above; and (v) the
Company and any Restricted Subsidiary may retire or repurchase any Capital
Stock of the Company or of any Restricted Subsidiary in exchange for, or out
of the proceeds of the substantially concurrent sale (other than to a
Subsidiary of the Company) of, Capital Stock (other than Disqualified Stock)
of the Company.
Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. (a) The Company may not, and may not permit any Restricted
Subsidiary to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any consensual encumbrance or restriction on the
ability of any Restricted Subsidiary (i) to pay dividends (in cash or
otherwise) or make any other distributions in respect of its Capital Stock
owned by the Company or any other Restricted Subsidiary or pay any Debt or
other obligation owed to the Company or any other Restricted Subsidiary; (ii)
to make loans or advances to the Company or any other Restricted Subsidiary;
or (iii) to transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
(b) Notwithstanding the foregoing limitation, the Company may, and may
permit any Restricted Subsidiary to, create or otherwise cause or suffer to
exist any such encumbrance or restriction (i) pursuant to any agreement in
effect on March 31, 1997; (ii) any customary encumbrance or restriction
applicable to a Restricted Subsidiary that is contained in an agreement or
instrument governing or relating to Debt contained in any Credit Facilities or
Purchase Money Debt, provided that the provisions of such agreement permit the
payment of interest and mandatory payment or prepayment of principal pursuant
to the terms of the Indenture and the Notes and other Debt that is solely an
obligation of the Company, but provided further that such agreement may
nevertheless contain customary net worth, leverage, invested capital and other
financial covenants, customary covenants regarding the merger of or sale of
all or any substantial part of the assets of the Company or any Restricted
Subsidiary, customary restrictions on transactions with Affiliates, and
customary subordination provisions governing Debt owed to the Company or any
Restricted Subsidiary; (iii) pursuant to an agreement relating to any Acquired
Debt, which encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person so acquired; (iv)
pursuant to an agreement effecting a renewal, refunding, permitted refinancing
or extension of Debt Incurred pursuant to an agreement referred to in clause
(i), (ii) or (iii) of this paragraph (b), provided, however, that the
provisions contained in such renewal, refunding or extension agreement
relating to such encumbrance or restriction are no more restrictive in any
material respect than the provisions contained in the agreement the subject
thereof; (v) in the case of clause (iii) of paragraph (a) above, restrictions
contained in any security agreement (including a Capital Lease Obligation)
securing Debt of the Company or a Restricted Subsidiary otherwise permitted
under the Indenture, but only to the extent such restrictions restrict the
transfer of the property subject to such security agreement; (vi) in the case
of clause (iii) of paragraph (a) above, customary nonassignment provisions
entered into in the ordinary course of business in leases and other agreements
and customary restrictions contained in asset sale agreements limiting the
transfer of such property or assets pending the closing of such sale; (vii)
any restriction with respect to a Restricted Subsidiary imposed pursuant to an
agreement which has been entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted
Subsidiary, provided that the consummation of such transaction would not
result in a Default or an Event of Default, that such restriction terminates
if such transaction is not consummated and that the consummation or
abandonment of such transaction occurs within one year of the date such
agreement was entered into; (viii) pursuant to applicable law; and (ix)
pursuant to the Indenture and the Notes.
Limitation on Liens. The Company may not, and may not permit any Restricted
Subsidiary to, Incur or suffer to exist any Lien on or with respect to any
property or assets now owned or acquired after March 31, 1997 to secure any
Debt without making, or causing such Restricted
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Subsidiary to make, effective provision for securing the Notes (x) equally and
ratably with such Debt as to such property for so long as such Debt will be so
secured or (y) in the event such Debt is Debt of the Company which is
subordinate in right of payment to the Notes, prior to such Debt as to such
property for so long as such Debt will be so secured.
The foregoing restrictions shall not apply to: (i) Liens existing on March
31, 1997 and securing Debt outstanding on March 31, 1997; (ii) Liens in favor
of the Company or any Restricted Subsidiary; (iii) Liens to secure the Notes;
(iv) Liens to secure Restricted Subsidiary Guarantees; (v) Liens to secure
Debt under Credit Facilities permitted to be Incurred pursuant to clause (ii)
of paragraph (b) of "--Limitation on Consolidated Debt"; (vi) Liens on real or
personal property of the Company or a Restricted Subsidiary constructed,
installed, acquired or constituting improvements made after the date of
original issuance of the Notes to secure Purchase Money Debt permitted to be
Incurred pursuant to clause (iii) of paragraph (b) of "--Limitation on
Consolidated Debt"; provided, however, that (a) the principal amount of any
Debt secured by such a Lien does not exceed 100% of such purchase price or
cost of construction, installation or improvement of the property subject to
such Lien, (b) such Lien attaches to such property prior to, at the time of or
within 270 days after the acquisition, the completion of construction,
installation or improvement or the commencement of operation of such property
and (c) such Lien does not extend to or cover any property other than the
specific item of property (or portion thereof) acquired, constructed,
installed or constituting the improvements financed by the proceeds of such
Purchase Money Debt; (vii) Liens to secure Acquired Debt, provided, however,
that (a) such Lien attaches to the acquired asset prior to the time of the
acquisition of such asset and (b) such Lien does not extend to or cover any
other asset; (viii) Liens to secure Debt Incurred to extend, renew, refinance
or refund (or successive extensions, renewals, refinancings or refundings), in
whole or in part, Debt secured by any Lien referred to in the foregoing
clauses (i), (iii), (iv), (v), (vi) and (vii) so long as such Lien does not
extend to any other property and the principal amount of Debt so secured is
not increased except as otherwise permitted under clause (v) of paragraph (b)
under "--Limitation on Consolidated Debt" above or clause (x) under "--
Limitation on Debt and Preferred Stock of Restricted Subsidiaries" above; (ix)
Liens to secure debt consisting of Permitted Interest Rate and Currency
Protection Agreements permitted to be Incurred pursuant to clause (vi) of
paragraph (b) under "--Limitation on Consolidated Debt"; (x) Liens to secure
Debt secured by Receivables permitted to be Incurred pursuant to clause (vii)
of paragraph (b) under "--Limitation on Consolidated Debt"; (xi) Liens to
secure Debt of Restricted Subsidiaries permitted to be Incurred pursuant to
clause (viii) of paragraph (b) under "--Limitation on Consolidated Debt";
(xii) Liens not otherwise permitted by the foregoing clauses (i) through (xi)
in an amount not to exceed 5% of the Company's Consolidated Tangible Assets;
and (xiii) Permitted Liens.
Limitation on Issuances of Certain Guarantees by, and Debt Securities of,
Restricted Subsidiaries. The Company may not (i) permit any Restricted
Subsidiary to, directly or indirectly, guarantee any Debt Securities of the
Company or (ii) permit any Restricted Subsidiary to issue any Debt Securities
unless, in either such case, such Restricted Subsidiary simultaneously
executes and delivers Restricted Subsidiary Guarantees providing for a
Guarantee of payment of the Notes.
Limitation on Sale and Leaseback Transactions. The Company may not, and may
not permit any Restricted Subsidiary to, directly or indirectly, enter into,
assume, Guarantee or otherwise become liable with respect to any Sale and
Leaseback Transaction, other than a Sale and Leaseback Transaction between the
Company or a Restricted Subsidiary on the one hand and a Restricted Subsidiary
or the Company on the other hand, unless (i) the Company or such Restricted
Subsidiary would be entitled to Incur a Lien to secure Debt by reason of the
provisions described under "--Limitation on Liens" above, equal in amount to
the Attributable Value of the Sale and Leaseback Transaction without equally
and ratably securing the Notes and (ii) the Sale and Leaseback Transaction is
treated as an Asset Disposition and all of the conditions of the Indenture
described under "--Limitation on Asset Dispositions" below (including the
provisions concerning the application
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of Net Available Proceeds) are satisfied with respect to such Sale and
Leaseback Transaction, treating all of the consideration received in such Sale
and Leaseback Transaction as Net Available Proceeds for purposes of such
covenant.
Limitation on Asset Dispositions. The Company may not, and may not permit
any Restricted Subsidiary to, make any Asset Disposition unless: (i) the
Company or the Restricted Subsidiary, as the case may be, receives
consideration for such disposition at least equal to the Fair Market Value for
the assets sold or disposed of as determined by the board of directors of the
Company in good faith and evidenced by a resolution of the board of directors
of the Company filed with the Trustee; and (ii) at least 75% of the
consideration for such disposition consists of cash or Cash Equivalents or the
assumption of Debt of the Company (other than Debt that is subordinated to the
Notes) or of the Restricted Subsidiary and release from all liability on the
Debt assumed. If the aggregate amount of Net Available Proceeds within any 12-
month period exceeds $5 million, then all such Net Available Proceeds shall be
applied within 360 days of the last such Asset Disposition (1) first, to the
permanent repayment or reduction of Debt then outstanding under any Credit
Facility, to the extent such agreements would require such application or
prohibit payments pursuant to clause (2) following; (2) second, to the extent
of remaining Net Available Proceeds, to make an Offer to Purchase outstanding
Notes at a price in cash equal to 100% of the principal amount of the Notes
plus accrued and unpaid interest thereon and premium, if any, to the purchase
date and, to the extent required by the terms thereof, any other Debt of the
Company that is pari passu with the Notes at a price no greater than 100% of
the principal amount thereof plus accrued and unpaid interest to the purchase
date (or 100% of the accreted value plus accrued and unpaid interest and
premium, if any, to the purchase date in the case of original issue discount
Debt); (3) third, to the extent of any remaining Net Available Proceeds
following the completion of the Offer to Purchase, to the repayment of other
Debt of the Company or Debt of a Restricted Subsidiary, to the extent
permitted under the terms thereof; and (4) fourth, to the extent of any
remaining Net Available Proceeds, to any other use as determined by the
Company which is not otherwise prohibited by the Indenture. Limitation on
Issuances and Sales of Capital Stock of Restricted Subsidiaries. The Company
may not, and may not permit any Restricted Subsidiary to, issue, transfer,
convey, sell or otherwise dispose of any shares of Capital Stock of a
Restricted Subsidiary or securities convertible or exchangeable into, or
options, warrants, rights or any other interest with respect to, Capital Stock
of a Restricted Subsidiary to any Person other than the Company or a
Restricted Subsidiary except (i) a sale of all of the Capital Stock of such
Restricted Subsidiary owned by the Company and any Restricted Subsidiary that
complies with the provisions described under "--Limitation on Asset
Dispositions" above to the extent such provisions apply, (ii) in a transaction
that results in such Restricted Subsidiary becoming a Permitted Joint Venture,
provided (x) such transaction complies with the provisions described under "--
Limitation on Asset Dispositions" above to the extent such provisions apply
and (y) the Company's remaining Investment in such Permitted Joint Venture
would have been permitted as a new Investment under the provisions of "--
Limitation on Restricted Payments" above, (iii) the transfer, conveyance, sale
or other disposition of shares required by applicable law or regulation, (iv)
if required, the issuance, transfer, conveyance, sale or other disposition of
directors' qualifying shares, or (v) Disqualified Stock issued in exchange
for, or upon conversion of, or the proceeds of the issuance of which are used
to redeem, refinance, replace or refund shares of Disqualified Stock of such
Restricted Subsidiary, provided that the amounts of the redemption obligations
of such Disqualified Stock shall not exceed the amounts of the redemption
obligations of, and such Disqualified Stock shall have redemption obligations
no earlier than those required by, the Disqualified Stock being exchanged,
converted, redeemed, refinanced, replaced or refunded.
Transactions with Affiliates and Related Persons. The Company may not, and
may not permit any Restricted Subsidiary to, enter into any transaction (or
series of related transactions) with an Affiliate or Related Person of the
Company (other than the Company or a Restricted Subsidiary), including any
Investment, unless such transaction is on terms no less favorable to the
Company or
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such Restricted Subsidiary than those that could be obtained in a comparable
arm's-length transaction with an entity that is not an Affiliate or Related
Person and is in the best interests of the Company or such Restricted
Subsidiary, provided that the Company or any Restricted Subsidiary may enter
into (i) transactions pursuant to the Company's existing tax sharing agreement
entered into with Anschutz Company described under the caption "Certain
Transactions" in this Prospectus, provided that any amendment of, supplement
to or substitute for such agreement is on terms that are no less favorable to
the Company or such Restricted Subsidiary than such existing agreement, (ii)
transactions pursuant to employee compensation arrangements approved by the
board of directors of the Company, either directly or indirectly, and (iii)
Receivables Sales between the Company or a Restricted Subsidiary and an
Affiliate of the Company or such Restricted Subsidiary, provided that such
Receivables Sales satisfy the provisions of clauses (i) and (ii) of "--
Limitation on Asset Dispositions." For any transaction that involves in excess
of $10 million but less than or equal to $15 million, the Company shall
deliver to the Trustee an Officers' Certificate stating that the transaction
satisfies the above criteria. For any transaction that involves in excess of
$15 million, a majority of the disinterested members of the board of directors
of the Company shall determine that the transaction satisfies the above
criteria and shall evidence such a determination by a board resolution filed
with the Trustee or, in the event that there shall not be disinterested
members of the board of directors with respect to the transaction, the Company
shall file with the Trustee a written opinion stating that the transaction
satisfies the above criteria from an investment banking firm of national
standing in the United States which, in the good faith judgment of the board
of directors of the Company, is independent with respect to the Company and
its Affiliates and qualified to perform such task.
Change of Control. Within 30 days of the occurrence of a Change of Control,
the Company will be required to make an Offer to Purchase all outstanding
Notes at a price in cash equal to 101% of the principal amount of the Notes
plus accrued and unpaid interest thereon and premium, if any, to the purchase
date. A "Change of Control" will be deemed to have occurred at such time as
(x) a Rating Decline shall have occurred and (y) either (A) the sale,
conveyance, transfer or lease of all or substantially all of the assets of the
Company to any Person or any Persons acting together that would constitute a
"group" (a "Group") for purposes of Section 13(d) of the Exchange Act,
together with any Affiliates or Related Persons thereof, other than any
Permitted Holder or any Restricted Subsidiary, shall have occurred; (B) any
Person or Group, together with any Affiliates or Related Persons thereof,
other than any Permitted Holder or any Restricted Subsidiary, shall
beneficially own (within the meaning of Rule 13d-3 under the Exchange Act,
except that a Person will be deemed to have beneficial ownership of all shares
that such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time) at least 50% of the aggregate
voting power of all classes of Voting Stock of the Company at a time when
Permitted Holders own less than or equal to 25% of the aggregate voting power
of all classes of Voting Stock of the Company; or (C) during any period of two
consecutive years, Continuing Directors cease for any reason to constitute a
majority of the Company's board of directors then in office.
In the event that the Company makes an Offer to Purchase the Notes, the
Company intends to comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1
under, the Exchange Act.
The existence of the holders' right to require, subject to certain
conditions, the Company to repurchase Notes upon a Change of Control may deter
a third party from acquiring the Company in a transaction that constitutes a
Change of Control. If an Offer to Purchase is made, there can be no assurance
that the Company will have sufficient funds to pay the Purchase Price for all
Notes tendered by holders seeking to accept the Offer to Purchase. In
addition, instruments governing other Debt of the Company may prohibit the
Company from purchasing any Notes prior to their Stated Maturity, including
pursuant to an Offer to Purchase. See "Description of Certain Indebtedness."
In the event that an Offer to Purchase occurs at a time when the Company does
not have sufficient available funds
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to pay the Purchase Price for all Notes tendered pursuant to such Offer to
Purchase or a time when the Company is prohibited from purchasing the Notes
(and the Company is unable either to obtain the consent of the holders of the
relevant Debt or to repay such Debt), an Event of Default would occur under
the Indenture. In addition, one of the events that constitutes a Change of
Control under the Indenture is a sale, conveyance, transfer or lease of all or
substantially all of the property of the Company. The Indenture will be
governed by New York law, and there is no established definition under New
York law of "substantially all" of the assets of a corporation. Accordingly,
if the Company were to engage in a transaction in which it disposed of less
than all of its assets, a question of interpretation could arise as to whether
such disposition was of "substantially all" of its assets and whether the
Company was required to make an Offer to Purchase.
Except as described herein with respect to a Change of Control, the
Indenture does not contain any other provisions that permit holders of Notes
to require that the Company repurchase or redeem Notes in the event of a
takeover, recapitalization or similar restructuring.
SEC Reports. The Company shall provide the Trustee, the Initial Purchasers
of the Notes, the holders of the Notes and (upon request) prospective holders
of the Notes with annual and quarterly reports and such other information as
is specified under Sections 13 and 15(d) of the Exchange Act ("SEC Reports")
on the date on which the Company is required to file the same with the
Commission. In the event the Company shall cease to be required to file SEC
Reports pursuant to the Exchange Act, the Company will nevertheless continue
to file such reports with the Commission (unless the Commission will not
accept such a filing) and the Trustee. The Company will furnish copies of the
SEC Reports to the holders of Notes at the time the Company is required to
file the same with the Trustee and will make such information available to
investors who request it in writing.
Limitation on Designations of Unrestricted Subsidiaries. The Indenture will
provide that the Company will not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made) as an "Unrestricted Subsidiary" under the Indenture (a
"Designation") unless:
(a) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such Designation;
(b) immediately after giving effect to such Designation, the Company would
be able to Incur $1.00 of Debt under paragraph (a) of "--Limitation on
Consolidated Debt"; and
(c) the Company would not be prohibited under the Indenture from making an
Investment at the time of Designation (assuming the effectiveness of such
Designation) in an amount (the "Designation Amount") equal to the Fair Market
Value of the net Investment of the Company or any other Restricted Subsidiary
in such Restricted Subsidiary on such date.
In the event of any such Designation, the Company shall be deemed to have
made an Investment constituting a Restricted Payment pursuant to the covenant
"--Limitation on Restricted Payments" for all purposes of the Indenture in the
Designation Amount. The Indenture will further provide that neither the
Company nor any Restricted Subsidiary shall at any time (x) provide credit
support for, or a guarantee of, any Debt of any Unrestricted Subsidiary
(including any undertaking, agreement or instrument evidencing such Debt);
provided that the Company or a Restricted Subsidiary may pledge Capital Stock
or Debt of any Unrestricted Subsidiary on a nonrecourse basis such that the
pledgee has no claim whatsoever against the Company other than to obtain such
pledged property, (y) be directly or indirectly liable for any Debt of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any Debt
which provides that the holder thereof may (upon notice, lapse of time or
both) declare a default thereon or cause the payment thereof to be accelerated
or payable prior to its final scheduled maturity upon the occurrence of a
default with respect to any Debt of any Unrestricted Subsidiary (including any
right to take enforcement action against such Unrestricted Subsidiary), except
in the case of clause (x) or (y) to the extent permitted under "--Limitation
on Restricted Payments" and "--Transactions with Affiliates and Related
Persons."
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The Indenture will further provide that a Designation may be revoked (a
"Revocation") by a resolution of the board of directors of the Company
delivered to the Trustee, provided that the Company will not make any
Revocation unless:
(a) no Default or Event of Default shall have occurred and be continuing at
the time of and after giving effect to such Revocation; and
(b) all Liens and Debt of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if Incurred at such time, have
been permitted to be Incurred at such time for all purposes of the Indenture.
All Designations and Revocations must be evidenced by resolutions of the
board of directors of the Company delivered to the Trustee certifying
compliance with the foregoing provisions.
MERGERS, CONSOLIDATIONS AND CERTAIN SALES OF ASSETS
The Company may not, in a single transaction or a series of related
transactions, (i) consolidate with or merge into any other Person or Persons
or permit any other Person to consolidate with or merge into the Company
(other than a merger of Qwest Corporation into the Company in which the
Company shall be the surviving Person) or (ii) directly or indirectly,
transfer, sell, lease or otherwise dispose of all or substantially all of its
assets to any other Person or Persons unless: (a) in a transaction in which
the Company is not the surviving Person or in which the Company sells, leases
or otherwise disposes of all or substantially all of its assets to any other
Person, the resulting surviving or transferee Person (the "successor entity")
is organized under the laws of the United States of America or any State
thereof or the District of Columbia and shall expressly assume, by
supplemental indentures executed and delivered to the Trustee in form
satisfactory to the Trustee, all of the Company's respective obligations under
the Indenture; (b) immediately before and after giving effect to such
transaction and treating any Debt which becomes an obligation of the Company
or a Restricted Subsidiary as a result of such transaction as having been
Incurred by the Company or such Restricted Subsidiary at the time of the
transaction, no Default or Event of Default shall have occurred and be
continuing; (c) immediately after giving effect to such transaction, the
Consolidated Net Worth of the Company (or other successor entity to the
Company) is equal to or greater than that of the Company immediately prior to
the transaction; (d) immediately after giving effect to such transaction and
treating any Debt which becomes an obligation of the Company or a Restricted
Subsidiary as a result of such transaction as having been Incurred by the
Company or such Restricted Subsidiary at the time of the transaction, the
Company (including any successor entity to the Company) could Incur at least
$1.00 of additional Debt pursuant to the provisions of the Indenture described
in paragraph (a) under "--Certain Covenants--Limitation on Consolidated Debt"
above; (e) if, as a result of any such transaction, property or assets of the
Company would become subject to a Lien prohibited by the provisions of the
Indenture described under "--Certain Covenants--Limitation on Liens" above,
the Company or the successor entity to the Company shall have secured the
Notes as required by said covenant; and (f) certain other conditions are met.
CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
"Acquired Debt" means, with respect to any specified Person, (i) Debt of any
other Person existing at the time such Person merges with or into or
consolidates with or becomes a Subsidiary of such specified Person and (ii)
Debt secured by a Lien encumbering any asset acquired by such specified
Person, which Debt was not incurred in anticipation of, and was outstanding
prior to, such merger, consolidation or acquisition.
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"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Asset Disposition" means any transfer, conveyance, sale, lease or other
disposition by the Company or any Restricted Subsidiary in one or more related
transactions occurring within any 12-month period (including a consolidation
or merger or other sale of any such Restricted Subsidiary with, into or to
another Person in a transaction in which such Restricted Subsidiary ceases to
be a Restricted Subsidiary of the Company, but excluding a disposition by a
Restricted Subsidiary to the Company or a Restricted Subsidiary or by the
Company to a Restricted Subsidiary) of (i) shares of Capital Stock or other
ownership interests of a Restricted Subsidiary (other than as permitted by the
provisions of the Indenture described in clauses (iii), (iv) and (v) of
section 1019 of the Indenture), (ii) substantially all of the assets of the
Company or any Restricted Subsidiary representing a division or line of
business or (iii) other assets or rights of the Company or any Restricted
Subsidiary outside of the ordinary course of business (excluding any transfer,
conveyance, sale, lease or other disposition of equipment that is obsolete or
no longer used by or useful to the Company, provided that the Company has
delivered to the Trustee an Officers' Certificate stating that such criteria
are satisfied); provided in each case that the aggregate consideration for
such transfer, conveyance, sale, lease or other disposition is equal to
$500,000 or more in any 12-month period and provided further that the
following shall not be Asset Dispositions: (x) Permitted Telecommunications
Capital Asset Dispositions, (y) exchanges of Telecommunications Assets for
other Telecommunications Assets where the Fair Market Value of the
Telecommunications Assets received is at least equal to the Fair Market Value
of the Telecommunications Assets disposed of or, if less, the difference is
received in cash and such cash is Net Available Proceeds and (z) Liens
permitted to be Incurred pursuant to the second paragraph under "--Limitation
on Liens."
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the total net amount
of rent required to be paid by such Person under such lease during the initial
term thereof as determined in accordance with generally accepted accounting
principles, discounted from the last date of such initial term to the date of
determination at a rate per annum equal to the discount rate which would be
applicable to a Capital Lease Obligation with like term in accordance with
generally accepted accounting principles. The net amount of rent required to
be paid under any such lease for any such period shall be the aggregate amount
of rent payable by the lessee with respect to such period after excluding
amounts required to be paid on account of insurance, taxes, assessments,
utility, operating and labor costs and similar charges. In the case of any
lease which is terminable by the lessee upon the payment of penalty, such net
amount shall also include the lesser of the amount of such penalty (in which
case no rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated) or the rent
which would otherwise be required to be paid if such lease is not so
terminated. "Attributable Value" means, as to a Capital Lease Obligation, the
principal amount thereof.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required
to be classified and accounted for as a capital lease or a liability on the
face of a balance sheet of such Person in accordance with generally accepted
accounting principles (a "Capital Lease"). The stated maturity of such
obligation shall be the date of the last payment of rent or any other amount
due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty. The principal amount of
such obligation shall be the capitalized amount thereof that would appear on
the face of a balance sheet of such Person in accordance with generally
accepted accounting principles.
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"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general
or limited, of such Person.
"Cash Equivalents" means (i) any Debt with a maturity of 365 days or less
issued or directly and fully guaranteed as insured by the United States or any
agency or instrumentality thereof (provided that the full faith and credit of
the United States is pledged in support thereof or such Debt constitutes a
general obligation of such country); (ii) deposits, certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System, in each case having combined
capital and surplus and undivided profits (or any similar capital concept) of
not less than $500 million and whose senior unsecured debt is rated at least
"A-1" by Standard & Poor's Corporation or "P-1" by Moody's Investors Service,
Inc.; (iii) commercial paper with a maturity of 365 days or less issued by a
corporation (other than an Affiliate of the Company) organized under the laws
of the United States or any State thereof and rated at least "A-1" by Standard
& Poor's Corporation or "P-1" by Moody's Investors Service, Inc.; and (iv)
repurchase agreements and reverse repurchase agreements relating to marketable
direct obligations issued or unconditionally guaranteed by the United States
or issued by any agency or instrumentality thereof and backed by the full
faith and credit of the United States maturing within 365 days from the date
of acquisition.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding
up of such Person, to shares of Capital Stock of any other class of such
Person.
"Consolidated Capital Ratio" of any Person as of any date means the ratio of
(i) the aggregate consolidated principal amount of Debt of such Person then
outstanding to (ii) the greater of either (a) the aggregate consolidated paid-
in capital of such Person as of such date or (b) the stockholders' equity as
of such date as shown on the consolidated balance sheet of such Person in
accordance with generally accepted accounting principles.
"Consolidated Cash Flow Available for Fixed Charges" for any period means
the Consolidated Net Income of the Company and its Restricted Subsidiaries for
such period increased by the sum of (i) Consolidated Interest Expense of the
Company and its Restricted Subsidiaries for such period, plus (ii)
Consolidated Income Tax Expense of the Company and its Subsidiaries for such
period, plus (iii) the consolidated depreciation and amortization expense or
other non-cash write-offs of assets included in the income statement of the
Company and its Restricted Subsidiaries for such period, plus (iv) any charge
related to any premium or penalty paid in connection with redeeming or
retiring any Debt prior to its stated maturity; provided, however, that there
shall be excluded therefrom the Consolidated Cash Flow Available for Fixed
Charges (if positive) of any Restricted Subsidiary (calculated separately for
such Restricted Subsidiary in the same manner as provided above for the
Company) that is subject to a restriction which prevents the payment of
dividends or the making of distributions to the Company or another Restricted
Subsidiary to the extent of such restriction.
"Consolidated Income Tax Expense" for any period means the aggregate amounts
of the provisions for income taxes of the Company and its Subsidiaries for
such period calculated on a consolidated basis in accordance with generally
accepted accounting principles.
"Consolidated Interest Expense" means for any period the interest expense
included in a consolidated income statement (excluding interest income) of the
Company and its Restricted Subsidiaries for such period in accordance with
generally accepted accounting principles, including without limitation or
duplication (or, to the extent not so included, with the addition of), (i) the
amortization of Debt discounts; (ii) any payments or fees with respect to
letters of credit, bankers'
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acceptances or similar facilities; (iii) fees with respect to interest rate
swap or similar agreements or foreign currency hedge, exchange or similar
agreements; (iv) Preferred Stock dividends of the Company and its Subsidiaries
(other than dividends paid in shares of Preferred Stock that is not
Disqualified Stock) declared and paid or payable; (v) accrued Disqualified
Stock dividends of the Company and its Restricted Subsidiaries, whether or not
declared or paid; (vi) interest on Debt guaranteed by the Company and its
Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation
paid during such period that is allocable to interest expense.
"Consolidated Net Income" for any period means the net income (or loss) of
the Company and its Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with generally accepted accounting
principles; provided that there shall be excluded therefrom (a) the net income
(or loss) of any Person acquired by the Company or a Restricted Subsidiary in
a pooling-of-interests transaction for any period prior to the date of such
transaction, (b) the net income (or loss) of any Person that is not a
Restricted Subsidiary except to the extent of the amount of dividends or other
distributions actually paid to the Company or a Restricted Subsidiary by such
Person during such period, (c) gains or losses on Asset Dispositions by the
Company or its Restricted Subsidiaries, (d) all extraordinary gains and
extraordinary losses, determined in accordance with generally accepted
accounting principles, (e) the cumulative effect of changes in accounting
principles, (f) non-cash gains or losses resulting from fluctuations in
currency exchange rates, (g) any non-cash expense related to the issuance to
employees or directors of the Company or any Restricted Subsidiary or any
Affiliate of the Company of (i) options to purchase Capital Stock of the
Company or such Restricted Subsidiary or (ii) other compensatory rights
(including under the Company's Growth Share Plan), provided, in either case,
that such options or rights, by their terms, can be redeemed only for Capital
Stock, (h) with respect to a Restricted Subsidiary that is not a Wholly Owned
Subsidiary, any aggregate net income (or loss) in excess of the Company's or
any Restricted Subsidiary's pro rata share of the net income (or loss) of such
Restricted Subsidiary that is not a Wholly Owned Subsidiary shall be excluded
and (i) the tax effect of any of the items described in clauses (a) through
(h) above; provided further that for purposes of any determination pursuant to
the provisions described under "--Certain Covenants--Limitation on Restricted
Payments," there shall further be excluded therefrom the net income (but not
net loss) of any Restricted Subsidiary that is subject to a restriction which
prevents the payment of dividends or the making of distributions to the
Company or another Restricted Subsidiary to the extent of such restriction.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person, determined on a consolidated basis in accordance with generally
accepted accounting principles, less amounts attributable to Disqualified
Stock of such Person; provided that, with respect to the Company, adjustments
following March 31, 1997 to the accounting books and records of the Company in
accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or
successor opinions thereto) or otherwise resulting from the acquisition of
control of the Company by another Person shall not be given effect to.
"Consolidated Tangible Assets" of any Person means the total amount of
assets (less applicable reserves and other properly deductible items) which
under generally accepted accounting principles would be included on a
consolidated balance sheet of such Person and its Subsidiaries after deducting
therefrom all goodwill, trade names, trademarks, patents, unamortized debt
discount and expense and other like intangibles, which in each case under
generally accepted accounting principles would be included on such
consolidated balance sheet.
"Continuing Director" means, as of any date of determination, any member of
the board of directors of the Company who (i) was a member of such board of
directors of the Company on March 31, 1997, or (ii) was nominated for election
or elected to the board of directors of the Company with the affirmative vote
of a majority of the Continuing Directors who were members of the board of
directors of the Company at the time of such nomination or election or the
affirmative vote of Permitted Holders.
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"Credit Facilities" means one or more credit agreements, loan agreements or
similar facilities, secured or unsecured, entered into from time to time by
the Company and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified,
restated or replaced from time to time.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or
not contingent, (i) every obligation of such Person for money borrowed, (ii)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses, (iii) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person, (iv)
every obligation of such Person issued or assumed as the deferred purchase
price of property or services (including securities repurchase agreements but
excluding trade accounts payable or accrued liabilities arising in the
ordinary course of business), (v) every Capital Lease Obligation of such
Person, (vi) all Receivables Sales of such Person, together with any
obligation of such Person to pay any discount, interest, fees, indemnities,
penalties, recourse, expenses or other amounts in connection therewith, (vii)
all obligations to redeem Disqualified Stock issued by such Person, (viii)
every obligation under Interest Rate and Currency Protection Agreements of
such Person and (ix) every obligation of the type referred to in clauses (i)
through (viii) of another Person and all dividends of another Person the
payment of which, in either case, such Person has Guaranteed. The "amount" or
"principal amount" of Debt at any time of determination as used herein
represented by (a) any Debt issued at a price that is less than the principal
amount at maturity thereof, shall be the amount of the liability in respect
thereof determined in accordance with generally accepted accounting
principles, (b) any Receivables Sale shall be the amount of the unrecovered
capital or principal investment of the purchaser (other than the Company or a
Wholly Owned Subsidiary of the Company) thereof, excluding amounts
representative of yield or interest earned on such investment or (c) any
Disqualified Stock shall be the maximum fixed redemption or repurchase price
in respect thereof.
"Debt Securities" means any debt securities (including any guarantee of such
securities) issued by the Company or any Restricted Subsidiary of the Company
in connection with a public offering or a private placement (excluding Debt
permitted to be Incurred under paragraph (b) of "--Certain Covenants--
Limitation on Consolidated Debt").
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Disqualified Stock" of any Person means any Capital Stock of such Person
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is redeemable at the option of such Person, any
Subsidiary of such Person or the holder thereof, in whole or in part, on or
prior to the final Stated Maturity of the Notes, provided, however, that any
Preferred Stock which would not constitute Disqualified Stock but for
provisions thereof giving holders thereof the right to require the Company to
repurchase or redeem such Preferred Stock upon the occurrence of a Change of
Control occurring prior to the final Stated Maturity of the Notes shall not
constitute Disqualified Stock if the change of control provisions applicable
to such Preferred Stock are no more favorable to the holders of such Preferred
Stock than the provisions applicable to the Notes contained in the covenant
described under "--Certain Covenants--Change of Control" and such Preferred
Stock specifically provides that the Company will not repurchase or redeem any
such stock pursuant to such provisions prior to the Company's repurchase of
such Notes as are required to be repurchased pursuant to the covenant
described under "--Certain Covenants--Change of Control."
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"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent
in foreign currency, whose debt is rated "A" (or higher) according to Standard
& Poor's Corporation or Moody's Investors Service, Inc. at the time as of
which any investment or rollover therein is made.
"Eligible Receivables" means, at any time, Receivables of the Company and
its Restricted Subsidiaries, as evidenced on the most recent quarterly
consolidated balance sheet of the Company as at a date at least 45 days prior
to such time, less Receivables of the Company or any Restricted Subsidiary
employed to secure Debt Incurred under clause (vii) of paragraph (b) of "--
Certain Covenants--Limitation on Consolidated Debt."
"Event of Default" has the meaning set forth under "Events of Default"
below.
"Exchange Act" means the Securities Exchange Act of 1934, as amended (or any
successor act) and the rules and regulations thereunder (or respective
successors thereto).
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arm's-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under
pressure or compulsion to complete the transaction. Unless otherwise specified
in the Indenture, Fair Market Value shall be determined by the board of
directors of the Company acting in good faith and shall be evidenced by a
resolution of the board of directors of the Company delivered to the Trustee.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged and
which have a remaining weighted average life to maturity of not less than one
year from the date of investment therein.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing, or having the economic effect of guaranteeing, any
Debt of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, and including, without limitation, any obligation of
such Person, (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such Debt, (ii) to
purchase property, securities or services for the purpose of assuring the
holder of such Debt of the payment of such Debt, or (iii) to maintain working
capital, equity capital or other financial statement condition or liquidity of
the primary obligor so as to enable the primary obligor to pay such Debt (and
"Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative
to the foregoing); provided, however, that the Guarantee by any Person shall
not include endorsements by such Person for collection or deposit, in either
case, in the ordinary course of business.
"Guarantor" means a Restricted Subsidiary of the Company that has executed a
Restricted Subsidiary Guarantee.
"Incur" means, with respect to any Debt or other obligation of any Person,
to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other
obligation including by acquisition of Subsidiaries or the recording, as
required pursuant to generally accepted accounting principles or otherwise, of
any such Debt or other obligation on the balance sheet of such Person (and
"Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in generally
accepted accounting principles that results in an obligation of such Person
that exists at such time becoming Debt shall not be deemed an Incurrence of
such Debt and that neither the accrual of interest nor the accretion of
original issue discount shall be deemed an Incurrence of Debt.
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"Interest Rate or Currency Protection Agreement" of any Person means any
forward contract, futures contract, swap, option or other financial agreement
or arrangement (including, without limitation, caps, floors, collars and
similar agreements) relating to, or the value of which is dependent upon,
interest rates or currency exchange rates or indices.
"Investment" by any Person means any direct or indirect loan, advance or
other extension of credit or capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of
Debt issued by, any other Person, including any payment on a Guarantee of any
obligation of such other Person.
"Lien" means, with respect to any property or assets, any mortgage or deed
of trust, pledge, hypothecation, assignment, Receivables Sale, deposit
arrangement, security interest, lien, charge, easement (other than any
easement not materially impairing usefulness), encumbrance, preference,
priority or other security agreement or preferential arrangement of any kind
or nature whatsoever on or with respect to such property or assets (including,
without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing). For
purposes of this definition the sale, lease, conveyance or other transfer by
the Company or any Subsidiary of, including the grant of indefeasible rights
of use or equivalent arrangements with respect to, dark or lit communications
fiber capacity or communications conduit shall not constitute a Lien.
"Net Available Proceeds" from any Asset Disposition by any Person means cash
or Cash Equivalents received (including amounts received by way of sale or
discounting of any note, installment receivable or other receivable, but
excluding any other consideration received in the form of assumption by the
acquiror of Debt or other obligations relating to such properties or assets)
therefrom by such Person, net of (i) any portion thereof Invested within 360
days of such Asset Disposition in Telecommunications Assets, (ii) all legal,
title and recording tax expenses, commissions and other fees and expenses
Incurred and all federal, state, provincial, foreign and local taxes required
to be accrued as a liability as a consequence of such Asset Disposition, (iii)
all payments made by such Person or its Subsidiaries on any Debt which is
secured by such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must by the terms of such Lien, or in order to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition, (iv) all distributions
and other payments made to minority interest holders in Subsidiaries of such
Person or Permitted Joint Ventures as a result of such Asset Disposition and
(v) appropriate amounts to be provided by such Person or any Subsidiary
thereof, as the case may be, as a reserve in accordance with generally
accepted accounting principles against any liabilities associated with such
assets and retained by such Person or any Subsidiary thereof, as the case may
be, after such Asset Disposition, including, without limitation, liabilities
under any indemnification obligations and severance and other employee
termination costs associated with such Asset Disposition, in each case as
determined by the board of directors of such Person, in its reasonable good
faith judgment evidenced by a resolution of the board of directors filed with
the Trustee; provided, however, that any reduction in such reserve within
twelve months following the consummation of such Asset Disposition will be for
all purposes of the Indenture and the Notes as a new Asset Disposition at the
time of such reduction with Net Available Proceeds equal to the amount of such
reduction.
"Offer to Purchase" means a written offer (the "Offer") sent by the Company
by first class mail, postage prepaid, to each holder of Notes at its address
appearing in the Note Register on the date of the Offer offering to purchase
up to the principal amount of Notes specified in such Offer at the purchase
price specified in such Offer (as determined pursuant to the Indenture).
Unless otherwise required by applicable law, the Offer shall specify an
expiration date (the "Expiration Date") of the Offer to Purchase which shall
be, subject to any contrary requirements of applicable law, not less than 30
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days or more than 60 days after the date of such Offer and a settlement date
(the "Purchase Date") for purchase of Notes within five Business Days after
the Expiration Date. The Company shall notify the Trustee at least 15 Business
Days (or such shorter period as is acceptable to the Trustee) prior to the
mailing of the Offer of the Company's obligation to make an Offer to Purchase,
and the Offer shall be mailed by the Company or, at the Company's request, by
the Trustee in the name and at the expense of the Company. The Offer shall
contain information concerning the business of the Company and its
Subsidiaries which the Company in good faith believes will enable such holders
to make an informed decision with respect to the Offer to Purchase (which at a
minimum will include (i) the most recent annual and quarterly financial
statements and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" contained in the documents required to be filed
with the Trustee pursuant to the Indenture (which requirements may be
satisfied by delivery of such documents together with the Offer), (ii) a
description of material developments in the Company's business subsequent to
the date of the latest of such financial statements referred to in clause (i)
(including a description of the events requiring the Company to make the Offer
to Purchase), (iii) if applicable, appropriate pro forma financial information
concerning the Offer to Purchase and the events requiring the Company to make
the Offer to Purchase and (iv) any other information required by applicable
law to be included therein). The Offer shall contain all instructions and
materials necessary to enable such holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
a. the Section of the Indenture pursuant to which the Offer to Purchase
is being made;
b. the Expiration Date and the Purchase Date;
c. the aggregate principal amount of the outstanding Notes offered to be
purchased by the Company pursuant to the Offer to Purchase (including, if
less than 100%, the manner by which such has been determined pursuant to
the section hereof requiring the Offer to Purchase) (the "Purchase
Amount");
d. the purchase price to be paid by the Company for each $1,000 aggregate
principal amount of Notes accepted for payment (as specified pursuant to
the Indenture) (the "Purchase Price");
e. that the holder may tender all or any portion of the Notes registered
in the name of such holder and that any portion of a Note tendered must be
tendered in an integral multiple of $1,000 principal amount;
f. the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
g. that any Notes not tendered or tendered but not purchased by the
Company will continue to accrue interest;
h. that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
i. that each holder electing to tender a Note pursuant to the Offer to
Purchase will be required to surrender such Note at the place or places
specified in the Offer prior to the close of business on the Expiration
Date (such Note being, if the Company or the Trustee so requires, duly
endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Trustee duly executed by, the holder
thereof or his attorney duly authorized in writing);
j. that holders will be entitled to withdraw all or any portion of Notes
tendered if the Company (or its paying agent) receives, not later than the
close of business on the Expiration Date, a telegram, telex, facsimile
transmission or letter setting forth the name of the holder, the principal
amount of the Note the holder tendered, the certificate number of the Note
the holder tendered and a statement that such holder is withdrawing all or
a portion of his tender;
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k. that (a) if Notes in an aggregate principal amount less than or equal
to the Purchase Amount are duly tendered and not withdrawn pursuant to the
Offer to Purchase, the Company shall purchase all such Notes and (b) if
Notes in an aggregate principal amount in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the Company
shall purchase Notes having an aggregate principal amount equal to the
Purchase Amount on a pro rata basis (with such adjustments as may be deemed
appropriate so that only Notes in denominations of $1,000 or integral
multiples thereof shall be purchased); and
l. that in the case of any holder whose Note is purchased only in part,
the Company shall execute, and the Trustee shall authenticate and deliver
to the holder of such Note without service charge, a new Note or Notes, of
any authorized denomination as requested by such holder, in an aggregate
principal amount equal to and in exchange for the unpurchased portion of
the Note so tendered.
Any Offer to Purchase shall be governed by and effected in accordance with
the Offer for such Offer to Purchase.
"Officers' Certificate" means a certificate signed by the Chairman of the
board of directors of the Company, a Vice Chairman of the board of directors
of the Company, the President or a Vice President, and by the Chief Financial
Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer,
the Secretary or an Assistant Secretary of the Company and delivered to the
Trustee, which shall comply with the Indenture.
"Opinion of Counsel" means an opinion of counsel acceptable to the Trustee
(who may be counsel to the Company, including an employee of the Company).
"Permitted Holders" means any Person who was the beneficial owner (within
the meaning of Rule 13d-3 under the Exchange Act) of stock of the Company on
March 31, 1997, and any Affiliates of such Person (i) who were Affiliates of
such Person on March 31, 1997 or (ii) who were formed, directly or indirectly,
by any such Person after March 31, 1997, provided, however, that Persons who
were beneficial owners (within the meaning of Rule 13d-3 under the Exchange
Act) of such Person on March 31, 1997 continued to be beneficial owners
(within the meaning of Rule 13d-3 under the Exchange Act) at the time of
formation of such Affiliate.
"Permitted Interest Rate or Currency Protection Agreement" of any Person
means any Interest Rate or Currency Protection Agreement entered into with one
or more financial institutions in the ordinary course of business that is
designed to protect such Person against fluctuations in interest rates or
currency exchange rates with respect to Debt Incurred and which shall have a
notional amount no greater than the payments due with respect to the Debt
being hedged thereby and not for purposes of speculation.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
loans, advances or extensions of credit to employees and directors made in the
ordinary course of business and consistent with past practice; (d) obligations
under Interest Rate or Currency Protection Agreements; (e) bonds, notes,
debentures and other securities received as a result of Asset Dispositions
pursuant to and in compliance with "--Certain Covenants--Limitation on Asset
Dispositions"; (f) Investments made in the ordinary course of business as
partial payment for constructing a network relating to a Telecommunications
Business; (g) commercially reasonable extensions of trade credit; (h)
Investments in any Person as a result of which such Person becomes a
Restricted Subsidiary; (i) Investments in Permitted Joint Ventures in an
aggregate amount not to exceed $25 million; (j) Investments in Affiliates or
Related Persons in an aggregate amount not to exceed $11 million, provided
that the making of such Investments is permitted under "--Certain Covenants--
Transactions with Affiliates and Related Persons"; and (k) Investments in an
aggregate amount not to exceed $15 million consisting of the contribution by
the Company or any Restricted Subsidiary of assets located in Mexico to joint
ventures in which the Company or a Restricted Subsidiary has an interest.
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"Permitted Joint Venture" means a corporation, partnership or other entity
other than a Restricted Subsidiary engaged in one or more Telecommunications
Businesses over which the Company and/or one or more Strategic Investors have,
directly or indirectly, the power to direct the policies, management and
affairs.
"Permitted Liens" means (a) Liens for taxes, assessments, governmental
charges, levies or claims which are not yet delinquent or which are being
contested in good faith by appropriate proceedings, if a reserve or other
appropriate provision, if any, as shall be required in conformity with
generally accepted accounting principles shall have been made therefor; (b)
other Liens incidental to the conduct of the Company's and its Restricted
Subsidiaries' businesses or the ownership of its property and assets not
securing any Debt, and which do not in the aggregate materially detract from
the value of the Company's and its Restricted Subsidiaries' property or assets
when taken as a whole, or materially impair the use thereof in the operation
of its business; (c) Liens with respect to assets of a Restricted Subsidiary
granted by such Restricted Subsidiary to the Company or a Restricted
Subsidiary to secure Debt owing to the Company or such Restricted Subsidiary;
(d) Liens, pledges and deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of statutory obligations; (e) Liens, pledges or deposits made to secure the
performance of tenders, bids, leases, public or statutory obligations,
sureties, stays, appeals, indemnities, performance or other similar bonds and
other obligations of like nature Incurred in the ordinary course of business
(exclusive of obligations for the payment of borrowed money); (f) zoning
restrictions, servitudes, easements, rights-of-way, restrictions and other
similar charges or encumbrances Incurred in the ordinary course of business
which, in the aggregate, do not materially detract from the value of the
property subject thereto or materially interfere with the ordinary conduct of
the business of the Company or its Restricted Subsidiaries; (g) Liens arising
out of judgments or awards against or other court proceedings concerning the
Company or any Restricted Subsidiary with respect to which the Company or such
Restricted Subsidiary is prosecuting an appeal or proceeding for review and
the Company or such Restricted Subsidiary is maintaining adequate reserves in
accordance with generally accepted accounting principles; and (h) any interest
or title of a lessor in the property subject to any lease other than a Capital
Lease.
"Permitted Telecommunications Capital Asset Disposition" means the transfer,
conveyance, sale, lease or other disposition of a capital asset that is a
Telecommunications Asset (including fiber, conduit and related equipment), (i)
the proceeds of which are treated as revenues by the Company in accordance
with generally accepted accounting principles and (ii) that, in the case of
the sale of fiber, would not result in the Company retaining less than 24
fibers per route mile on any segment of the Company's network.
"Person" means any individual, corporation, partnership, joint venture,
association, joint stock company, trust, unincorporated organization,
government or agency or political subdivision thereof or any other entity.
"Preferred Dividends" for any Person means for any period the quotient
determined by dividing the amount of dividends and distributions paid or
accrued (whether or not declared) on Preferred Stock of such Person during
such period calculated in accordance with generally accepted accounting
principles, by 1 minus the maximum statutory income tax rate then applicable
to the Company (expressed as a decimal).
"Preferred Stock" of any Person means Capital Stock of such Person of any
class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or
involuntary liquidation, dissolution or winding up of such Person, to shares
of Capital Stock of any other class of such Person.
"Public Equity Offering" means an underwritten public offering of common
stock made on a primary basis by the Company pursuant to a registration
statement filed with, and declared effective by, the Commission in accordance
with the Securities Act.
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"Purchase Money Debt" means Debt Incurred at any time within 270 days of,
and for the purposes of financing all or any part of the cost of, the
construction, installation, acquisition or improvement by the Company or any
Restricted Subsidiary of the Company of any new Telecommunications Assets
constructed, installed, acquired or improved after March 31, 1997, provided
that the proceeds of such Debt are expended for such purposes within such 270-
day period.
"Rating Decline" means the Notes cease to be rated B+ (or the equivalent
thereof) or better by Standard & Poor's Corporation or B2 (or the equivalent
thereof) or better by Moody's Investors Service, Inc.
"Receivables" means receivables, chattel paper, instruments, documents or
intangibles evidencing or relating to the right to payment of money, excluding
allowances for doubtful accounts.
"Receivables Sale" of any Person means any sale of Receivables of such
Person (pursuant to a purchase facility or otherwise), other than in
connection with a disposition of the business operations of such Person
relating thereto or a disposition of defaulted Receivables for purposes of
collection and not as a financing arrangement.
"Related Person" of any Person means any other Person directly or indirectly
owning (a) 5% or more of the outstanding Common Stock of such Person (or, in
the case of a Person that is not a corporation, 5% or more of the outstanding
equity interest in such Person) or (b) 5% or more of the combined outstanding
voting power of the Voting Stock of such Person.
"Restricted Subsidiary" means a Subsidiary of the Company or of a Restricted
Subsidiary that is a Wholly Owned Subsidiary of the Company that has not been
designated by the board of directors of the Company (by a board resolution
delivered to the Trustee) as an Unrestricted Subsidiary pursuant to and in
compliance with "--Certain Covenants--Limitations on Designations of
Unrestricted Subsidiaries."
"Restricted Subsidiary Guarantee" means a supplemental indenture to the
Indenture in form satisfactory to the Trustee, providing for an unconditional
Guarantee of payment in full of the principal of, premium, if any, and
interest on the Notes. Any such Restricted Subsidiary Guarantee shall not be
subordinate in right of payment to any Debt of the Restricted Subsidiary
providing the Restricted Subsidiary Guarantee.
"Sale and Leaseback Transaction" of any Person means an arrangement with any
lender or investor or to which such lender or investor is a party providing
for the leasing by such Person of any property or asset of such Person which
has been or is being sold or transferred by such Person more than 365 days
after the acquisition thereof or the completion of construction or
commencement of operation thereof to such lender or investor or to any Person
to whom funds have been or are to be advanced by such lender or investor on
the security of such property or asset. The stated maturity of such
arrangement shall be the date of the last payment of rent or any other amount
due under such arrangement prior to the first date on which such arrangement
may be terminated by the lessee without payment of a penalty.
"Stated Maturity," when used with respect to a Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Investor" means a corporation, partnership or other entity
engaged in one or more Telecommunications Businesses that has, or 80% or more
of the Voting Stock of which is owned by a Person that has, an equity market
capitalization, at the time of its initial Investment in the Company or in a
Permitted Joint Venture with the Company, in excess of $2 billion.
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"Subordinated Debt" means Debt of the Company as to which the payment of
principal of (and premium, if any) and interest and other payment obligations
in respect of such Debt shall be subordinate to the prior payment in full of
the Notes to at least the following extent: (i) no payments of principal of
(or premium, if any) or interest on or otherwise due in respect of such Debt
may be permitted for so long as any default in the payment of principal (or
premium, if any) or interest on the Notes exists; (ii) in the event that any
other Default exists with respect to the Notes, upon notice by 25% or more in
principal amount of the Notes to the Trustee, the Trustee shall have the right
to give notice to the Company and the holders of such Debt (or trustees or
agents therefor) of a payment blockage, and thereafter no payments of
principal of (or premium, if any) or interest on or otherwise due in respect
of such Debt may be made for a period of 179 days from the date of such
notice; and (iii) such Debt may not (x) provide for payments of principal of
such Debt at the stated maturity thereof or by way of a sinking fund
applicable thereto or by way of any mandatory redemption, defeasance,
retirement or repurchase thereof by the Company (including any redemption,
retirement or repurchase which is contingent upon events or circumstances but
excluding any retirement required by virtue of acceleration of such Debt upon
an event of default thereunder), in each case prior to the final Stated
Maturity of the Notes or (y) permit redemption or other retirement (including
pursuant to an offer to purchase made by the Company) of such other Debt at
the option of the holder thereof prior to the final Stated Maturity of the
Notes, other than a redemption or other retirement at the option of the holder
of such Debt (including pursuant to an offer to purchase made by the Company)
which is conditioned upon a change of control of the Company pursuant to
provisions substantially similar to those described under "--Certain
Covenants--Change of Control" (and which shall provide that such Debt will not
be repurchased pursuant to such provisions prior to the Company's repurchase
of the Notes required to be repurchased by the Company pursuant to the
provisions described under "--Certain Covenants--Change of Control").
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Subsidiaries thereof or (ii) any
other Person (other than a corporation) in which such Person, or one or more
other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority
ownership and power to direct the policies, management and affairs thereof.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended
for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) constructing, creating,
developing or marketing communications related network equipment, software and
other devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made
in good faith by the board of directors of the Company.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to and in compliance with "--Certain Covenants--Limitation on
Designations of Unrestricted Subsidiaries."
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons
performing similar functions) of such Person, whether at all times or only for
so long as no senior class of securities has such voting power by reason of
any contingency.
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"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person
all of the outstanding Voting Stock or other ownership interests (other than
directors' qualifying shares) of which shall at the time be owned by such
Person or by one or more Wholly Owned Subsidiaries of such Person or by such
Person and one or more Wholly Owned Subsidiaries of such Person.
EVENTS OF DEFAULT
The following will be Events of Default under the Indenture: (a) failure to
pay principal of (or premium, if any, on) any Note when due; (b) failure to
pay any interest on any Note when due, continued for 30 days; (c) default in
the payment of principal and interest on Notes required to be purchased
pursuant to an Offer to Purchase as described under "--Certain Covenants--
Change of Control" when due and payable; (d) failure to perform or comply with
the provisions described under "--Mergers, Consolidations and Sales of Assets"
and "--Certain Covenants--Limitation on Certain Asset Dispositions"; (e)
failure to perform any other covenant or agreement of the Company under the
Indenture or the Notes continued for 60 days after written notice to the
Company by the Trustee or holders of at least 25% in aggregate principal
amount of the outstanding Notes; (f) default under the terms of any instrument
evidencing or securing Debt of the Company or any Restricted Subsidiary having
an outstanding principal amount of $10 million individually or in the
aggregate which default results in the acceleration of the payment of such
indebtedness or constitutes the failure to pay such indebtedness when due
(after expiration of any applicable grace period); (g) the rendering of a
final judgment or judgments (not subject to appeal) against the Company or any
Restricted Subsidiary in an amount in excess of $10 million which remains
undischarged or unstayed for a period of 45 days after the date on which the
right to appeal has expired; and (h) certain events of bankruptcy, insolvency
or reorganization affecting the Company or any Restricted Subsidiary. Subject
to the provisions of the Indenture relating to the duties of the Trustee in
case an Event of Default (as defined) shall occur and be continuing, the
Trustee will not be under any obligation to exercise any of its rights or
powers under the Indenture at the request or direction of any of the holders
of Notes, unless such holders shall have offered to the Trustee reasonable
indemnity. Subject to such provisions for the indemnification of the Trustee,
the holders of a majority in aggregate principal amount of the outstanding
Notes will have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the Trustee or exercising any trust
or power conferred on the Trustee.
If any Event of Default (other than an Event of Default described in clause
(h) above) shall occur and be continuing, either the Trustee or the holders of
at least 25% in aggregate principal amount of the outstanding Notes may
accelerate the maturity of all Notes; provided, however, that after such
acceleration, but before a judgment or decree based on acceleration, the
holders of a majority in aggregate principal amount of the outstanding Notes
may, under certain circumstances, rescind and annul such acceleration if all
Events of Default, other than the non-payment of accelerated principal, have
been cured or waived as provided in the Indenture. If an Event of Default
specified in clause (h) above occurs, the outstanding Notes will ipso facto
become immediately due and payable without any declaration or other act on the
part of the Trustee or any holder. For information as to waiver of defaults,
see "--Amendment, Supplement and Waiver."
No holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such holder
shall have previously given to the Trustee written notice of a continuing
Event of Default (as defined) and unless also the holders of at least 25% in
aggregate principal amount of the outstanding Notes shall have made written
request and offered reasonable indemnity to the Trustee to institute such
proceeding as trustee, and the Trustee shall not have received from the
holders of a majority in aggregate principal amount of the outstanding Notes a
direction inconsistent with such request and shall have failed to institute
such proceeding within 60 days. However, such limitations do not apply to a
suit instituted by a holder of a Note for enforcement of payment of the
principal of and premium, if any, or interest on such Note on or after the
respective due dates expressed in such Note.
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The Company will be required to furnish to the Trustee quarterly a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance.
AMENDMENT, SUPPLEMENT AND WAIVER
The Company and the Trustee may, at any time and from time to time, without
notice to or consent of any holder of Notes, enter into one or more indentures
supplemental to the Indenture (1) to evidence the succession of another Person
to the Company and the assumption by such successor of the covenants of the
Company in the Indenture and the Notes; (2) to add to the covenants of the
Company, for the benefit of the holders, or to surrender any right or power
conferred upon the Company by the Indenture; (3) to add any additional Events
of Default; (4) to provide for uncertificated Notes in addition to or in place
of certificated Notes; (5) to evidence and provide for the acceptance of
appointment under the Indenture of a successor Trustee; (6) to secure the
Notes; or (7) to cure any ambiguity in the Indenture to correct or supplement
any provision in the Indenture which may be inconsistent with any other
provision therein or to add any other provisions with respect to matters or
questions arising under the Indenture; provided such actions shall not
adversely affect the interests of the holders in any material respect.
With the consent of the holders of not less than a majority in principal
amount of the outstanding Notes, the Company and the Trustee may enter into
one or more indentures supplemental to the Indenture for the purpose of adding
any provisions to or changing in any manner or eliminating any of the
provisions of the Indenture or modifying in any manner the rights of the
holders, provided that no such supplemental indenture shall, without the
consent of the holder of each outstanding Note (1) change the Stated Maturity
of the principal of, or any installment of interest on, any Note, or alter the
redemption provisions thereof, or reduce the principal amount thereof (or
premium, if any), or the interest thereon that would be due and payable upon
maturity thereof, or change the place of payment where, or the coin or
currency in which, any Note or any premium or interest thereon is payable, or
impair the right to institute suit for the enforcement of any such payment on
or after the maturity thereof; (2) reduce the percentage in principal amount
of the outstanding Notes, the consent of whose holders is necessary for any
such supplemental indenture or required for any waiver of compliance with
certain provisions of the Indenture or certain Defaults thereunder; (3)
subordinate in right of payment, or otherwise subordinate, the Notes to any
other Debt; or (4) modify any provision of this paragraph (except to increase
any percentage set forth herein).
The holders of not less than a majority in principal amount of the
outstanding Notes may, on behalf of the holders of all the Notes waive any
past Default under the Indenture and its consequences, except Default (1) in
the payment of the principal of (or premium, if any) or interest on any Note,
or (2) in respect of a covenant or provision hereof which under the proviso to
the prior paragraph cannot be modified or amended without the consent of the
holder of each outstanding Note affected.
SATISFACTION AND DISCHARGE OF THE INDENTURE, DEFEASANCE
The Company may terminate its obligations under the Indenture when (i)
either (A) all outstanding Notes have been delivered to the Trustee for
cancellation or (B) all such Notes not theretofore delivered to the Trustee
for cancellation have become due and payable, will become due and payable
within one year or are to be called for redemption within one year under
irrevocable arrangements satisfactory to the Trustee for the giving of notice
of redemption by the Trustee in the name and at the expense of the Company,
and the Company has irrevocably deposited or caused to be deposited with the
Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of (or premium, if any, on) and interest to the
date of deposit or maturity or date of redemption on such Notes; (ii) the
Company has paid or caused to be paid all other sums payable by the Company
under the Indenture; and (iii) the Company has delivered an Officers'
Certificate and an Opinion of Counsel relating to compliance with the
conditions set forth in the Indenture.
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The Company, at its election, shall (a) be deemed to have paid and
discharged its debt on the Notes and the Indenture shall cease to be of
further effect as to all outstanding Notes (except as to (i) rights of
registration of transfer, substitution and exchange of Notes and the Company's
right of optional redemption, (ii) rights of holders to receive payments of
principal of, premium, if any, and interest on such Notes (but not the
Purchase Price referred to under "--Certain Covenants--Change of Control") and
any rights of the holders with respect to such amounts, (iii) the rights,
obligations and immunities of the Trustee under the Indenture and (iv) certain
other specified provisions in the Indenture) or (b) cease to be under any
obligation to comply with certain restrictive covenants including those
described under "--Certain Covenants," after the irrevocable deposit by the
Company with the Trustee, in trust for the benefit of the holders, at any time
prior to the maturity of the Notes, of (A) money in an amount, (B) Government
Securities which through the payment of interest and principal will provide,
not later than one day before the due date of payment in respect of the Notes,
money in an amount, or (C) a combination thereof, sufficient to pay and
discharge the principal of, and interest on, the Notes then outstanding on the
dates on which any such payments are due in accordance with the terms of the
Indenture and of the Notes. Such defeasance or covenant defeasance shall be
deemed to occur only if certain conditions are satisfied, including, among
other things, delivery by the Company to the Trustee of an Opinion of Counsel
acceptable to the Trustee to the effect that (i) such deposit, defeasance and
discharge will not be deemed, or result in, a taxable event for federal income
tax purposes with respect to the holders; and (ii) the Company's deposit will
not result in the Trust or the Trustee being subject to regulation under the
Investment Company Act of 1940.
GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of New
York.
THE TRUSTEE
Bankers Trust Company will be the Trustee under the Indenture. The Trustee's
current address is 123 Washington Street, 1st Floor, New York, New York 10006.
The holders of not less than a majority in principal amount of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. Except during the continuance of an Event of
Default, the Trustee will perform only such duties are specifically set forth
in the Indenture. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured or waived), the Trustee will be
required, in the exercise of its rights and powers under the Indenture, to use
the degree of care of a prudent person in the conduct of such person's own
affairs.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation, solely by reason of its status as a
director, officer, employee, incorporator or stockholder of the Company. By
accepting a Note each holder waives and releases all such liability (but only
such liability). The waiver and release are part of the consideration for
issuance of the Notes. Nevertheless, such waiver may not be effective to waive
liabilities under the federal securities laws and it has been the view of the
Commission that such a waiver is against public policy.
TRANSFER AND EXCHANGE
A holder may transfer or exchange Notes in accordance with the Indenture.
The Company, the Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company has entered into a registration rights agreement with the
Initial Purchasers (the "Registration Agreement") pursuant to which the
Company agreed, for the benefit of the holders of the Old Notes, at the
Company's cost, (a) by June 30, 1997, to file a registration statement (a
"Registration Statement") with the Commission with respect to a registered
offer to exchange the Notes for the Exchange Notes, (b) to use its best
efforts to cause such Registration Statement to be declared effective under
the Securities Act by August 28, 1997, and (c) to consummate the Exchange
Offer by September 29, 1997. For each Old Note surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Note will receive an
Exchange Note having a principal amount equal to that of the surrendered Old
Note.
Based upon no-action letters issued by the staff of the Commission to third
parties, the Company believes that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Old Notes would in general be freely
transferable after the Exchange Offer without further registration under the
Securities Act if the holder of the Exchange Notes represents (i) that it is
not an "affiliate," as defined in Rule 405 of the Securities Act, of the
Company, (ii) that it is acquiring the Exchange Notes in the ordinary course
of its business and (iii) that it has no arrangement or understanding with any
person to participate in the distribution (within the meaning of the
Securities Act) of the Exchange Notes; provided that, in the case of broker-
dealers, a prospectus meeting the requirements of the Securities Act be
delivered as required. However, the Commission has not considered the Exchange
Offer in the context of a no-action letter and there can be no assurance that
the staff of the Commission would make a similar determination with respect to
the Exchange Offer as in such other circumstances. Holders of Old Notes
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer, where it acquired the Old
Notes exchanged for such Exchange Notes for its own account as a result of
market-making or other trading activities, may be deemed to be an
"underwriter" within the meaning of the Securities Act and must acknowledge
that it will deliver a prospectus in connection with the resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of one year after consummation of
the Exchange Offer, it will make this Prospectus available to any broker-
dealer for use in connection with any such resale. A broker-dealer that
delivers such a prospectus to purchasers in connection with such resales will
be subject to certain of the civil liability provisions under the Securities
Act, and will be bound by the provisions of the Registration Agreement
(including certain indemnification and contribution rights and obligations).
See "The Exchange Offer--Resale of the Exchange Notes" and "Plan of
Distribution."
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will be
required to represent that (a) it is not an affiliate of the Company, (b) any
Exchange Notes to be received by it will be acquired in the ordinary course of
its business and (c) at the time of commencement of the Exchange Offer, it has
no arrangement with any person to participate in the distribution (within the
meaning of the Securities Act) of the Exchange Notes. If the holder is a
broker-dealer (a "Participating Broker-Dealer") who acquired the Notes for its
own account as a result of market-making or other trading activities, it may
be deemed to be an "underwriter" within the meaning of the Securities Act and
will be required to acknowledge that it must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Commission has taken the position that Participating
Broker-Dealers may fulfill their prospectus delivery requirements with respect
to the Exchange Notes (other than a resale of an unsold allotment from the
original sale of the Old Notes) with the prospectus
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contained in the Exchange Offer Registration Statement. Under the Registration
Agreement, the Company is required to allow Participating Broker-Dealers and
other persons, if any, subject to similar prospectus delivery requirements to
use the prospectus contained in the Exchange Offer Registration Statement in
connection with the resale of such Exchange Notes.
If, (i) because of any change in law or applicable interpretations thereof
by the Commission's staff, the Company determines upon advice of its outside
counsel that it is not permitted to effect the Exchange Offer as contemplated
by the Registration Agreement, or (ii) for any other reason the Exchange Offer
is not consummated within 180 days of the closing date of the Old Notes, or
(iii) any Initial Purchaser so requests with respect to Notes held by it
following consummation of the Exchange Offer, or (iv) any holder of Notes
(other than an Initial Purchaser) is not eligible to participate in the
Exchange Offer or (v) in the case of any Initial Purchaser that participates
in the Exchange Offer or acquires Exchange Notes issued and delivered to it by
the Company in exchange for Notes, such Purchaser does not receive freely
tradeable Exchange Notes in exchange for Notes constituting any portion of an
unsold allotment, the Company will, at its cost, (a) as promptly as
practicable, file a shelf registration statement (a "Shelf Registration
Statement") with the Commission relating to the offer and sale of the Notes or
the Exchange Notes, (b) cause such Shelf Registration Statement to be declared
effective under the Securities Act and (c) use its best efforts to keep such
Shelf Registration Statement continuously effective under the Securities Act
for a period of three years or such shorter period that will terminate when
all the Notes or Exchange Notes, as applicable, covered by such Shelf
Registration Statement have been sold. The Company will, in the event of
filing such a Shelf Registration Statement, provide to each holder of the
Notes copies of the prospectus that is a part of such Shelf Registration
Statement, notify each such holder when such Shelf Registration Statement for
the Notes has been filed with the Commission and when such Shelf Registration
Statement or any post-effective amendment thereto has become effective and
take certain other actions as are required to permit unrestricted resales of
the Notes. A holder of Notes that sells such Notes pursuant to a Shelf
Registration Statement generally will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Agreement which are applicable to such a holder
(including certain indemnification and contribution rights and obligations).
The Old Notes provide that if (i) the Registration Statement has not been
filed with the Commission within 90 days after the closing date of the Old
Notes or declared effective within 150 days after the closing date of the Old
Notes, or the Exchange Offer has not been consummated within 180 days after
the closing date of the Old Notes 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 of the Old Notes or (iii)
after either the Registration Statement or the Shelf Registration Statement
has been declared effective, as the case may be, such Registration Statement
thereafter ceases to be effective or usable (subject to certain exceptions) in
connection with resales of Notes or Exchange 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 Old Notes (in
addition to the stated interest on the Old 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 Old 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
Old 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.
The summary herein of certain provisions of the Registration Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Agreement, a copy of
which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
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. Borrowings
bear interest at an adjustable rate 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
was repaid with cash generated from operations.
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
Initial Public Offering. 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
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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 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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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain of the expected United
States federal income tax consequences applicable to holders of the Old Notes
who purchased the Old Notes for the stated principal amount of the Old Notes
pursuant to the Offering, who exchange the Old Notes for Exchange Notes
pursuant to the Exchange Offer, and who hold the Old Notes and will hold the
Exchange Notes as capital assets (such persons are referred to herein as
"Holders"). Qwest has received an opinion of its counsel, Holme Roberts & Owen
LLP, that the following summarizes the material federal income tax
consequences expected to result to Holders, subject to the conditions,
limitations, and assumptions described herein. 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 of this Prospectus,
all of which are subject to change, which changes could be applied
retroactively. This discussion is also based upon information contained in
this Prospectus and the related documents, and upon certain representations
from Qwest as to factual matters. This discussion does not purport to cover
all aspects of federal taxation that may be relevant to, or the actual tax
effect that any of the matters described herein will have on, any particular
Holder and does not address foreign, state, or local tax consequences.
Qwest has not sought and will not seek any rulings from the Internal Revenue
Service (the "IRS" or the "Service") with respect to the Notes. There can be
no assurance that the Service will not take a different position concerning
the tax consequences of the exchange of Old Notes for Exchange Notes or the
ownership or disposition of the Exchange Notes or that the Service's position
would not be sustained by a court.
The federal income tax consequences applicable to a Holder may vary
depending upon the Holder's particular situation or status. Holders that are
subject to special rules under the Code (including insurance companies, tax-
exempt organizations, mutual funds, retirement plans, financial institutions,
dealers in securities or foreign currency, persons who hold the Notes as part
of a "straddle" or as a "hedge" against currency risk or in connection with a
conversion transaction, persons who have a functional currency other than the
United States dollar, investors in pass-through entities, and except as
expressly addressed herein, Non-U.S. Holders (as defined below)) may be
subject to special rules not discussed below. Qwest will classify the Notes as
debt under section 385 of the Code.
As used in this discussion, the term "U.S. Holder" means a Holder 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. The term "Non-U.S. Holder" means a Holder
that is, for United States federal income tax purposes, not a U.S. Holder.
THIS DISCUSSION IS FOR GENERAL INFORMATION PURPOSES ONLY. EACH HOLDER OF AN
OLD NOTE IS EXPECTED AND URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH PERSON OF EXCHANGING OLD NOTES FOR
EXCHANGE NOTES AND OF HOLDING AND DISPOSING OF THE EXCHANGE NOTES, INCLUDING
THE APPLICABILITY AND EFFECT OF ANY FOREIGN, STATE, OR LOCAL TAX LAWS AND OF
ANY CHANGE IN FEDERAL INCOME TAX LAW OR ADMINISTRATIVE OR JUDICIAL
INTERPRETATION THEREOF SINCE THE DATE OF THIS PROSPECTUS.
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EXCHANGE OF NOTES
Although there is no direct authority as to whether the exchange of Old
Notes for Exchange Notes pursuant to the Exchange Offer will be treated as a
taxable exchange for United States federal income tax purposes, it is the
opinion of Holme Roberts & Owen LLP, counsel to Qwest, that based upon its
analysis of applicable law, such exchange should not be treated as a taxable
exchange for United States federal income tax purposes. A Holder should not
recognize gain or loss upon the exchange of Old Notes for Exchange Notes and,
upon such exchange, should have the same adjusted tax basis in and holding
period for the Exchange Notes as it had in the Old Notes immediately prior to
the exchange.
STATED INTEREST
Qwest was advised by the Initial Purchasers at the time of the sale of the
Old Notes that the Initial Purchasers intended to sell the Old Notes at a
price equal to the stated principal amount of the Old Notes, and Qwest
believes that substantially all of the Old Notes were sold to investors at
that price. This discussion is, therefore, based upon the assumption that the
Old Notes were not issued with original issue discount for federal income tax
purposes. A U.S. Holder is required to include stated interest on the Exchange
Notes in gross income as accrued or received, in accordance with such U.S.
Holder's regular method of tax accounting.
This discussion does not address special rules that may apply to purchasers
who acquired the Old Notes (or who may acquire the Exchange Notes) at a price
that differs from the adjusted issue price of the Notes at the time of
acquisition, including those provisions of the Code and Regulations relating
to the treatment of "market discount," "acquisition premium," and "amortizable
bond premium." Such purchasers should consult their tax advisors regarding
these matters.
SALE, RETIREMENT, OR OTHER TAXABLE DISPOSITION
General. Upon the sale, retirement, or other taxable disposition of a Note,
a U.S. Holder will generally recognize gain or loss measured by the difference
between (i) the amount of cash plus the fair market value of property received
in exchange therefor (except to the extent that the consideration received is
attributable to stated interest not previously taken into account, which
consideration will be treated as ordinary interest income) and (ii) such U.S.
Holder's adjusted tax basis in the Note.
Character. Any gain or loss on the sale, retirement, or other taxable
disposition of a Note, measured as described above, will generally be capital
gain or loss, provided that the Note was a capital asset in the hands of the
U.S. Holder. Any capital gain or loss will be long-term capital gain or loss
if the Note has been held for more than one year at the time of disposition;
otherwise, the capital gain or loss will be short-term capital gain or loss.
Defeasance. With respect to tax matters related to legal defeasance and
covenant defeasance in certain circumstances, see "Description of the Notes--
Satisfaction and Discharge of the Indenture, Defeasance."
BACKUP WITHHOLDING
The backup withholding rules of the Code require a payor to deduct and
withhold a tax amount if (i) the payee fails to furnish a taxpayer
identification number ("TIN") to the payor, (ii) the Service notifies the
payor that the TIN furnished by the payee is incorrect, (iii) the payee has
failed properly to report the receipt of a "reportable payment" and the
Service has notified the payor that withholding is required, or (iv) there has
been a failure on the part of the payee to certify under penalty of perjury
that the payee is not subject to withholding under section 3406 of the Code.
If any one of the events discussed above occurs, Qwest or its paying agent or
other withholding agent will be required to withhold a tax equal to 31 percent
of any "reportable payment" which includes, among other things,
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interest actually paid and amounts paid through brokers in retirement of
securities. Any amount withheld from a payment to a U.S. Holder under the
backup withholding rules will be allowed as a refund or credit against such
U.S. Holder's United States federal income tax, provided that the required
information is furnished to the Service. Certain U.S. Holders (including,
among others, corporations) are not subject to the backup withholding
information reporting requirements.
TAX CONSEQUENCES TO NON-U.S. HOLDERS
General. The following discussion is for general information purposes only
and does not purport to cover all aspects of United States federal income
taxation that may apply to, or the actual tax effect that any of the matters
described herein will have on, any particular Non-U.S. Holder. Non-U.S.
Holders are expected and urged to consult their own tax advisors as to the
particular tax consequences to them of acquiring, holding, and disposing of
the Notes.
Portfolio Interest Exemption. A Non-U.S. Holder will generally, under the
portfolio interest provisions of the Code, not be subject to United States
federal income taxes or United States federal withholding tax, on payments of
principal, if any, on the Notes, and interest paid on the Notes, provided that
(i) the Non-U.S. Holder does not actually or constructively own 10 percent or
more of the total combined voting power of all classes of stock of the Company
entitled to vote, (ii) the Non-U.S. Holder is not (a) a bank receiving
interest pursuant to a loan agreement entered into in the ordinary course of
its trade or business or (b) a controlled foreign corporation that is related
to Qwest through stock ownership, (iii) such interest is not effectively
connected with a United States trade or business and (iv) either (a) the
beneficial owner of the Notes certifies to Qwest or its agent, under penalties
of perjury, that it is not a U.S. Holder and provides a completed IRS Form W-8
("Certificate of Foreign Status") or (b) a securities clearing organization,
bank, or other financial institution which holds customers' securities in the
ordinary course of its trade or business (a "financial institution") and holds
the Notes, certifies to Qwest or its agent, under penalties of perjury, that
it has received Form W-8 from the beneficial owner or that it has received
from another financial institution a Form W-8 and furnishes the payor with a
copy thereof. If any of the situations described in proviso (i), (ii), or (iv)
of the preceding sentence do not exist, interest on the Notes, when received,
is subject to United States withholding tax at the rate of 30 percent, unless
an income tax treaty between the United States and the country of which the
Non-U.S. Holder is a tax resident applies and provides for the elimination or
reduction in the rate of United States federal withholding tax.
If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest on the Note is effectively connected with the conduct of such
trade or business, such Non-U.S. Holder, although exempt from United States
federal withholding tax as discussed in the preceding paragraph (or by reason
of the delivery of a properly completed IRS Form 4224), will be subject to
United States federal income tax on such interest and on any gain realized on
the sale, exchange, or other disposition of a Note in the same manner as if it
were a U.S. Holder. In addition, if such Non-U.S. Holder is a foreign
corporation, it may be subject to a branch profits tax equal to 30 percent of
its effectively connected earnings and profits for that taxable year, unless
it qualifies for a lower rate under an applicable income tax treaty.
Federal Estate Tax. Notes owned or treated as owned by an individual who is
neither a United States citizen nor a United States resident (as defined for
United States federal estate tax purposes) at the time of death will be
excluded from the individual's gross estate for United States federal estate
tax purposes and will not be subject to United States federal estate tax if
the nonresident qualifies for the portfolio interest exemption discussed
above.
Sale of Exchange Notes. A Non-U.S. Holder generally will not be subject to
United States federal income tax on any gain realized in connection with the
sale, exchange, or retirement of Notes, unless
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(i)(a) the gain is effectively connected with a trade or business carried on
by the Non-U.S. Holder within the United States or (b) if a tax treaty
applies, the gain is generally attributable to the United States permanent
establishment maintained by the Non-U.S. Holder, (ii) in the case of a Non-
U.S. Holder who is an individual, such Non-U.S. Holder is present in the
United States for 183 days or more in the taxable year of disposition and
certain other conditions are satisfied, or (iii) the Non-U.S. Holder is
subject to tax pursuant to provisions of the Code applicable to United States
expatriates.
Information Reporting and Backup Withholding Tax. In general, there is no
United States information reporting requirement or backup withholding tax on
payments to Non-U.S. Holders who provide the appropriate certification
described above regarding qualification for the portfolio interest exemption
from United States federal income tax for payments of interest on the Notes.
In general, backup withholding and information reporting will not apply to a
payment of the gross proceeds of a sale of Notes effected at a foreign office
of a broker. If, however, such broker is, for United States federal income tax
purposes, a United States person, a controlled foreign corporation, or a
foreign person, 50 percent or more of whose gross income for certain periods
is derived from activities that are effectively connected with the conduct of
a trade or business in the United States, such payments will not be subject to
backup withholding but will be subject to information reporting, unless (i)
such broker has documentary evidence in its records that the beneficial owner
is a Non-U.S. Holder and certain other conditions are met or (ii) the
beneficial owner otherwise establishes an exemption. Temporary Regulations
provide that the United States Department of Treasury is considering whether
backup withholding should be required in such circumstances. Under proposed
Regulations not currently in effect, backup withholding will not apply to such
payments absent actual knowledge that the payee is a United States person.
Recently proposed Regulations (the "New Proposed Regulations") would provide
alternative methods for satisfying the certification requirement described in
clause (iv)(a) and (b) under "--Portfolio Interest Exemption" above. The New
Proposed Regulations also would require, in the case of Notes held by foreign
partnerships, that (i) the certification described in clause (iv)(a) and (b)
under "--Portfolio Interest Exemption" above be provided by the partners
rather than by the foreign partnership and (ii) the partnership provide
certain information, including a United States taxpayer identification number.
A look-through rule would apply in the case of tiered partnerships. The New
Proposed Regulations are proposed to be effective for payments made after
December 31, 1997. There can be no assurance that the New Proposed Regulations
will be adopted or as to the provisions they will include if and when adopted
in temporary or final form. Non-U.S. Holders should consult their own tax
advisors regarding the application of these rules to their particular
situations, the availability of an exemption therefrom, the procedure for
obtaining such an exemption, if available, and the possible application of the
Proposed Regulations addressing the withholding and the information reporting
rules.
Payment by Qwest of principal on the Notes or payment by a United States
office of a broker of the proceeds of a sale of Notes is subject to both
backup withholding and information reporting unless the beneficial owner
provides a completed IRS Form W-8 which certifies under penalty of perjury
that it is a Non-U.S. Holder who meets all the requirements for exemption from
United States federal income tax on any gain from the sale, exchange, or
retirement of the Notes. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules will be allowed as a
refund or a credit against such Non-U.S. Holder's United States federal income
tax liability, provided the required information is furnished to the Service.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be
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used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that for a period of one year after consummation of the Exchange Offer, it
will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
any broker-dealer. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of one year after consummation of the Exchange Offer, the
Company will promptly send additional copies of this Prospectus and any
amendment or supplement to this Prospectus to any broker-dealer that requests
such documents in the letter of transmittal. The Company has agreed to pay all
expenses incident to the Company's performance of, or compliance with, the
Registration Agreement and all expenses incident to the Exchange Offer
(including the expenses of one counsel for the holders of the Old Notes) other
than commissions or concessions of any brokers or dealers, and will indemnify
the holders (including any broker-dealers) and certain parties related to the
holders against certain liabilities, including liabilities under the
Securities Act.
The Company has not entered into any arrangements or understandings with any
person to distribute the Exchange Notes to be received in the Exchange Offer.
LEGAL MATTERS
The validity of the Exchange Notes and certain other legal matters in
connection with the Exchange Notes offered hereby are being passed upon for
the Company by Holme Roberts & Owen LLP, Denver, Colorado with respect to
matters of United States law. Certain United States federal income tax matters
will be passed upon for the Company by Holme Roberts & Owen LLP, Denver,
Colorado.
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,
except as to note 1, paragraph (i) and note 18, which are as of May 23, 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.
116
<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>
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.
KPMG Peat Marwick LLP
Denver, Colorado
February 19, 1997, except as
to note 1, paragraph (i) and
note 18, which are as of May 23, 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 out-
standing (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 equi-
ty........................................ $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 serv-
ices.................... 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 ad-
ministrative (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 amorti-
zation.................. 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 Par-
ent.................... -- -- 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 Par-
ent.................... -- -- 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 be-
half (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
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)
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 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.
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)
(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
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
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)
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>
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 un-
der 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 con-
tracts........................................ $382,525 $328,688 $ 6,692
======== ======== =======
</TABLE>
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)
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 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.
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)
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 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 amortiza-
tion...................................... (29,928) (25,916) (12,192)
-------- -------- --------
Property and equipment, net................ $231,228 $186,535 $114,748
======== ======== ========
</TABLE>
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)
(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).
(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).
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)
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
$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
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)
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 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.
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)
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 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>
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)
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 ben-
efit............................................. 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
======= =======
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
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)
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.
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.
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)
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 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.
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)
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
====== ======= =======
As of March 31, 1997 (unaudited)
<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.
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)
(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 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>
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)
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 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.
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)
(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. All Growth Share grants made
through March 31, 1997 have generally been based on a beginning Company value
that was greater than or equal to the fair value of the Company at the grant
date. 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. Settlement is made in common stock or cash at the Company's
option, except that settlement of Growth Shares granted under the October 1996
Plan is to be made, after an initial public offering, only in common stock.
Certain participants vest fully upon completion of an initial public offering
by the Company.
Compensation under the Growth Share Plan is measured, pursuant to Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, 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. Had the Company accounted for its stock-based compensation
pursuant to the fair value method in Statement of Financial Accounting
Standards No. 123, Accounting for Stock Based Compensation, the amount of
compensation would not have been materially different from what has been
reflected in the accompanying consolidated financial statements.
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. Upon completion
of the initial public offering (as described in note (18)--Securities
Offering), certain Growth Shares vested in full, which will result in
additional compensation expense under the Growth Share Plan to be recorded in
the Company's financial statements for the second quarter of 1997. The Company
estimates that the additional compensation expense accrual in the second
quarter of 1997 will be approximately $58.0 million. In addition, the number
of shares of Common Stock issued to holders of Growth Shares in payment
therefor is subject to reduction as a result of certain elections by them for
tax withholdings and cash payments. Based upon withholdings
F-25
<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)
and payments elected to date, approximately $26.0 million of accrued
compensation would be payable in cash by the Company. Compensation relating to
certain nonvested Growth Shares will be amortized as expense over the remaining
approximately four and one-half year vesting period.
The following table summarizes Growth Share grants and Growth Shares
outstanding:
<TABLE>
<CAPTION>
OUTSTANDING GROWTH SHARES
-------------------------
<S> <C>
December 31, 1993..................................... 174,000
1994 grants.......................................... 502,000
--------
December 31, 1994..................................... 676,000
1995 grants.......................................... 11,000
1995 forfeitures..................................... (8,500)
--------
December 31, 1995..................................... 678,500
1996 grants.......................................... 67,500
1996 forfeitures and settlements .................... (470,600)
--------
December 31, 1996..................................... 275,400
1997 grants.......................................... 330,000
--------
March 31, 1997........................................ 605,400
========
</TABLE>
Approximately 110,000 Growth Shares were vested at December 31, 1996 and
March 31, 1997. An additional 127,400 of the Growth Shares outstanding as of
March 31, 1997 would vest upon completion of an initial public offering by the
Company.
As of March 31, 1997, the threshold to be used in determining the increase in
the Company's value, adjusted for contributions, for 275,400 of the Growth
Shares outstanding was approximately $140 million. The threshold to be used for
the remaining 330,000 Growth Shares outstanding as of March 31, 1997 was
approximately $1 billion.
(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>
F-26
<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)
(18) SECURITIES OFFERING
In April 1997, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of
13,500,000 shares of Common Stock. On May 23, 1997, the Board of Directors
approved a change in the Company's capital stock to authorize 400,000,000
shares of Common Stock, $.01 par value per share, 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 Preferred Stock, $.01 par value per share. On May 23,
1997, the Board of Directors declared a stock dividend to the existing
stockholder of 86,490,000 shares of Common Stock, which is payable immediately
prior to the effectiveness of the registration statement. This dividend 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 23, 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.
Effective May 23, 1997, the Company sold to an affiliate (the Affiliate) of
the Parent for $2,300,000 in cash, a 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-27
<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.
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.
G-2
<PAGE>
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.
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.
G-3
<PAGE>
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.
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. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AF-
FAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHO-
RIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALI-
FIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITA-
TION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information................................................... 3
Prospectus Summary....................................................... 4
Summary Consolidated Financial and Operating Data........................ 13
Risk Factors............................................................. 15
The Exchange Offer....................................................... 22
Use of Proceeds.......................................................... 29
Capitalization........................................................... 30
Selected Consolidated Financial Data..................................... 31
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 33
Industry Overview........................................................ 44
Business................................................................. 48
Regulation............................................................... 60
Management............................................................... 66
Principal Stockholder.................................................... 79
Certain Transactions..................................................... 79
Description of the Notes................................................. 81
Description of Certain Indebtedness...................................... 110
Certain United States Federal Income Tax Considerations.................. 112
Plan of Distribution..................................................... 115
Legal Matters............................................................ 116
Experts.................................................................. 116
Index to Consolidated Financial Statements............................... F-1
Glossary................................................................. G-1
</TABLE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
OFFER TO EXCHANGE
10 7/8% SERIES B SENIOR NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING 10
7/8% SENIOR NOTES DUE 2007
[LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON WEDNESDAY,
AUGUST 13, 1997, UNLESS EXTENDED; PROVIDED IT MAY NOT BE EXTENDED BEYOND
SEPTEMBER 2, 1997.
PROSPECTUS
DATED JULY 14, 1997
