AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON ________, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
QWEST COMMUNICATIONS INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 4813 84-1339282
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
555 SEVENTEENTH STREET, SUITE 1000
DENVER, COLORADO 80202
(303) 291-1400
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
ROBERT S. WOODRUFF
EXECUTIVE VICE PRESIDENT--FINANCE
QWEST COMMUNICATIONS INTERNATIONAL INC.
555 SEVENTEENTH STREET, SUITE 1000
DENVER, COLORADO 80202
(303) 291-1400
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE FOR THE REGISTRANT)
---------------
COPIES TO:
MARTHA D. REHM, ESQ. DAVID J. BEVERIDGE, ESQ.
HOLME ROBERTS & OWEN LLP SHEARMAN & STERLING
1700 LINCOLN STREET, SUITE 4100 599 LEXINGTON AVENUE
DENVER, COLORADO 80203 NEW YORK, NEW YORK 10022-6069
(303) 861-7000 (212) 848-4000
---------------
<PAGE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
---------------
If the Securities registered on this Form are to be offered in connection with
the formation of a holding company and there is compliance with General
Instruction G, check the following box. [_]
---------------
<PAGE>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
MAXIMUM PROPOSED
AMOUNT OFFERING MAXIMUM
TITLE OF EACH CLASS OF SECURITIES TO BE PRICE AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE(2)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9.47% Senior Discount
Notes Due 2007........ $555,890,000 62.962% $349,999,462 $106,011
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933, as amended.
(2) Calculated pursuant to Rule 457(f)(2) based upon the book value on December
18, 1997 of the Notes to be received by the Registrants in the exchange
described herein.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS Subject to Completion
Dated December 19, 1997
QWEST COMMUNICATIONS INTERNATIONAL INC. [LOGO OF QWEST COMMUNICATIONS
OFFER TO EXCHANGE INTERNATIONAL INC. APPEARS HERE]
9.47% SERIES B SENIOR DISCOUNT NOTES DUE 2007
FOR ANY AND ALL OF ITS OUTSTANDING
9.47% SENIOR DISCOUNT NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON _______DAY,
_____________, 1997, UNLESS EXTENDED; PROVIDED IT MAY NOT BE EXTENDED BEYOND
_______________, 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
at maturity of its 9.47% Series B Senior Discount Notes Due 2007 (the "Exchange
Notes") for each $1,000 principal amount at maturity of its outstanding 9.47%
Senior Discount Notes Due 2007 (the "Old Notes") of which $555,890,000 in
aggregate principal amount at maturity 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, interest rate step-up,
original issue discount and cash interest 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 the Indenture dated as of October 15, 1997 governing the Old Notes
and the Exchange Notes. The Exchange Notes and the Old Notes are considered
collectively to be a single class for all purposes under the Indenture,
including, without limitation, waivers, amendments, redemptions and Offers to
Purchase, and 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 _______day, __________,
1997 ("Expiration Date"); provided, however, that if the Company, in its sole
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<PAGE>
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 ____________, 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 Notes will mature on October 15, 2007, unless previously redeemed. The
Old Notes were issued at a price of $629.62 per $1,000 original principal amount
at maturity, representing a yield to maturity of 9.47%. The Exchange Notes will
be issued without coupons and in fully registered form only, in minimum
denominations of $1,000 and integral multiples thereof. Cash interest on the
Notes will not accrue until October 15, 2002, and thereafter will accrue at a
rate of 9.47% per annum and will be payable semi-annually in arrears commencing
on April 15, 2003 and thereafter on April 15 and October 15 of each year;
provided, however, that the Company may elect to commence the accrual of cash
interest on an interest payment date on or after October 15, 2000 and prior to
October 15, 2002, in which case the outstanding principal amount at maturity of
each Note will on such interest payment date be reduced to the Accreted Value
(as defined) of the Note as of such interest payment date and cash interest will
be payable on each interest payment date thereafter. The Notes will be
redeemable at the option of Qwest, in whole or in part, at any time on or after
October 15, 2002, upon not less than 30 nor more than 60 days' 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 October 15, 2000,
Qwest may redeem up to 35% of the Notes at a redemption price of 109.47% of the
Accreted Value 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). Within 30 days of the occurrence of a Change of Control
(as defined), Qwest will be required to make an Offer to Purchase (as defined)
all outstanding Notes at a purchase price equal to 101% of the Accreted Value of
the Notes on the purchase date plus any accrued and unpaid interest and premium,
if any, not otherwise included in the Accreted Value to such purchase date.
There can be no assurance that Qwest will have the financial resources necessary
to purchase the Notes in such circumstances. See "Description of the
Notes-Optional Redemption" and "-Certain Covenants-Change of Control."
The Exchange Notes will be senior unsecured obligations of Qwest, ranking pari
passu in right of payment with all existing and future senior unsecured
indebtedness of Qwest, including its 10-7/8% Series B Senior Notes Due 2007, and
will be senior in right of payment to all existing and future subordinated
indebtedness of Qwest. See "Capitalization" and "Description of the
Notes-General."
SEE "RISK FACTORS" BEGINNING ON PAGE __ 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 December __, 1997.
The Old Notes were sold by the Company on October 15, 1997 to Salomon Brothers
Inc, Donaldson, Lufkin & Jenrette Securities Corporation and Merrill Lynch,
Pierce, Fenner & Smith Incorporated (the "Initial Purchasers") pursuant to a
Purchase Agreement dated October 9, 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 October 15, 1997 ("Registration Agreement") which granted
the holders of the Old
2
<PAGE>
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
3
<PAGE>
significant discount from face value. See "Risk Factors--Absence of Public
Market."
The Exchange Notes will bear interest at the same rate and on the same
terms as the Old Notes. Consequently, cash interest on the Exchange Notes will
not accrue until October 15, 2002, and thereafter will accrue at a rate of 9.47%
per annum and will be payable semi-annually in arrears commencing on April 15,
2003 and thereafter on April 15 and October 15 of each year; provided, however,
that the Company may elect to commence the accrual of cash interest on an
interest payment date on or after October 15, 2000 and prior to October 15,
2002, in which case the outstanding principal amount at maturity of each Note
will on such interest payment date be reduced to the Accreted Value of the Note
as of such interest payment date and cash interest will be payable on each
interest payment date thereafter. Amortization of original issue discount on
each Exchange Note should accrue from the date of original issue of the
surrendered Old Note and interest, if any, on each Exchange Note will accrue
from the last interest payment date on which interest was paid on the
surrendered Old Note (see "Certain United States Federal Income Tax
Considerations") or, if no interest has been paid on such Old Note, from the
date on which cash interest on such Old Note would begin to accrue.
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.
----------------
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
4
<PAGE>
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.
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, including financial,
regulatory environment, and trend projections, 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, cost efficiently and on a timely basis 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.
For additional information, see "Risk Factors."
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 16,000 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
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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.
Under the Company's current plan, the Qwest Network will extend approximately
16,000 route miles coast-to-coast and connect approximately 125 metropolitan
areas that represent approximately 80% of the originating and terminating long
distance traffic in the United States. Construction of approximately 13,000
route miles of the Qwest Network is scheduled to be completed by late 1998, and
approximately 3,000 route miles, mostly in the southeastern United States, are
scheduled to be completed by the end of the second quarter of 1999. 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 will connect to international cable heads for trans-Atlantic and
trans-Pacific transmission and cross-border points to Canada and Mexico. Qwest
also plans to extend its network approximately 1,400 route miles into Mexico
through dark fiber to be owned by the Company on the fiber optic system of a
third party. Completion of the Mexican network is scheduled for late 1998.
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
As of September 30, 1997, the Company's network infrastructure included, among
other assets: (i) approximately 7,900 route miles of conduit in place,
consisting of approximately 2,800 route miles of lit fiber systems, one in
California (the "Cal-Fiber" system) carrying traffic between Los Angeles and
Sacramento, one connecting Sacramento and Denver, one connecting Kansas City and
Denver, and one in Texas connecting Dallas and Houston, approximately 2,800
route miles of dark fiber installed in conduit, and approximately 2,300 route
miles of vacant conduit; (ii) right-of-way agreements in place for approximately
6,900 additional route miles of planned construction for the Qwest Network;
(iii) an approximately 3,500 mile operating digital microwave system (the
"Microwave System"); (iv) approximately 15,000 DS-3 miles of fiber transmission
capacity leased by the Company from other carriers, used primarily to extend the
Company's switched services for originating and terminating traffic beyond the
boundaries of the Company's lit fiber network; and (v) five digital switches.
Upon completion, key characteristics of the Qwest Network will include:
~ Technologically Advanced Platform. The Company is installing technologically
advanced fiber optic cable and electronic equipment in a uniform configuration
throughout the entire Qwest Network, which will provide full coast-to-coast
SONET four-fiber ring protection. The Company is deploying an advanced network
management system (Nortel's Integrated Network Management
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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/-15/ 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 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 8,200 route miles of telecommunications conduit
systems over the last eight years for itself and major interexchange carriers
7
<PAGE>
including AT&T, MCI, Sprint and WorldCom. Network Construction Services
currently employs over 810 experienced construction personnel led by a 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 approximately 94% of
the Qwest Network and already has installed approximately 50% 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 four 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 developing its distinctive "ride the light" brand identity 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.
Dark Fiber Sales
The Company entered into agreements in 1996 with both Frontier and WorldCom
and into two agreements in 1997 with GTE whereby each is purchasing certain dark
fiber along the Qwest Network. Proceeds from these dark fiber agreements
8
<PAGE>
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 GTE agreements provide for the purchase of 24 fibers along
substantially all of the route of the Qwest Network, including the Southeast
route. The Frontier agreement provides for the purchase of 24 fibers along the
route of the Qwest Network, with the exception of the Southeast route and
certain other segments. 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 also has several smaller construction contracts for the sale of
dark fiber along the Qwest Network aggregating approximately $170.0 million. 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 dark fiber agreements of the size and
scope of the Frontier and GTE contracts. The Company presently intends to retain
ownership of at least 48 fibers and the related conduit and a second empty
conduit, all 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 $1.9 billion. Of this amount, the Company had
already expended approximately $640.0 million as of September 30, 1997. The
Company anticipates remaining total cash outlays for these purposes of
approximately $170.0 million in 1997, $850.0 million in 1998 and $240.0 million
in 1999. Estimated total expenditures for 1997 and 1998 include the Company's
commitment to purchase a minimum quantity of fiber for approximately $399.0
million (subject to quality and performance specifications), of which
approximately $198.5 million had been expended as of September 30, 1997.
Estimated total expenditures for 1997, 1998 and 1999 together also include
approximately $139.0 million for the purchase of electronic equipment. In
addition, the Company anticipates approximately $325.0 million of capital
expenditures in 1997 and 1998 to support growth in Carrier Services and
Commercial Services.
As of September 30, 1997 the Company has obtained the following sources of
funds to complete the build-out: (i) approximately $1.1 billion under the
Frontier, WorldCom and GTE contracts and additional smaller construction
contracts for sales of dark fiber, of which approximately $351.0 million had
already been paid and approximately $770.0 million remained to be paid at
September 30, 1997; (ii) $90.0 million of vendor financing; (iii) approximately
$117.6 million in net proceeds from the sale on March 31, 1997 of $250.0 million
in principal amount of the Company's 10-7/8% Series B Senior Notes Due 2007 (the
"Senior Notes") remaining after repayment of certain existing debt; and (iv)
approximately $319.5 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, the net proceeds
from the sale of the Old Notes and future borrowings. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Liquidity and Capital Resources."
9
<PAGE>
With the completion of the approximately 16,000 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 network extensions in the Pacific Northwest. Also,
the Company continues to evaluate opportunities to acquire or invest in
complementary, attractively valued businesses, facilities, contract positions
and hardware to improve its ability to offer new products and services to
customers, to compete more effectively and to facilitate further growth of its
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
Recent Developments
In October 1997, Qwest and NEWSUPERNET ("NSN") consummated an agreement
whereby Qwest acquired from NSN all of the issued and outstanding shares of
capital stock of NSN's then wholly-owned subsidiary, SuperNet, Inc.
("SuperNet"), and the capital stock of SuperNet issued at the closing of the
acquisition, for $20.0 million in cash. The acquisition will be accounted for
using the purchase method of accounting. The purchase price will be allocated to
the assets and liabilities acquired based upon the estimated fair values of such
assets and liabilities. SuperNet is a regional ISP in the Rocky Mountain region
that offers Internet services ranging from metered dial-in access to
Internet-based data management and hosting services. SuperNet will provide a
customer base, existing product lines and technical expertise from which the
Company can build product lines in Commercial Services, including corporate
intranet and extranet services and virtual private networks. See the unaudited
Pro Forma Consolidated Financial Statements and unaudited interim pro forma
financial statements of the Company and the notes thereto, appearing elsewhere
in this Prospectus.
THE EXCHANGE OFFER
The Exchange Offer.... The Company is offering to exchange $1,000 principal
amount at maturity of Exchange Notes for each $1,000 principal amount at
maturity 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, interest rate step-up, original issue discount and
cash interest 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
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<PAGE>
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. See "The Exchange Offer--Resale of the Exchange Notes" and
"Plan of Distribution."
Registration Agreement.... The Old Notes were sold by the Company on October 15,
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 York City time, on the "Expiration Date." As used herein, the term
"Expiration Date" means 5:00 p.m., New York City time, on ______day,
____________, 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 __________, 1997.
Withdrawal............... 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
11
<PAGE>
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.
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,
interest rate step-up, original issue discount and cash interest 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 "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 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. Amortization
of original issue discount on each Exchange Note should accrue from the date of
original issue of the surrendered Old Note (see "Certain United States Federal
Income Tax Considerations") and interest, if any, 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 on which cash interest on such Old Note would begin to accrue.
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.
The Notes ...
12
<PAGE>
The Old Notes were issued at an issue price of $629.62 per $1,000 stated
principal amount at maturity and generated gross proceeds to the Company of
approximately $350.0 million. The Notes will accrete at a rate of 9.47% per
annum, compounded semi-annually, to an aggregate principal amount of
$555,890,000 by October 15, 2002 (subject to the Company's option to elect to
commence the accrual of cash interest as provided herein). The Notes will mature
on October 15, 2007. The yield to maturity of the Notes is 9.47% per annum
(computed on a semi-annual bond equivalent basis) calculated from October 15,
1997.
Interest ...
Cash interest on the Notes will not accrue until October 15, 2002, and
thereafter will accrue at a rate of 9.47% per annum and will be payable
semi-annually in arrears commencing on April 15, 2003 and thereafter on April 15
and October 15 of each year; provided, however, that the Company may elect, upon
not less than 60 days' prior notice, to commence the accrual of cash interest on
all outstanding Notes on any April 15 or October 15, on or after October 15,
2000 and prior to October 15, 2002.
Ranking ...
The Notes are senior unsecured obligations of Qwest, ranking pari passu in right
of payment with all existing and future senior unsecured indebtedness of Qwest,
including the Senior Notes, and are senior in right of payment to all existing
and future subordinated indebtedness of Qwest. The Notes are not secured by any
assets and are effectively subordinated to any future secured indebtedness of
Qwest to the extent of the value of the assets securing such indebtedness. As of
September 30, 1997, on a pro forma basis after giving effect to the sale of the
Old Notes, Qwest would have had approximately $600.0 million of indebtedness
outstanding, none of which would have constituted secured indebtedness. The
Notes are effectively subordinated to all existing and future third-party
indebtedness and other liabilities of Qwest's subsidiaries (including trade
payables). As of September 30, 1997, on a pro forma basis as if the acquisition
of SuperNet had been consummated at that date, total liabilities of Qwest's
subsidiaries (after the elimination of loans and advances by Qwest to its
subsidiaries) would have been approximately $292.8 million. Of that amount,
approximately $26.1 million in indebtedness was secured by certain assets of the
borrowers. See "Description of Certain Indebtedness." Any rights of Qwest and
its creditors, including the holders of Notes, to participate in the assets of
any of Qwest'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 redeemable at the option of the Company, in whole or in part,
at any time or from time to time, on or after October 15, 2002, upon not less
than 30 nor more than 60 days' notice, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon (if any) to the redemption
date. In addition, prior to October 15, 2000, Qwest may redeem up to 35% of the
Accreted Value of the Notes at a redemption price equal to 109.47% of the
Accreted Value at the redemption date of the 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 (as defined) resulting in gross proceeds
of at least $100.0 million in the aggregate; provided that at least 65% of the
Accreted Value of the originally issued Notes would remain outstanding
immediately after any such redemption.
Original Issue Discount ...
The Notes are issued with substantial amounts of original issue discount
13
<PAGE>
for United States federal income tax purposes. Thus, although there will be no
periodic payments of cash interest on the Notes prior to April 15, 2003
(subject to Qwest's option to elect to commence the accrual of cash interest on
or after October 15, 2000), original issue discount (i.e., the difference
between the stated redemption price at maturity and the issue price of the
Notes) will accrue from the issue date and will be includable as interest
income periodically in a holder's gross income for United States federal income
tax purposes in advance of receipt of the cash payments to which the income is
attributable. See "Certain United States Federal Income Tax Considerations."
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 Accreted Value of the
Notes on the purchase date plus any accrued and unpaid interest and premium, if
any, not otherwise included in the Accreted Value to such purchase date. Qwest
may not have the financial resources 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 Qwest 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 Qwest 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."
For additional information concerning the Notes and the definitions of certain
capitalized terms used above, see "Description of the Notes" and "Description of
the Notes--Exchange Offer; Registration Rights."
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."
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 have been
taken or derived from the historical audited 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 nine months ended September 30, 1997 and 1996 have been
taken or 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
14
<PAGE>
years in the three-year period ended December 31, 1996 and unaudited interim
financial statements as of the end of and for the nine months ended September
30, 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.
15
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------ ----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- -----------
(in thousands)
Statement of Operations Data:
Revenue:
Carrier services(1)(2)(3)............................. $41,561 53,064 50,240 67,789 57,573 45,106 39,062
Commercial services................................... - 969 8,712 20,412 34,265 25,475 38,033
---------- ---------- ---------- ---------- ---------- ---------- -----------
41,561 54,033 58,952 88,201 91,838 70,581 77,095
Network construction services(4)...................... 11,751 15,294 11,921 36,901 139,158 59,255 413,226
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total revenue......................................... 53,312 69,327 70,873 125,102 230,996 129,836 490,321
---------- ---------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Telecommunications services........................... 31,557 41,240 48,239 81,215 80,368 62,399 65,310
Network construction services......................... 9,730 15,515 9,369 32,754 87,542 37,661 282,472
Selling, general and administrative(5)................ 10,270 15,622 21,516 37,195 45,755 34,230 59,987
Growth share plan(6).................................. 2,000 2,600 - - 13,100 - 69,320
Depreciation and amortization......................... 5,020 5,270 2,364 9,994 16,245 11,890 13,114
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total operating expenses.............................. 58,577 80,247 81,488 161,158 243,010 146,180 490,203
---------- ---------- ---------- ---------- ---------- ---------- -----------
Earnings(loss)from operations......................... (5,265) (10,920) (10,615) (36,056) (12,014) (16,344) 118
Gain on sale of contract rights(7).................... - - - - - - 9,296
Gain on sale of telecommunications service
agreements(2)......................................... - - - - 6,126 6,126 -
Gain on sale of network(1)............................ - 126,521 - - - - -
Interest income (expense), net........................ (2,687) (3,127) (28) (2,466) (4,373) (3,106) (2,974)
Other income (expense), net........................... (610) (763) (42) 55 60 113 (1,986)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Earnings (loss) before income taxes................... (8,562) 111,711 (10,685) (38,467) (10,201) (13,211) 4,454
Income tax expense (benefit).......................... (1,988) 43,185 (3,787) (13,336) (3,234) (4,310) 2,191
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net earnings (loss)................................... $(6,574) 68,526 (6,898) (25,131) (6,967) (8,901) 2,263
========== ========== ========== ========== ========== ========== ===========
Earnings (loss) per share(8).......................... $(0.07) 0.78 (0.08) (0.29) (0.08) (0.10) 0.02
Weighted average number of shares outstand-
16
<PAGE>
ing(8)................................................ 88,158 88,158 88,158 88,158 88,158 88,158 93,945
Other Financial Data:
EBITDA(9)............................................. $(855) (824) (6,338) (26,007) 6,912 (2,742) 11,246
Net cash provided by (used in) operating activities... $1,377 (7,125) 3,306 (56,635) 32,524 (9,340) (60,072)
Net cash provided by (used in) investing activities... $(11,202) 107,496 (41,712) (58,858) (52,622) (44,353) (196,304)
Net cash provided by (used in) financing activities... $11,549 (95,659) 34,264 113,940 25,519 56,338 436,202
Capital expenditures(10).............................. $11,000 3,794 40,926 48,732 85,842 49,573 271,332
Ratio of earnings to fixed charges(11)................ - 5.68 - - - - -
</TABLE>
<TABLE>
<S> <C> <C>
As of December 31, 1996 As of September 30, 1997
----------------------- ------------------------
Operating Data:
Route miles of conduit installed...... 3,650 7,900
Route miles of dark fiber installed... 1,800 2,800
Route miles of lit fiber installed.... 900 2,800
Switches.............................. 5 5
Minutes of Use(12).................... 382,000,000 433,000,000
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, As of September 30,
----------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents................... $ 2,467 7,179 3,037 1,484 6,905 4,129 186,731
Property and equipment, net................. $34,628 23,666 63,009 114,748 186,535 154,389 444,816
Total assets................................ $52,735 60,754 89,489 184,178 264,259 225,520 908,478
Long-term debt, including current portion... $27,600 2,141 27,369 90,063 134,461 127,094 284,728
Total liabilities........................... $51,482 48,675 64,908 157,703 254,817 207,946 539,627
Total stockholders' equity.................. $ 1,253 12,079 24,581 26,475 9,442 17,574 368,851
</TABLE>
17
<PAGE>
(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 and 1997, the Company entered into construction contracts for sales
of dark fiber with Frontier, WorldCom and GTE whereby the Company agreed to
sell dark fiber along the route of the Qwest Network for a purchase price
of approximately $952.0 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 $374.0 million in
the nine months ended September 30, 1997. See "Business-The Qwest
Network-Dark Fiber 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) $1.6 million and $2.6 million
for the nine months ended September 30, 1996 and the twelve months ended
December 31, 1996, respectively, 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. Upon
completion of the Initial Public Offering in June 1997, certain Growth
Shares vested in full, which resulted in the issuance in July 1997 of
1,295,766 shares of Common Stock, net of cash payments of approximately
$21.9 million related to tax withholdings. 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 September 30, 1997, the Company
has received $9.0 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
18
<PAGE>
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 $80.6 million for the nine months
ended September 30,1997.
(10) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures, capital expenditures financed with the
equipment credit facility 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 $6.7 million and
$14.8 million in the nine month periods ended September 30, 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 $16.0 million in the nine month
period ended September 30, 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 nine months ended September 30, 1997.
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.
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
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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 (i) qualified institutional
buyers pursuant to Rule 144A under the Securities Act and (ii) qualified buyers
outside the United States in reliance upon Regulation S under the Securities
Act. The Old Notes are eligible for 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 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.
Although the Company believes that its cost estimates and the build-out schedule
are reasonable, there can be no assurance that the actual
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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 including its ability to pay the
principal of and interest on the Notes.
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 income of
approximately $2.3 million for the nine months ended September 30, 1997 and a
net loss of approximately $7.0 million for the year ended December 31, 1996; and
the Company had an accumulated deficit of approximately $44.2 million as of
September 30, 1997. Although the Company had positive working capital of
approximately $221.1 million as of September 30, 1997, the Company expects to
incur approximately $769.4 million of total capital expenditures for the
remainder of the year ending December 31, 1997 and the year ending December 31,
1998. However, the Company had working capital deficits for each of the past
five fiscal years. See the Consolidated Financial Statements of the Company
appearing elsewhere in this Prospectus. Any future working capital deficits
would limit the Company's cash resources, resulting in reduced liquidity. There
can be no assurance that the Company will be able to achieve or sustain
operating profitability to pay the principal of and interest on the Notes. The
Company may 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 September 30, 1997, the Company had
approximately $284.7 million of long-term debt (including the current portion
thereof) and stockholders' equity of approximately $368.9 million. As of
September 30, 1997, on a pro forma basis, as if the acquisition of SuperNet had
been consummated at that date and as adjusted to give effect to the issuance of
the Old Notes, the Company would have had approximately $636.1 million of
long-term debt (including the current portion thereof), and a debt-to-equity
ratio of 1.7 to 1.0. 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.
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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. 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
increases 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.
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, including the
Senior Notes. 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
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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 September 30, 1997, on a pro forma basis as if the acquisition of SuperNet
had been consummated as of that date and as adjusted to give effect to the
issuance of the Notes, the total liabilities of Qwest's subsidiaries (after
elimination of loans and advances by Qwest to its subsidiaries) would have been
approximately $292.8 million, of which approximately $26.1 million in
indebtedness was secured by certain assets of the borrowers. In addition, as of
September 30, 1997, the Company had future obligations of approximately $43.6
million under long-term non-cancelable operating leases, capacity service
agreements and right-of-way agreements requiring future minimum lease payments
through the year 2028, 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 $53.8 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.
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
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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, which recently
made an unsolicited exchange offer for MCI). 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 October 1997 MCI and WorldCom
announced a proposed merger. The impact on the Company of such a merger or other
consolidation in the industry is uncertain. 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 nine months of 1997, the Company's top 10 customers
accounted for approximately 69.3% and 86.3%, respectively, of its consolidated
gross revenue. Frontier, WorldCom and GTE accounted for 26.3%, 27.8% and 0.0% of
such revenue, respectively, in 1996 and 33.4%, 6.3% and 36.9% of such revenue in
the first nine months of 1997, respectively, attributable primarily to
construction contracts for the sale of dark fiber to these customers that extend
through 1998 or into 1999 pursuant to the applicable contract. In 1997, the
Company entered into two substantial construction contracts 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
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expenditures. A significant reduction in the level of services the Company
provides for any of its large customers could have a material adverse effect on
the Company's results of operations or financial condition. In addition, the
Company's business plan assumes increased revenue from its Carrier Services
operations to fund the expansion of the Qwest Network. Many of the Company's
customer arrangements are subject to termination on short notice and do not
provide the 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 completion 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
including its ability to complete the Qwest Network
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successfully and its ability to pay the principal of and interest on the Notes.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant changes in
technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those provided by the
Company. While the Company believes that for the foreseeable future technology
changes will neither materially affect the continued use of fiber optic cable
nor materially hinder the Company's ability to acquire necessary technologies,
the effect of technological changes on the Company's operations cannot be
predicted and could have a material adverse effect on the Company's business,
financial condition and results of operations, 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
approximately 94% 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 ability to use such rights 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
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third parties will not raise material issues with regard to the Company's
compliance or noncompliance with applicable regulations.
The Telecom Act of 1996 may have potentially significant effects on the
operations of the Company. The Telecom Act of 1996, among other things, allows
the RBOCs and the General Telephone Operating Companies to enter the long
distance business and enables other entities, including entities affiliated with
power utilities and ventures between LECs and cable television companies, to
provide an expanded range of telecommunications services. Entry of such
companies into the long distance business would result in substantial additional
competition in Commercial Services and Carrier Services, affecting the Company
and its customers, which may have a material adverse effect on the Company and
such customers. However, the Company believes that entry by the RBOCs and other
companies into the market will create opportunities for the Company to sell
fiber or lease long distance high volume capacity.
The Company monitors compliance with federal, state and local regulations
governing the discharge and disposal of hazardous and environmentally sensitive
materials, including the emission of electromagnetic radiation. Although the
Company believes that it is in compliance with such regulations, there can be no
assurance that any such discharge, disposal or emission might not expose the
Company to claims or actions that could have a material adverse effect on the
Company. See "Regulation."
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 83.7% 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."
Original Issue Discount; Possible Unfavorable Tax and Other Legal Consequences
for Holders of Senior Discount Notes and for Qwest
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Because there will be no accrual of cash interest on the Notes prior to
October 15, 2002 (subject to Qwest's option to elect to commence the accrual of
cash interest on or after October 15, 2000), the Notes are issued with
substantial amounts of original issue discount for United States federal income
tax purposes. Consequently, purchasers of the Notes will generally be required
to include the original issue discount (i.e., the difference between the stated
redemption price at maturity and the issue price of the Notes) as interest
income periodically in gross income for United States federal income tax
purposes in advance of receipt of the cash payments to which the income is
attributable. See "Certain United States Federal Income Tax Considerations" for
a more detailed discussion of the United States federal income tax consequences
applicable to certain purchasers of the Notes.
If a bankruptcy petition is filed by or against the Company under the United
States Bankruptcy Code after the issuance of the Notes, the claim of a holder of
Notes with respect to the principal amount thereof may be limited to an amount
equal to the sum of: (i) the initial offering price for the Notes and (ii) that
portion of the original issue discount that is not deemed to constitute
"unmatured interest" within the meaning of the United States Bankruptcy Code.
Any original issue discount that was not amortized as of the date of any such
bankruptcy filing would constitute "unmatured interest."
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Old Notes were originally issued and sold on October 9, 1997 in an offering
that was exempt from registration under the Securities Act in reliance upon the
exemptions provided by Section 4(2), Rule 144A and Regulation S of the
Securities Act. Accordingly, the Old Notes may not be reoffered, resold or
otherwise pledged, hypothecated or transferred in the United States unless so
registered or unless an exemption from the registration requirements of the
Securities Act and applicable state securities laws is available.
As a condition to the sale of the Old Notes, the Company and the Initial
Purchasers entered into the Registration Agreement as of October 15, 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 January 13, 1998; (ii) use its best efforts to
cause such Registration Statement to be declared effective under the Securities
Act by March 14, 1998; and (iii) consummate an offer of the Exchange Notes in
exchange for surrender of the Old Notes by April 13, 1998. 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 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
28
<PAGE>
defined in Rule 405 ofthe 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 inconnection 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 at maturity
of Exchange Notes in exchange for each $1,000 principal amount at maturity 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, interest rate step-up, original issue
discount and cash interest provisions will be modified or eliminated as
appropriate and (iii) holders of the Exchange Noteswill not be entitled to
certain rights of holders of Old Notes under theRegistration 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 $555,890,000 in principal
amount at maturity of the Old Notes is outstanding. This Prospectus, together
with the Letter of Transmittal, is first being sent on or about _______, 1997,
to all holders of Old Notes known to the Company.
29
<PAGE>
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 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, nonacceptance or
termination 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
30
<PAGE>
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.
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.
31
<PAGE>
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
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
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. See "--Certain Conditions of the Exchange Offer" below. For
purposes of the 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 the same rate and on the same
terms as the Old Notes. Consequently, cash interest on the Exchange Notes will
not accrue until October 15, 2002, and thereafter will accrue at a rate of 9.47%
per annum and will be payable semi-annually in arrears commencing on April 15,
2003 and thereafter on April 15 and October 15 of each year; provided, however,
that the Company may elect to commence the accrual of cash interest on an
interest payment date on or after October 15, 2000 and prior to October 15,
2002, in which case the outstanding principal amount at maturity of each Note
will on such interest payment date be reduced to the Accreted Value of the Note
as of such interest payment date and cash interest will be payable on each
interest payment date thereafter. Amortization of original issue discount on
each Exchange Note should accrue from the date of original issue of the
surrendered Old Note (see "Certain United States Federal Income Tax
Considerations") and interest, if any, 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 on which
cash interest on such Old Note would begin to accrue. 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.
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
32
<PAGE>
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.
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
33
<PAGE>
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 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:
34
<PAGE>
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 $245,000 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.
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
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<PAGE>
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 Notes (in addition to the
stated interest on the 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 15 and October 15, at a rate per annum
equal to 0.50% of the principal amount at maturity of the Notes during the
90-day period immediately following the occurrence of any Registration Default
and shall increase by 0.25% per annum of the principal amount at maturity of the
Notes at the end of each subsequent 90-day period, but in no event shall such
rates exceed 2.0% 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.
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<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the historical
consolidated capitalization of the Company, and (ii) the pro forma
capitalization of the Company as adjusted to give effect to the issuance of the
Old Notes and assuming the acquisition of SuperNet had occurred on September 30,
1997. 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.
September 30, 1997
-----------------------
Actual Pro Forma(1)
--------- ------------
(in thousands)
Current portion of long-term debt....................... $15,782 $ 16,688
========= ============
Senior Notes............................................ 250,000 250,000
Senior Discount Notes................................... - 349,999
Other long-term debt.................................... 18,946 19,400
--------- ------------
Total long-term debt (excluding current portion)........ 268,946 619,399
--------- ------------
Stockholders' 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; 103,320,766 shares issued and
outstanding(2).......................................... 1,033 1,033
Additional paid-in capital.............................. 412,005 412,005
Accumulated deficit..................................... (44,187) (44,187)
--------- ------------
Total stockholders' equity.............................. 368,851 368,851
--------- ------------
Total capitalization.................................... $637,797 $988,250
========= ============
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- ------
(1) For additional information concerning the pro forma adjustments, see the
unaudited Pro Forma Consolidated Financial Statements of the Company and the
notes thereto, included elsewhere in this Prospectus.
(2) 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."
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 have been
taken or derived from the historical audited 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 nine months ended September 30, 1997 and 1996 have been
taken or 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 nine
months ended September 30, 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.
38
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months
Year Ended December 31, Ended September 30,
------------------------------------------------------ ----------------------
1992 1993 1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------- ---------- -----------
(in thousands)
Statement of Operations Data:
Revenue:
Carrier services(1)(2)(3)............................. $41,561 53,064 50,240 67,789 57,573 45,106 39,062
Commercial services................................... - 969 8,712 20,412 34,265 25,475 38,033
---------- ---------- ---------- ---------- ---------- ---------- -----------
41,561 54,033 58,952 88,201 91,838 70,581 77,095
Network construction services(4)...................... 11,751 15,294 11,921 36,901 139,158 59,255 413,226
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total revenue......................................... 53,312 69,327 70,873 125,102 230,996 129,836 490,321
---------- ---------- ---------- ---------- ---------- ---------- -----------
Operating expenses:
Telecommunications services........................... 31,557 41,240 48,239 81,215 80,368 62,399 65,310
Network construction services......................... 9,730 15,515 9,369 32,754 87,542 37,661 282,472
Selling, general and administrative(5)................ 10,270 15,622 21,516 37,195 45,755 34,230 59,987
Growth share plan(6).................................. 2,000 2,600 - - 13,100 - 69,320
Depreciation and amortization......................... 5,020 5,270 2,364 9,994 16,245 11,890 13,114
---------- ---------- ---------- ---------- ---------- ---------- -----------
Total operating expenses.............................. 58,577 80,247 81,488 161,158 243,010 146,180 490,203
---------- ---------- ---------- ---------- ---------- ---------- -----------
Income (loss) from operations......................... (5,265) (10,920) (10,615) (36,056) (12,014) (16,344) 118
Gain on sale of contract rights(7).................... - - - - - - 9,296
Gain on sale of telecommunications service
agreements(2)......................................... - - - - 6,126 6,126 -
Gain on sale of network(1)............................ - 126,521 - - - - -
Interest income (expense), net........................ (2,687) (3,127) (28) (2,466) (4,373) (3,106) (2,974)
Other income (expense), net........................... (610) (763) (42) 55 60 113 (1,986)
---------- ---------- ---------- ---------- ---------- ---------- -----------
Earnings (loss) before income taxes................... (8,562) 111,711 (10,685) (38,467) (10,201) (13,211) 4,454
Income tax expense (benefit).......................... (1,988) 43,185 (3,787) (13,336) (3,234) (4,310) 2,191
---------- ---------- ---------- ---------- ---------- ---------- -----------
Net earnings (loss)................................... $(6,574) 68,526 (6,898) (25,131) (6,967) (8,901) 2,263
========== ========== ========== ========== ========== ========== ===========
Earnings (loss) per share(8).......................... $(0.07) 0.78 (0.08) (0.29) (0.08) (0.10) 0.02
Weighted average number of shares outstand-
ing(8)................................................ 88,158 88,158 88,158 88,158 88,158 88,158 93,945
========== ========== ========== ========== ========== ========== ===========
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Other Financial Data:
EBITDA(9)............................................. $(855) (824) (6,338) (26,007) 6,912 (2,742) 11,246
Net cash provided by (used in) operating activities... $1,377 (7,125) 3,306 (56,635) 32,524 (9,340) (60,072)
Net cash provided by (used in) investing activities... $(11,202) 107,496 (41,712) (58,858) (52,622) (44,353) (196,304)
Net cash provided by (used in) financing activities... $11,549 (95,659) 34,264 113,940 25,519 56,338 436,202
Capital expenditures(10).............................. $11,000 3,794 40,926 48,732 85,842 49,573 271,332
Ratio of earnings to fixed charges(11)................ - 5.68 - - - - -
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
As of December 31, As of September 30,
----------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(in thousands)
Balance Sheet Data:
Cash and cash equivalents................... $ 2,467 7,179 3,037 1,484 6,905 4,129 186,731
Property and equipment, net................. $34,628 23,666 63,009 114,748 186,535 154,389 444,816
Total assets................................ $52,735 60,754 89,489 184,178 264,259 225,520 908,478
Long-term debt, including current portion... $27,600 2,141 27,369 90,063 134,461 127,094 284,728
Total liabilities........................... $51,482 48,675 64,908 157,703 254,817 207,946 539,627
Total stockholders' equity.................. $ 1,253 12,079 24,581 26,475 9,442 17,574 368,851
</TABLE>
40
<PAGE>
(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 and 1997, the Company entered into construction contracts for the
sale of dark fiber with Frontier, WorldCom and GTE whereby the Company
agreed to sell dark fiber along the route of the Qwest Network for a
purchase price of approximately $952.0 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 $374.0
million in the nine months ended September 30, 1997. See "Business-The Qwest
Network-Dark Fiber 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) $1.6 million and $2.6 million for the nine
months ended September 30, 1996 and the twelve months ended December 31,
1996, respectively, 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. Upon
completion of the Initial Public Offering in June 1997, certain Growth
Shares vested in full, which resulted in the issuance in July 1997 of
1,295,766 shares of Common Stock, net of cash payments of approximately
$21.9 million related to tax withholdings. 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 September 30, 1997, the Company has
received $9.0 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
41
<PAGE>
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 $80.6 million for the nine months
ended September 30, 1997.
(10) Capital expenditures include expenditures for property and equipment,
accrued capital expenditures, capital expenditures financed with the
equipment credit facility 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 $6.7 million and
$14.8 million in the nine month periods ended September 30, 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 $16.0 million in the nine month
period ended September 30, 1997, and $18.7 million and $27.6 million in
1996 and 1993, respectively.
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 is a facilities-based provider of communications services to
interexchange carriers and other telecommunications entities (Carrier Services),
businesses and consumers (Commercial Services) and constructs and installs fiber
optic communications systems for interexchange carriers and other
telecommunications entities, as well as for its own use (Network Construction
Services). The Company is expanding its existing long distance network into the
Qwest Network, an approximately 16,000 route mile 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
42
<PAGE>
activating the Cal-Fiber system. The Company derives its revenue from Carrier
Services, Commercial Services and Network Construction Services.
In October 1997, Qwest and NEWSUPERNET (NSN) consummated an agreement whereby
Qwest acquired from NSN all of the issued and outstanding shares of capital
stock of NSN's then wholly-owned subsidiary, SuperNet, Inc. (SuperNet), and the
capital stock of SuperNet issued at the closing of the acquisition, for $20.0
million in cash. The acquisition will be accounted for using the purchase method
of accounting. The purchase price will be allocated to the assets and
liabilities acquired based upon the estimated fair values of such assets and
liabilities.
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 nine 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 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 nine months ended September 30, 1997 and year
ended December 31, 1996, the Company's five largest
43
<PAGE>
carrier customers accounted for approximately 41.3% 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. The Company plans to build on its Carrier Services
experience to expand its presence in the Commercial Services market by
developing its distinctive "ride the light" brand identity 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.
Revenue from Commercial Services is recognized primarily on a minutes-of-use
basis. Commercial Services has generated revenue using three primary sales
channels: direct mail, agent and telemarketing. The Commercial Services market
is highly competitive and generally subject to significant customer attrition.
The Company's attrition rates vary by product line and sales channel, and the
Company typically has experienced an average monthly attrition rate ranging from
4% to 9%. The average attrition rate for the nine months ended September 30,
1997 has been consistent with historical rates. In September 1997, the Company
entered into an arrangement with a third party under which they will jointly
define and test new broadband business multimedia services. The Company has also
entered into marketing agreements in September 1997 with two additional third
parties. Under one of these agreements, the third party, a marketing company
that wholesales and retails telecommunications products on a national basis,
will be an authorized sales representative of Qwest, marketing the Company's
long-distance products through affinity groups. Under the second of these
agreements, the Company will offer its One Plus and Calling Card services (with
competitive international pricing for both) to utilities across the nation along
with other services provided by the third party under its Simple ChoiceSM brand
name.
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 two substantial construction contracts
with GTE in 1997 for the sale of dark fiber along the entire route of the Qwest
Network. 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
44
<PAGE>
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, general and administrative ("SG&A"), and
depreciation and amortization. Expenses for Network Construction Services
primarily consist of the costs to construct the Qwest Network, including
conduit, fiber cable, construction crews and rights-of-way. 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.
Commercial services sales and marketing expenses has been incurred primarily
through the use of its agent, telemarketing, and direct sales channels. The
Company expects that increased SG&A 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 is in the process of opening 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 of its employees and
directors. Growth Share Plan expense, included in Operating Expenses, reflects
the Company's estimate of compensation expense with respect to the Growth Shares
issued to participants. A "Growth Share" is a unit of value based on the
increase in value of the Company over a specified measuring period. Growth
Shares granted under the 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
45
<PAGE>
share performance cycle. Upon completion of the Initial Public Offering in June
1997, certain Growth Shares vested in full and became payable, which resulted in
substantial compensation expense under the Growth Share Plan in the second
quarter of 1997. The Company issued 1,295,766 shares of Common Stock in July
1997, which were net of cash payments of amounts related to tax withholdings, in
settlement of the accrued liability related to these Growth Shares. Effective
with the Initial Public Offering, all holders of Growth Shares not vested by
virtue of the Initial Public Offering have been granted nonqualified stock
options under the Company's Equity Incentive Plan, and the value of their Growth
Shares has been capped based upon the Initial Public Offering price of $22.00
per share. Compensation expense relating to these nonvested Growth Shares will
be recognized over the remaining approximately four-year vesting period and is
estimated to be up to approximately $27.7 million in total. Payment of the
liability related to these Growth Shares is required to be paid in Common Stock,
net of cash payments related to the tax withholdings. The Company does not
anticipate any future grants under the Growth Share Plan.
The Company has created a project team, including internal and external
resources, that is in the process of identifying and addressing the impact on
its operating and application software and products of problems and
uncertainties related to the year 2000. The Company expects to resolve year 2000
compliance issues primarily through replacement and normal upgrades of its
software and products, the cost of which replacements and upgrades are included
in the Company's estimated capital expenditures for the remainder of 1997 and
the year ended 1998. However, there can be no assurance that such replacements
and upgrades can be completed on schedule and within the estimated costs. See
"Risk Factors-Operating Losses and Working Capital Deficits."
46
<PAGE>
Results of Operations
The table set forth below summarizes the Company's percentage of revenue by
source and operating expenses as a percentage of total revenues:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
Revenue:
Carrier services................ 78.0% 76.5% 70.9% 54.2% 24.9% 34.7% 8.0%
Commercial services............. - 1.4 12.3 16.3 14.8 19.6 7.8
------- ------- ------- ------- ------- ------- -------
78.0 77.9 83.2 70.5 39.7 54.3 15.8
Network construction services... 22.0 22.1 16.8 29.5 60.3 45.7 84.2
------- ------- ------- ------- ------- ------- -------
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 48.1 13.3
Network construction services... 18.3 22.4 13.2 26.2 37.9 29.0 57.6
Selling, general and
administrative.................. 19.2 22.5 30.4 29.7 19.8 26.4 12.2
Growth Share Plan............... 3.8 3.8 - - 5.7 - 14.1
Depreciation and amortization... 9.4 7.6 3.3 8.0 7.0 9.1 2.8
------- ------- ------- ------- ------- ------- -------
Total operating expenses........ 109.9% 115.8% 115.0% 128.8% 105.2% 112.6% 100.0%
</TABLE>
47
<PAGE>
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
1996
The Company reported net income of $2.3 million in the nine months ended
September 30, 1997 compared to a net loss of $8.9 million in the same period of
the prior year. 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 $46.6 million for the nine months ended September 30,
1997.
Revenue. Total revenue increased $360.5 million, or 278%, during the nine
months ended September 30, 1997 as compared to the corresponding period in 1996.
Revenue from Network Construction Services increased $354.0 million, or 597%,
during the nine months ended September 30, 1997 as compared to the corresponding
period in 1996. The increase was due primarily to network construction revenue
from dark fiber sales to WorldCom, GTE and Frontier. Carrier Services revenue
decreased $6.0 million, or 13%, for the nine months ended September 30, 1997
compared with the corresponding period in 1996, primarily due to the Company's
sale of its resale dedicated line services on leased capacity in July 1996. The
sold business generated revenue of $18.8 million for the nine months ended
September 30, 1996. Exclusive of this revenue, Carrier Services revenue
increased $12.8 million, or 48%, during the nine months ended September 30,
1997, as compared to corresponding period of 1996. This increase in Carrier
Services revenue was due primarily to increases in revenue from carrier switched
services and carrier dedicated line services provided on the Qwest Network.
Commercial Services revenue increased $12.6 million, or 49%, for the nine months
ended September 30, 1997 as compared to the corresponding period in 1996. The
increase was due primarily to growth in switched services provided to small- and
medium-sized business and to consumers as a result of continued expansion of the
Company's direct mail, agent and telemarketing sales channels.
Operating Expenses. Total operating expenses increased $344.0 million, or
235%, during the nine months ended September 30, 1997 over the same period in
1996, due primarily to increases in telecommunication services, network
construction services, SG&A, Growth Share Plan and depreciation and amortization
expenses.
Expenses for telecommunications services increased $2.9 million, or 5%, for
the nine months ended September 30, 1997 compared to the corresponding period in
the prior year. The growth in telecommunications service expenses was primarily
attributable to the continued growth in switched services network engineering
and operations, partially offset by the reduction in expenses resulting from the
sale on July 1, 1996 of the Company's dedicated line services on leased
capacity. Expenses for Network Construction Services increased $244.8 million,
or 650%, in the nine months ended September 30, 1997 compared to the
corresponding period in 1996 due to costs of construction contracts relating to
increased dark fiber sales revenue.
SG&A increased $25.8 million, or 75%, in the nine months ended September 30,
1997 compared to the corresponding period of 1996. The increase was due
primarily to increases in expenses related to the following: the Company's
direct mail sales program, the development of the Company's new brand identity,
administrative and information services support of the Company's growth, and
recruiting and hiring additional personnel. The Company anticipates that as it
deploys the Qwest Network, expands its Carrier Services and Commercial Services,
and initiates its direct sales operations, SG&A will continue to increase.
48
<PAGE>
The Company has estimated an increase in the value of Growth Shares primarily
triggered by the Initial Public Offering in June 1997, and has recorded
approximately $69.3 million of additional compensation expense in the nine
months ended September 30, 1997. No expense was recognized in the nine months
ended September 30, 1996, as there were no compensatory elements in that period.
As discussed above, the Company anticipates total additional expense of up to
approximately $27.7 million through the year 2002 in connection with this plan.
The Company's depreciation and amortization expense increased $1.2 million, or
10%, during the nine months ended September 30, 1997 from the corresponding
period in 1996. This increase resulted primarily from activating the Denver to
Sacramento segment of the Qwest Network in late July 1997, purchases of
additional equipment used in constructing the Qwest Network and purchases of
other fixed assets to accommodate the Company's growth. The Company expects that
depreciation and amortization expense will continue to increase in subsequent
periods as the Company continues to activate additional segments of the Qwest
Network and amortizes the goodwill acquired with the SuperNet purchase
(discussed above).
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, under that agreement, sell the network. In the first
quarter of 1997, the Company sold certain of these rights to the purchaser in
return for $9.0 million in cash and the right to re-acquire certain terminal
facilities.
As previously discussed, the Company sold a portion of its 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 with respect to the
reimbursement of such costs and, as a result, the Company made a provision of
approximately $2.0 million in the first quarter of 1997.
During the nine months ended September 30, 1997 the Company's net interest and
other expenses increased $2.0 million, as compared to the corresponding period
of 1996. Interest expense, net, increased $3.9 million, or 78%, during the nine
months ended September 30, 1997, as compared to the corresponding period of
1996. This increase was due primarily to interest expense related to the
issuance of $250.0 million in principal amount of its 10-7/8% Senior Notes due
2007 (the Senior Notes) on March 31, 1997, partially offset by additional
capitalized interest resulting from construction of the Qwest Network. Interest
income increased by $4.0 million, or 211%, during the nine months ended
September 30, 1997, attributable to the increase in cash equivalent balances,
which resulted from the issuance of the Senior Notes and the Initial Public
Offering. During the nine months ended September 30, 1997, the Company's other
expense, net, increased $2.1 million, as compared to the corresponding period of
1996 due primarily to the provision for transition service costs described in
the previous paragraph. The Company expects interest expense to grow in future
periods due to the issuance in October 1997 of its 9.47% Senior Discount Notes
(discussed below).
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 for the nine months ended
September 30, 1997 was higher than the statutory federal rate as a result of
49
<PAGE>
permanent differences between book and tax expense relating to the Growth Share
Plan. The Company's effective tax rate in the corresponding period of 1996
approximated the statutory federal rate.
Net Loss. The Company realized net income of $2.3 million in the nine months
ended September 30, 1997 compared to a net loss of $8.9 million in the
corresponding period of 1996 as a result of the factors discussed above.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenue. Total revenue increased $105.9 million, or 85%, 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%, 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 68%, 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%, 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 nine months ended September 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 51%,
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%, 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%, 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%, to $45.8 million in 1996 from
$37.2 million in 1995. The Company incurred additional SG&A expenses as a result
of growth in the Company's telecommunications services and the construction of
the Qwest Network, including additional sales commissions on higher revenue,
expenses incurred in the implementation of the Company's direct mail sales
channel and expenses for customer service personnel added to support the
Company's expansion of its commercial customer base. The SG&A expenses in 1996
also included restructuring expenses of $1.6 million incurred by the Company as
a result of its decision to close 13 sales offices and the termination of
approximately 130 employees involved in sales, marketing and administrative
functions. As a result of this restructuring, the Company experienced a
reduction in payroll, commissions and rental expense. The Company anticipates
that as it deploys the Qwest Network and expands its Carrier Services and
Commercial Services, SG&A expenses will continue to increase.
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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
63%, 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 79%, 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 77%, 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 35%, 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%, 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 210%, 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 98%,
to $161.2 million in 1995 from $81.5 million in 1994. Expenses for
telecommunications services increased $33.0 million, or 68%, 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 250%, 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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SG&A expenses increased $15.7 million, or 73%, 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 323%, 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 March 31, 1997, the Company 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. During the six months ended September 30,
1997, the Company has funded capital expenditures and long-term debt repayments
primarily through the net proceeds of approximately $319.5 million from the
Initial Public Offering and net proceeds of approximately $242.0 million from
the issuance of the Senior Notes on March 31, 1997. 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 the
Parent.
The Company's operations generated insufficient cash flows from 1994 through
the nine months ended September 30, 1997 to enable it to meet its capital
expenditures, debt service and other cash needs. Total cash expended from
January 1, 1994 to September 30, 1997 to fund capital expenditures, repayments
of long-term debt to third parties, repayment of net advances from the Company's
parent and the acquisition of the Microwave System was approximately $349.7
million, $209.7 million, $22.1 million and $12.5 million, respectively. Total
cash used in operations was approximately $80.9 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 $138.0 million and $48.9 million, respectively. In addition,
during this same period, the Company's net cash provided by secured borrowings
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under long-term debt agreements with third parties aggregated $93.0 million. As
of September 30, 1997, the Company had positive working capital of $221.1
million. At December 31, 1996, 1995 and 1994, the Company had working capital
deficits of approximately $69.4 million, $2.6 million and $11.9 million,
respectively.
In October 1997, the Company issued $555,890,000 in principal amount at
maturity of Old Notes, generating net proceeds of approximately $342.6 million,
after deducting offering costs which are included in intangible and other
long-term assets and will be amortized to interest expense over the term of the
notes. The net proceeds will be used to fund capital expenditures for continuing
construction and activation of the Network and to fund further growth in the
business. The Old Notes will accrete at a rate of 9.47% per annum, compounded
semi-annually, to an aggregate principal amount of $555,890,000 by October 15,
2002. The principal amount of the Old Notes is due and payable in full on
October 15, 2007. The Old Notes are redeemable at the Company's option, in whole
or in part, at any time on or after October 15, 2002, at specified redemption
prices. In addition, prior to October 15, 2000, the Company may use the net cash
proceeds from certain specified equity transactions to redeem up to 35% of the
Old Notes at specified redemption prices. Cash interest on the Old Notes will
not accrue until October 15, 2002, and thereafter will accrue at a rate of 9.47%
per annum, and will be payable semi-annually in arrears commencing on April 15,
2003 and thereafter on April 15 and October 15 (each an interest payment date)
of each year. The Company has the option of commencing the accrual of cash
interest on an interest payment date on or after October 15, 2000, in which case
the outstanding principal amount at maturity of the Old Notes will, on such
interest payment date, be reduced to the then accreted value, and cash interest
will be payable on each interest payment date thereafter. The indenture for the
Old Notes contains certain covenants that are substantially identical to the
Senior Notes described below. See "Description of the Notes."
In connection with the sale of the Old Notes, the Company agreed to make an
offer to exchange new notes, registered under the Securities Act and with terms
identical in all material respects to the Old Notes (the Exchange Notes), for
the Old Notes or, alternatively, to file a shelf registration statement under
the 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 Old Notes during
specified time periods (each a Registration Default), additional cash interest
will accrue at a rate per annum equal to 0.50% of the principal amount at
maturity 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 of the principal amount at maturity of the Old Notes 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 1997, the Company received approximately $319.5 million in net
proceeds from the sale of 15,525,000 shares of Common Stock in its Initial
Public Offering.
In March 1997, the Company issued and sold $250.0 million in principal amount
of its 10 7/8% Senior Notes due 2007 (the Senior Notes), the net proceeds
(approximately $242.0 million) of which were used to repay certain long-term
debt and to fund a portion of capital expenditures required to construct
segments of the Qwest Network. Issuance costs totaling approximately $8.0
million are being amortized to interest expense over the term of the Senior
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Notes. Interest on the Senior 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 Senior Notes is due and payable in full on April 1, 2007. The Indenture
for the Senior Notes (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 Senior 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 Senior Notes will have the right to require
the Company to purchase all of their Senior Notes at a price equal to 101% of
the aggregate principal amount thereof plus accrued and unpaid interest.
Generally, the Senior 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 Senior
Notes may be redeemed at a premium over par prior to April 1, 2000 with the
proceeds of certain public stock offerings.
In August 1997, the Company completed an exchange of new Senior Notes (with
terms identical in all material respects to the originally issued Senior Notes),
registered under the Securities Act, for all of the originally issued Senior
Notes. The Company received no proceeds from and recognized no profit on the
exchange transaction, and no change in the financial condition of the Company
occurred as a result of the exchange transaction.
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 September 30, 1997, the outstanding principal balance was $15.0
million. In November 1997, the Company repaid $4.1 million of the outstanding
principal.
The Company had a $100.0 million three-year revolving credit facility,
convertible to a two-year term loan maturing on April 2, 2001. In October 1997,
the Company repaid the then outstanding balance of $10.0 million and terminated
this credit facility. The Company is considering obtaining a new bank credit
facility of equal or lesser amount, which may be secured or unsecured, as
permitted under the indenture.
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 (the
Equipment Credit Facility) to finance the transmission electronics equipment to
be purchased from Nortel under a procurement agreement. Under the Equipment
Credit Facility, 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 collateral for the loans. Principal amounts
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outstanding under the Equipment Credit Facility 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. As of September
30, 1997, approximately $8.1 million was outstanding under the Equipment Credit
Facility.
In May 1997, the Company's board of directors approved a change in the
Company's capital stock to authorize 400 million shares of $.01 par value Common
Stock (of which 10 million shares were reserved for issuance under the equity
incentive plan, 2 million shares were reserved for issuance under the Growth
Share Plan, and 4.3 million shares were reserved for issuance upon exercise of
warrants), and 25 million shares of $.01 par value Preferred Stock. In May 1997,
the Company declared a stock dividend to the existing stockholder of 86,490,000
shares of Common Stock, which was paid immediately prior to the effectiveness of
the registration statement for the Initial Public Offering on June 23, 1997. In
June 1997, the Company completed the Initial Public Offering of 15,525,000
shares of its Common Stock.
Effective May 23, 1997, the Company sold to an affiliate of the Parent for
$2.3 million in cash, a warrant to acquire 4.3 million shares of Common Stock at
an exercise price of $28.00 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.
The Company is highly leveraged. As of September 30, 1997, the Company had, on
a consolidated basis, approximately $284.7 million in principal amount of
indebtedness outstanding. On a pro forma basis, as if the acquisition of
SuperNet had been consummated as of September 30, 1997, and as adjusted to give
effect to the issuance of the Notes, the Company would have had a debt-to-equity
ratio of 1.7 to 1.0 at that date. The Indenture for the Notes, the Senior Note
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 nine months ended September 30, 1997 and the years ended December
31, 1996, 1995 and 1994, capital expenditures, including accrued capital
expenditures, capital expenditures financed with the equipment credit facility,
and assets held under capital leases, of the Company totaled $271.3 million,
$85.8 million, $48.7 million and $40.9 million, respectively. Prior to the
issuance of the Senior Notes and the Initial Public Offering, 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 its parent 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 $1.9 billion. Of this amount, the Company had
already expended approximately $640.0 million as of September 30, 1997. The
Company anticipates remaining total cash outlays for these purposes of
approximately $170.0 million in 1997, $850.0 million in 1998 and $240.0 million
in 1999. Estimated total expenditures for 1997 and 1998 include the Company's
commitment to purchase a minimum quantity of fiber for approximately $399.0
million (subject to quality and performance specifications), of which
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approximately $198.5 million had been expended as of September 30, 1997.
Estimated total expenditures for 1997, 1998 and 1999 together also include
$139.0 million for the purchase of electronic equipment. In addition, the
Company anticipates approximately $325.0 million of capital expenditures in 1997
and 1998 to support growth in Carrier Services and Commercial Services.
As of September 30, 1997, the Company has obtained the following sources of
funds to complete the build-out: (i) approximately $1.1 billion under the
Frontier, WorldCom and GTE contracts and additional smaller construction
contracts for sales of dark fiber, of which approximately $351.0 million had
already been paid and $770.0 million remained to be paid at September 30, 1997;
(ii) $90.0 million of vendor financing; (iii) $117.6 million in net proceeds
from the sale on March 31, 1997 of $250.0 million in principal amount of the
Senior Notes remaining after repayment of certain existing debt; and (iv)
approximately $319.5 million in net proceeds from the Initial Public Offering,
of which approximately $164.3 million has been used as of September 30, 1997 for
construction of the Qwest Network. The Company believes that its available cash
and cash equivalent balances at September 30, 1997, the net proceeds from
issuance of the Old Notes in October and cash flow from operations will satisfy
its currently anticipated cash requirements at least through the second quarter
of 1998.
With the completion of the approximately 16,000 route-mile network, Qwest
will provide telecommunications 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 is evaluating the economics of
extending its core network versus continuing to lease network capacity. In this
regard, the Company is considering extensions in the Pacific Northwest. Also,
the Company continues to evaluate opportunities to acquire or invest in
complementary, attractively valued businesses, facilities, contract positions
and hardware to improve its ability to offer new products and services to
customers, to compete more effectively and to facilitate further growth of its
business.
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, including financial,
regulatory, environment and trend projections, 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, cost efficiently and on a timely basis 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
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calls. The FCC recently adopted measures intended to overhaul the system of
international settlements by mandating that U.S. carriers negotiate settlement
rates with foreign correspondents at or below FCC-mandated benchmark levels.
Several parties have filed petitions for reconsideration with the FCC or court
appeals or both following this order, so it remains subject to modification.
Additionally, recent worldwide trade negotiations may lead to reduced
settlement rates. See "Regulation-General Regulatory Environment."
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.
[DIAGRAM OF BROADBAND SERVICES NETWORK APPEARS HERE]
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.
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~ 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 had an estimated 53% of the total long
distance market revenue in 1995, while MCI and Sprint held the number two and
three market positions with approximately 18% 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 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
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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.
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, an approximately 16,000 route mile 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
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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 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
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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
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providing telecommunications services.
~ Build on Network Construction Expertise and Existing Network Assets. The
Company has built over 8,200 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 810 experienced construction personnel led by a 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 approximately 94% of
the Qwest Network and already has installed approximately 50% 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 four 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 developing its distinctive "ride the light" brand identity 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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The Qwest Network
As of September 30, 1997, the Company's network infrastructure included, among
other assets: (i) approximately 7,900 route miles of conduit in place,
consisting of approximately 2,800 route miles of lit fiber systems, one in
California, the Cal-Fiber system, carrying traffic between Los Angeles and
Sacramento, one connecting Sacramento and Denver, one connecting Kansas City and
Denver, and one in Texas connecting Dallas and Houston, approximately 2,800
route miles of dark fiber installed in conduit, and approximately 2,300 route
miles of vacant conduit; (ii) right-of-way agreements in place for approximately
6,900 additional route miles of planned construction for the Qwest Network;
(iii) an approximately 3,500 mile operating digital microwave system (the
"Microwave System"); (iv) approximately 15,000 DS-3 miles of fiber transmission
capacity leased by the Company from other carriers, used primarily to extend the
Company's switched services for originating and terminating traffic beyond the
boundaries of the Company's lit fiber network; and (v) five digital switches.
Under the Company's current plan, the Qwest Network will extend approximately
16,000 route miles coast-to-coast and connect approximately 125 metropolitan
areas that represent approximately 80% of the originating and terminating long
distance traffic in the United States. Construction of approximately 13,000
route miles of the Qwest Network is scheduled to be completed by late 1998, and
approximately 3,000 route miles, mostly in the southeastern United States, are
scheduled to be completed by the second quarter of 1999. 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 will connect
to three trans-Atlantic cable heads and two trans-Pacific cable heads, as well
as cross-border points to Canada and Mexico. Qwest also plans to extend its
network approximately 1,400 route miles into Mexico through dark fiber to be
owned by the Company on the fiber optic system of a third party. Completion of
the Mexican network is scheduled for late 1998. 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 inches 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) 125
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).
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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 inches 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 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 225 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
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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 approximately 94% of the
combined railroad and other rights-of-way needed to complete the Qwest Network.
The remaining rights-of-way needed for completion of the Qwest Network consist
of approximately 1,000 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 810 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 inches 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 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
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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 GTE agreements provide for the purchase of 24 fibers along
substantially all of the route of the Qwest Network, including the Southeast
route. The Frontier agreement provides for the purchase of 24 fibers along the
route of the Qwest Network, excluding the Southeast route and certain other
segments. 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 agreements, 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 also has several smaller construction contracts for the sale of
dark fiber along the Qwest Network aggregating approximately $170.0 million. The
Company believes that significant opportunities exist to sell additional
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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
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 plans to install 96 fibers along the entire route of
the Qwest Network. The Frontier and GTE agreements each provide for the purchase
of 24 fibers along major portions of the Qwest Network, while the WorldCom
agreement generally provides for the purchase of 24 or, in certain segments, 36
fibers. 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 $1.9 billion. Of
this amount, the Company had already expended approximately $640.0 million as of
September 30, 1997. The Company anticipates remaining total cash outlays for
these purposes of approximately $170.0 million in 1997, $850.0 million in 1998
and $240.0 million in 1999. Estimated total expenditures for 1997 and 1988
include the Company's commitment to purchase a minimum quantity of fiber for
approximately $399.0 million (subject to quality and performance
specifications), of which approximately $198.5 million had been expended as of
September 30, 1997. Estimated total expenditures for 1997, 1998 and 1999
together also include $139.0 million for the purchase of electronic equipment.
In addition, the Company anticipates approximately $325.0 million of capital
expenditures in 1997 and 1998 to support growth in Carrier Services and
Commercial Services.
As of September 30, 1997, the Company has obtained the following sources of
funds to complete the build-out: (i) approximately $1.1 billion under the
Frontier, WorldCom and GTE contracts and additional smaller construction
contracts for sales of dark fiber, of which approximately $351.0 million had
already been paid and $770.0 million remained to be paid at September 30, 1997;
(ii) $90.0 million of vendor financing; (iii) $117.6 million in net proceeds
from the sale on March 31, 1997 of $250.0 million in principal amount of the
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Senior Notes remaining after repayment of certain existing debt; and (iv)
approximately $319.5 million in net proceeds from the Initial Public Offering.
With the completion of the approximately 16,000 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 network extensions in the Pacific Northwest. Also,
the Company continues to evaluate opportunities to acquire or invest in
complementary, attractively valued businesses, facilities, contract positions
and hardware to improve its ability to offer new products and services to
customers, to compete more effectively and to facilitate further growth of its
business. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-Liquidity and Capital Resources."
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 $39.1 million and $45.1 million for the nine months ended
September 30, 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
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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.
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
$38.0 million and $25.5 million in the nine months ended September 30, 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
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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-Managing Rapid Growth."
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.
~ 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
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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.
In September 1997, the Company entered into an arrangement with Cisco Systems
Inc. under which they will jointly define and test new broadband business
multimedia services.
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 $413.2 million and $59.3 million for the
nine months ended September 30, 1997 and 1996, respectively.
The Company has built for itself and other carriers over 8,200 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.
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
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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 18.0% of consolidated gross revenue. No other customer accounted
for more than 10% of consolidated gross revenue in 1994. In the first nine
months of 1997, GTE was the largest single customer, accounting for 36.9% of the
Company's consolidated gross revenue, with Frontier accounting for 33.4%.
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 is establishing
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 developing its distinctive "ride the light" brand
identity 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.
In September 1997, the Company entered into a marketing agreement with Innova,
Inc. ("Innova") under which Innova will be an authorized sales representative of
Qwest marketing the Company's long-distance products through affinity groups.
Innova is a marketing company that wholesales and retails telecommunication
products on a national basis with an emphasis on developing bundled product
packages.
Also in September 1997, the Company entered into a marketing agreement with
en~able, a joint venture of KN Energy, Inc. ("KN") and PacifiCorp. Jordan
Haines, a Director of Qwest, is also a Director of KN. The Company's One Plus
and Calling Card services (with competitive international pricing for both) will
be offered to utilities across the nation along with other services provided by
en~able under its Simple Choice /SM/ brand name.
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 advanced technology similar to 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
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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."
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.
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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.
In July 1997, the Company entered into an agreement with an unrelated third
party whereby the Company will receive (i) four dark fibers along a 2,270
kilometer route to be constructed in Mexico by the third party, and (ii) certain
construction inventory and value-added tax refunds, totaling approximately $2.9
million. In exchange for these assets, the third party will receive the stock of
the Company's subsidiary, SP Servicios de Mexico S.A. de C.V., and approximately
$6.7 million in cash.
Employees
As of September 30, 1997, the Company employed approximately 1,290 employees
of which 130 perform corporate and administrative services, 810 provide Network
Construction Services, 105 provide Commercial Services, 20 provide Carrier
Services, and 225 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.
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
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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.
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 sought the
FCC's reconsideration of AT&T's status, but the FCC denied these petitions on
October 9, 1997.
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. QCC has applied for expanded international authority that would permit
it to operate as a facilities-based carrier to all permissible international
points and to operate as a resale carrier (including the resale of private lines
for the provision of switched services) to all permissible points. 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. International carriers are also required to
file periodic reports regarding traffic and revenue and regarding circuit status
and additions. 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
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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 and in fact prohibited the filing of such tariffs, 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 concluded 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 stayed the FCC's order pending
further expedited judicial review or FCC reconsideration or both. In August
1997, the FCC issued an order on reconsideration in which it affirmed its
decision to impose complete or mandatory detariffing, although it decided to
allow optional or permissive tariffing in certain limited circumstances
(including for interstate, domestic, interexchange dial-around services, which
end users access by dialing a carrier's 10XXX access code). Petitions for
further reconsideration of this order are pending, and this order also remains
subject to the Court of Appeals' stay pending further judicial review and any
appeals of the order on reconsideration. The Company cannot predict the ultimate
outcome of these or other proceedings on its service offerings or operations.
On May 8, 1997, the FCC released an order intended to reform its system of
interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 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. Several parties have filed petitions for reconsideration
or judicial appeals or both of this order, many of which are still pending.
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 the pending judicial appeals or
petitions for FCC reconsideration.
The FCC also released a companion order on universal service reform on May 8,
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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. Several parties have
filed petitions for reconsideration or judicial appeals on both of this order,
many of which are still pending. The Company is unable to predict the outcome of
the further FCC proceedings or of the pending judicial appeals or petitions for
FCC reconsideration on its operations.
On April 11, 1997, the FCC released an order requiring that all carriers
transition from three-digit to four-digit Carrier Identification Codes ("CICs")
by January 1, 1998. CICs are the suffix of a carrier's Carrier Access Code
("CAC"), and the transition will expand CACs from five (10XXX) to seven digits
(101XXXX). These codes permit customers to reach their carrier of choice from
any telephone. Parties filed petitions for reconsideration of this design,
arguing in part that this short transition (following the FCC's proposal for a
six-year transition) does not permit carriers sufficient time to make necessary
hardware and software upgrades or to educate their customers regarding the need
to dial additional digits to reach their carrier of choice. In response to these
petitions, the FCC on October 22, 1997 issued an order on reconsideration that
modified the transition to create a "two-step" process. LECs must have completed
switch changes to recognize the new codes by January 1, 1998, but interexchange
carriers have until June 30, 1998 to prepare for and educate their consumers
about the change to new codes. The Company cannot predict whether this
transition period will permit adequate customer notification.
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.
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
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facilities, such as fiber optic cable. The FCC adopted 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 has scrutinized 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. These rules have also required
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 November 26, 1997, the FCC issued a new
order that modified the continued applicability of its ECO test in light of this
agreement. In that order, which is tentatively scheduled to become effective on
January 8, 1998, the FCC eliminated the ECO test for applicants from WTO member
countries seeking international authority from the FCC or seeking to exceed the
indirect foreign ownership limits on US common carrier radio licenses. The FCC
instead adopted an open entry standard with a presumption that such
participation by WTO member countries is permissible. The FCC retained the ECO
test, however, for applicants from non-WTO member countries. The FCC also
modified certain dominant carrier safeguards and further reduced the tariff
notice requirements from 14 to one day's notice. Finally, the FCC raised the
threshold for the required 60-day advance notification of foreign carrier
affiliations from 10% to 25%. This order remains subject to judicial appeal
and/or petitions for reconsideration at the FCC. Although the Company believes
these changes will have a positive effect on its ability to identify potential
sources of capital, they will also increase the number of competitors for
international traffic. 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
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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 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
recently adopted measures intended to overhaul the system of international
settlements by mandating that U.S. carriers negotiate settlement rates with
foreign correspondents at or below FCC-mandated benchmark levels. Several
parties have filed petitions for reconsideration with the FCC or judicial
appeals or both following this order, so it remains subject to modification.
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 was scheduled to take effect
January 1, 1998, but some countries have urged a delay to permit member
countries to complete their domestic implementation of the agreement. 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
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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.
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
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Company to claims or actions that could have a material adverse effect on the
Company.
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:
Name Age Position
- ----------------------- --- -----------------------------------------------
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....... 57 Director
Richard T. Liebhaber... 62 Director
Douglas L. Polson...... 55 Director
Craig D. Slater........ 40 Director
Joseph T. Garrity...... 46 Secretary
Richard L. Smith....... 36 Vice President and Controller
Jordan L. Haines....... 70 Director
W. Thomas Stephens..... 55 Director
Other Management
In addition, management of QCC includes the individuals set forth below:
Name Age Position
- ---------------------- --- ----------------------------------------------
Lewis O. Wilks........ 44 President-Business Markets
Brij Khandelwal....... 52 Executive Vice President and Chief Information
Officer
Larry M. Seese........ 52 Executive Vice President-Network Engineering
and Operations
Nayel S. Shafei....... 38 Executive Vice President-Product
Development
Anthony J. Brodman.... 55 Senior Vice President-Strategy and Planning
Gregory M. Casey...... 39 Senior Vice President-Carrier Markets
Stephen M. Jacobsen... 39 Senior Vice President-Consumer Markets
August B. Turturro.... 50 Senior Vice President-Network Construction
A. Dean Wandry........ 57 Senior Vice President-New Business
Development
Marc Weisberg......... 40 Senior Vice President-Corporate Development
Reynaldo U. Ortiz..... 51 Managing Director and Senior Vice President-
International
Philip F. Anschutz has been a Director and the Chairman of the Board of Qwest
since February 1997. He was a Director and Chairman of the Board of QCC from
November 1993 until September 1997. 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
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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.
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 was
Director of QCC from December 1996 until September 1997. 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
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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 was
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 and has been a Director of QCC since
September 1997. 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.
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
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Committee.
Lewis O. Wilks became President-Business Markets of QCC in October 1997.
Wilks, who previously was president of GTE Communications, has extensive senior-
level management experience in delivering communications services to the
corporate sector. While Wilks served as president of GTE Communications, he
oversaw national sales, service and marketing activities for the competitive
local exchange markets. The business unit, under his leadership, was responsible
for all consumer, business and strategic accounts as well as long-distance,
media ventures and Internet product distribution. Before joining GTE, Wilks was
a senior executive with MCI Corporation, and held a variety of management
positions with Wang Laboratories.
Brij Khandelwal became Executive Vice President and Chief Information Officer
of QCC in October 1997. Prior to joining Qwest he was Vice President and Chief
Information Officer at Lucent Technologies Network Systems from November 1995 to
October 1997. At Lucent from August 1994 to October 1997, he was responsible for
global delivery of enterprise information systems and services aligned with
corporate strategic and tactical goals. He is experienced in a wide range of
information technologies, systems and processes affecting the business
enterprise, including sales, marketing, financial, operations, and R&D. From
August 1990 through August 1994 he was Director, Systems Development at GE
Aerospace/Martin Marietta, where he was responsible for architecture and
delivery of enterprise information systems. Mr. Khandelwal holds a B.S. from the
University of Roorkee (Roorkee, India), an M.S. from the University of Nebraska,
and a Ph.D. from the University of Wisconsin.
Larry M. Seese became Executive Vice President-Network Engineering and
Operations of QCC in October 1997. From 1968 to October 1997, he was employed
by AT&T, most recently as Vice President of Network Operations. During Mr.
Seese's 29 year tenure at AT&T, he was responsible for managing the operations,
reliability and cost performance of AT&T's voice and data networks and worked
on the development of advanced switching systems and the development of
lightwave systems. He has experience in all aspects of network planning,
development, certification and deployment. Mr. Seese holds a B.S. from the
University of Kentucky and an M.S. from Columbia University, both in electrical
engineering. He also received an M.S. from the Sloan School of Management at
M.I.T.
Nayel S. Shafei became Executive Vice President-Product Development of QCC in
August 1997. From August 1996 to August 1997 he was Senior Vice President and
General Manager of Arrowsmith Corporation's Telecommunications Division. From
July 1994 to August 1996, he was Vice President and General Manager for
AlliedSignal. From April 1992 to July 1994, he was Vice President, Development
and General Manager for Computervision Corporation, and was Principal Architect,
Research and Development for Computervision from August 1986 to February 1991.
Mr. Shafei serves as a computer/communications consultant for the United Nations
Development Program and is a member of the IEEE Computer Society, Association of
Computer Machinery, Society of Cable Engineers and Product Data Exchange
Standards. He holds an undergraduate degree from Cairo University and an M.S.
and a Ph.D. in computer science from the school of engineering at M.I.T.
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
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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.
August B. Turturro became Senior Vice President-Network Construction for QCC
in September 1997 and President and Chief Operating Officer of Qwest Network
Construction Services. From January 1996 to September 1997, Mr. Turturro was
President and Chief Operating Officer of Inliner American, a specialty
trenchless utility contractor. From January 1992 to January 1996 he was
President and Chief Executive Officer of Fishbach Corporation and its Natkin
Group, which is the second largest speciality contractor in the United States.
Mr. Turturro has over 27 years of construction experience as a professional
engineer and holds contractor licenses in several states. He holds a B.S. degree
in Mechanical Engineering from West Virginia University.
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.
Marc Weisberg became Senior Vice President-Corporate Development of QCC in
September 1997. Prior to joining QCC, he was the founder and owner of Weisberg
& Company, where he provided investment banking and advisory services to
clients in several industries, including telecommunications, multimedia and
emerging technologies. Mr. Weisberg holds a B.A. from Michigan State
University.
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Reynaldo ("Reynie") U. Ortiz became Managing Director, International and
Senior Vice President of QCC in December 1997. Before joining Qwest full time,
Ortiz was a consultant to QCC. In this capacity, he negotiated with the
government of Mexico and forged a deal with Bestel S.A. de C.V. to extend the
Qwest network into 14 major cities in Mexico. Previously, Ortiz served as
president and CEO of US West International, Inc., where he developed and
implemented a successful strategy for US West's entry into the cable television-
telephony and wireless communications markets in Asia, Europe and Latin America.
He also developed international distribution sales and marketing agreements and
product sourcing for International Business Machines, Inc. (IBM). Ortiz received
an honorary doctorate degree in law from New Mexico State University for his
international achievements. He also holds a Masters of Science in management
degree from Stanford University.
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.
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<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Summary Compensation Table
Annual Compensation
------------------------------
Other Annual All Other
Name/Principal Position Year Salary Bonus Compensation Compensation
- ----------------------------------- ---- --------- ------- ------------ ------------
Robert S. Woodruff, Interim Chief
Operating Officer, Executive Vice 1996 $182,200 $25,000 $2,083(1) $ 5,466(2)
President-Finance and Chief 1995 167,766 16,500 - 1,671
Financial Officer and Treasurer 1994 65,683(3) - - -
- ------------------------------------------------------------------------------------------
Anthony Brodman Senior Vice 1996 152,333 30,000 - 7,945(2)
President-Strategy and 1995 130,270 11,634 15,752(4) 7,163
Planning (QCC) 1994 112,140 - 2,083(4) 62,602
- ------------------------------------------------------------------------------------------
A. Dean Wandry, Senior Vice 1996 148,300 30,000 - 7,725(2)
President-New Business 1995 141,866 14,000 - 2,310
Development (QCC) 1994 45,141(5) - -
- ------------------------------------------------------------------------------------------
1996 130,083 - 56,300(6) 7,203(2)
Joseph DePetro, Vice President- 1995 120,000 - 45,634(4) 6,712
Sales and Marketing (QCC) 1994 99,897 - 50,403(7) 62,313
- ------------------------------------------------------------------------------------------
Douglas H. Hanson, former President 1996 193,557 - - 128,420(9)
and Chief Executive Officer 1995 200,040 20,004 - 8,240
(QCC)(8) 1994 195,865 - - 79,001
- ------------------------------------------------------------------------------------------
1996 157,150 - - 24,147(11)
Peter R. Geddis, former Executive 1995 188,127 18,504 239,680(12) 9,738
Vice President (QCC)(10) 1994 180,865 - 239,680(12) 75,000
- ------------------------------------------------------------------------------------------
</TABLE>
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- --------------------------------------------------------------------------------
(1) QCC's forgiveness of a portion of a loan.
(2) The amount shown represents QCC's contribution to QCC's 401(k) plan.
(3) Mr. Woodruff began his employment with QCC in August 1994 and amounts
disclosed for Mr. Woodruff for 1994 represent compensation paid after that
date.
(4) The amount shown represents commissions.
(5) Mr. Wandry began his employment with QCC in September 1994 and amounts
disclosed for Mr. Wandry for 1994 represent compensation paid after that
date.
(6) The amount shown represents commissions ($48,337) and QCC's forgiveness of
a portion of a loan ($7,963). 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.
(7) The amount shown represents commissions ($38,577) and QCC's forgiveness of
a portion of a loan ($11,826).
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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 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."
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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 general terms of the Growth Share Plan in
certain respects. Annually, Mr. Nacchio may elect to receive payment for up to
20% of his vested growth shares in shares of Common Stock; the growth shares for
which he has received payment will be canceled. The number of growth shares
granted to Mr. Nacchio are subject to adjustment upon changes in the Company's
capital structure in connection with mergers and other reorganizations. If Mr.
Nacchio's employment is terminated for good reason (generally, resignation after
a reduction in title or responsibility) or other than for cause (as defined
below), he will vest in one-twelfth of the 20% of growth shares subject to
annual vesting for the year of termination for each full month of employment in
such calendar year. A change in control (as defined in the employment agreement)
will not result in full vesting of, or payment for, the growth shares unless Mr.
Nacchio is terminated without cause or resigns for good reason after the change
in control. If his employment is terminated for cause, he will be paid for his
vested growth shares based on the value of the Company as of the end of the
immediately preceding calendar year. Upon payment of certain dividends, the
growth shares will vest 100% and Mr. Nacchio will be paid for a portion of the
growth shares. Termination of the Plan will not be a "triggering event," see
"-Growth Share Plan," with respect to Mr. Nacchio's growth shares.
The Company 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
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terminated for cause (including any willful misconduct materially detrimental to
the Company, felony conviction, or nonfeasance with respect to duties set forth
in the employment agreement) on or before December 31, 1999, the agreement
provides that he will repay to Qwest a portion of the equalization payment
previously paid. If a termination for cause occurs after December 31, 1999, the
equalization payment will not be repaid. If Qwest terminates Mr. Nacchio's
employment other than for cause or if Mr. Nacchio resigns for good reason, which
for this purpose includes a change in control of Qwest or certain other events,
Qwest will be obligated to make certain payments to him, including an amount
equal to two times his base salary at the rate in effect on the date of
employment termination and any installments of the equalization payment that
have not yet been made, with interest. Mr. Nacchio will also be entitled to
continuation of certain benefits, including welfare benefits and participation
in the Growth Share Plan for a two-year period following termination. For this
purpose, change in control means the acquisition of 20% or more of Qwest by an
individual, entity (not controlled by Philip F. Anschutz) or group if the new
acquirors own a larger percentage of Qwest than entities controlled by Philip F.
Anschutz. The agreement provides that if Mr. Nacchio receives any payments upon
a change in control that are subject to the excise tax of Section 4999 of the
Internal Revenue Code, Qwest will pay Mr. Nacchio an amount that reimburses him
in full for the excise tax.
Growth Share Plan
The Growth Share Plan was originally adopted by QCC effective November 1,
1993. Qwest adopted, assumed, and continued the Growth Share Plan, effective May
1, 1996. The Growth Share Plan was amended and restated in its entirety,
effective October 1, 1996 (the "October 1996 amendment and restatement"). The
October 1996 amendment and restatement provides for the grant of "growth shares"
to selected employees and directors of Qwest and certain affiliates who can
significantly affect the long-term financial success of Qwest. Growth share
grants may include additional or different terms and conditions from those
described herein. A "growth share" is a unit of value based on the increase in
value of Qwest over a specified performance cycle or other specified measuring
period. The value of a growth share is generally equal to (1) the value of Qwest
at or near the date of a "triggering event," as defined below, minus (2) the
value of Qwest as of a date determined by Qwest's board of directors in its sole
discretion at the time of grant of a growth share ("beginning company value"),
minus (3) the value of contributions to capital during the period beginning with
the date as of which Qwest's value for purposes of the growth share's grant is
determined and ending with the date as of which the value of the growth share is
determined (the "measuring period") together with an amount equal to 9% of each
such contribution made by entities 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
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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 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 resulted in payment by Qwest to the
holders of the value of those growth shares. Qwest issued cash and a total of
1,295,766 shares of Common Stock in payment of these growth shares. 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.
Growth shares granted under the October 1996 amendment and restatement were
not accelerated or triggered by completion of the Initial Public Offering. The
Company has entered into amendments to the growth share agreements with
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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. As of September
30, 1997, 379,500 growth shares had been granted and remained outstanding.
Compensation expense relating to the nonvested growth shares is estimated to be
up to approximately $27.7 million and will be recognized over the remaining
approximately four-year vesting period. The Company does not intend to grant any
more growth shares.
The first growth shares were granted as of November 1, 1993. 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.
Initial
Grant Number of Vesting
Name Date Growth Shares Date
- ------------------ ------- ------------- -------
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
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
Number of
Name Growth Shares Performance Period
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- ------------------ ------------- ------------------
January 1, 1997 to
Anthony Brodman... 2,500 December 31, 2001
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 September 30, 1997, there were approximately 1,290 eligible participants.
Administration. The Equity Incentive Plan is administered by the Company's
Compensation Committee (the "Committee"). The Committee must be structured at
all times so that it satisfies the "non-employee director" requirement of Rule
16b-3 under the Securities Exchange Act of 1934 (the "Exchange Act"). To the
extent practicable, the Company intends to satisfy the similar requirement for
administration by "outside" directors under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"), with respect to grants to
employees whose compensation is subject to Section 162(m) of the Code. The
Committee has the sole discretion to determine the employees and consultants to
whom awards may be granted under the Equity Incentive Plan and the manner in
which such awards will vest. Options, stock appreciation rights, restricted
stock and stock units are granted by the Committee to employees and consultants
in such numbers and at such times during the term of the Equity Incentive Plan
as the Committee shall determine, except that the maximum number of shares
subject to one or more awards that can be granted during the term of the Equity
Incentive Plan to any employee or consultant is 10,000,000 shares of Common
Stock, and except that incentive options may be granted only to employees. In
granting options, stock appreciation rights, restricted stock and stock units,
the Committee will take into account such factors as it may deem relevant in
order to accomplish the Equity Incentive Plan's purposes, including one or more
of the following: the extent to which performance goals have been met, the
duties of the respective employees and consultants and their present and
potential contributions to the Company's success.
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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.
Employment Contracts and Termination of Employment and Change-In-Control
Arrangements
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The employment agreement between Qwest and Joseph P. Nacchio, which includes
provision for a payment if Mr. Nacchio resigns following a change in control, is
described under "-CEO Employment Agreement" above.
In November 1996 QCC extended Robert S. Woodruff an unsecured,
noninterest-bearing loan in the principal amount of $100,000. The principal
amount is forgiven in monthly increments of $2,083 beginning December 1, 1996.
As of December 1997 the outstanding principal balance of the loan was $72,921.
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.
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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.
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. 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. In July 1997, Mr. Harvey resigned
from the committee. Since July 1997, Philip F. Anschutz, Jordan L. Haines and W.
Thomas Stephens have served 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.
Compensation Committee Interlocks and Insider Participation
Mr. Anschutz is a Director and Chairman of Qwest, 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.
PRINCIPAL STOCKHOLDER
Mr. Philip F. Anschutz is the sole beneficial owner of approximately 83.7% 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.
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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 $0.9 million, $1.2 million
and $1.0 million in the nine months ended September 30, 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 $3.0 million, $2.1 million and $2.5
million for the nine months ended September 30, 1997 and for the years ended
December 31, 1996 and 1995, respectively, and was not material in 1994.
The Company historically has received capital contributions and
noninterest-bearing advances from Anschutz Company and an affiliate of Anschutz
Company to fund operations. The Company 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. In May 1997, all outstanding advances,
totaling approximately $28.0 million, were repaid.
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
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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 was collateralized by
shares owned and pledged by an affiliate of Anschutz Company. For a description
of this facility, 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 September 30, 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 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 and the Company expects to renew the agreement for 1998. 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
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granted an option to purchase 100,000 shares of Common Stock. See
"Management-Growth Share Plan" and "-Equity Incentive Plan."
DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued under 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,
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, including its 10-7/8% Series B Senior Notes Due
2007 (the "Senior Notes"), and will be senior in right of payment to all
existing and future subordinated indebtedness of the Company. As of September
30, 1997, on a pro forma basis after giving effect to the application of net
proceeds from the sale of the Old Notes, Qwest would have had $600.0 million of
indebtedness outstanding, none of which would have constituted secured
indebtedness or subordinated indebtedness.
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 September 30, 1997, on a pro
forma basis, as if the acquisition of SuperNet had been consummated as of that
date, 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 $292.8 million, of which approximately $26.1 million in
indebtedness was secured by the assets of the borrowers. See "Description of
Certain Indebtedness." The Company expects that it or its subsidiaries will
incur substantial 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
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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 at maturity to
$555,890,000 and will mature on October 15, 2007. The Notes were issued at a
discount to their aggregate principal amount at maturity and generated proceeds
to the Company of approximately $350.0 million. The Notes will accrete at a rate
of 9.47% per annum, compounded semiannually, to an aggregate principal amount of
$555,890,000 by October 15, 2002. Cash interest will not accrue on the Notes
prior to October 15, 2002; provided, however, that the Company may elect, upon
not less than 60 days' prior notice, to commence the accrual of cash interest on
all outstanding Notes on any April 15 or October 15 on or after October 15, 2000
and prior to October 15, 2002, in which case the outstanding principal amount at
maturity of each Note will on such commencement date be reduced to the Accreted
Value of such Note as of such date and cash interest shall be payable with
respect to such note on each April 15 and October 15 thereafter. Except as
otherwise described in this paragraph, interest on the Notes will accrue at the
rate of 9.47% per annum and will be payable in cash semiannually on April 15 and
October 15, commencing April 15, 2003. Interest will be computed on the basis of
a 360-day year comprised of twelve 30-day months.
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.
The interest rate on the Notes is subject to increase in the circumstances
(such additional interest being referred to as "Liquidated Interest") described
under "Exchange Offer; Registration Rights." All references herein to interest
on the Notes shall include such Liquidated Interest, if appropriate.
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
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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.
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
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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 October 15, 2002, upon
not less than 30 nor more than 60 days' prior notice, at the redemption prices
(expressed as percentages of Accreted Value) set forth below, plus accrued and
unpaid interest thereon (if any) to the redemption date, if redeemed during the
twelve months beginning October 15 of the years indicated below:
Year Redemption Price
- ---------------------- ----------------
2002.................. 104.735%
2003.................. 103.157%
2004.................. 101.578%
2005 and thereafter... 100.000%
In addition, prior to October 15, 2000, the Company may redeem up to 35% of
the Accreted Value of the Notes at a redemption price equal to 109.47% of the
Accreted Value at the redemption date of the 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 Accreted Value
of the originally issued 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.
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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;
(v) Debt Incurred to renew, extend, refinance, defease or refund (each, a
"refinancing") the Notes, the Senior Notes or Debt of the Company Incurred
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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";
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(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";
(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
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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 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 the date of the Senior Notes Indenture 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
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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 "-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
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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 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
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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 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
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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 Accreted Value of the Notes on the purchase date plus
accrued and unpaid interest thereon and premium, if any, not otherwise included
in the Accreted Value to such 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 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
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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 Accreted Value of the Notes on the
purchase date plus any accrued and unpaid interest thereon and premium, if any,
not otherwise included in the Accreted Value to such 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
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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 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.
Reports. The Company will file with the Trustee on the date on which it files
them with the Commission copies of the annual and quarterly reports and the
information, documents, and other reports that the Company is required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports"). 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
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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."
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 a supplemental indenture 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
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Incur at least $1.00 of additional Debt pursuant to the provisions of the
Indenture described in paragraph (a) under "-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 "-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.
"Accreted Value" means, with respect to any Note, (i) as of any date prior to
October 15, 2002, an amount per $1,000 principal amount at maturity of Notes
that is equal to the sum of (a) the offering price ($629.62 per $1,000 principal
amount at maturity of Notes) of such Notes and (b) the portion of the excess of
the principal amount at maturity of such Notes over such offering price which
shall have been amortized through such date, such amount to be so amortized on a
daily basis and compounded semiannually on each April 15 and October 15 at a
rate of 9.47% per annum from the date of original issue of the Notes through the
date of determination computed on the basis of a 360-day year of twelve 30-day
months, and (ii) as of any date on or after October 15, 2002, the principal
amount at maturity of each Note; provided, however, that if the Company elects
to commence the accrual of cash interest on the Notes on or after October 15,
2000 and prior to October 15, 2002, the Notes shall cease to accrete, and the
Accreted Value and the principal amount at maturity thereof shall be the
Accreted Value on the date of commencement of such accrual as calculated in
accordance with the foregoing.
"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.
"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) under the
caption "-Limitation on Issuances and Sales of Capital Stock of Restricted
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Subsidiaries"), (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.
"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
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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 restrictions.
"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
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amortization of Debt discounts; (ii) any payments or fees with respect to
letters of credit, bankers' 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
prorata 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
"-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,
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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.
"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 "-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.
"Disqualified Stock" of any Person means any Capital Stock of such Person
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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 "-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 "-Change of Control."
"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 "-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
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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.
"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)
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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 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:
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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 at maturity 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 at maturity 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 accrete and/or accrue interest, as the case may be;
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, if any, 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 their 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 at maturity 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;
k. that (a) if Notes in an aggregate principal amount at maturity 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 at maturity 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 at maturity 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
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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 at maturity 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 "-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 "-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
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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.
"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 "-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
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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.
"Senior Notes Indenture" means the Indenture dated March 31, 1997 between the
Company and Bankers Trust Company, as trustee thereunder, relating to the
Company's $250,000,000 Senior Notes Due 2007 (which were subsequently exchanged
for the Company's $250,000,000 Series B Senior Notes Due 2007).
"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.
"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 "-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 "-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
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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 "-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.
"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 "-Change of Control" when due and
payable; (d) failure to perform or comply with the provisions described under
"-Mergers, Consolidations and Certain Sales of Assets" and "-Limitation on 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 at maturity 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 amountin excess 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
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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 at maturity 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 at maturity 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."
Notwithstanding the foregoing, upon an acceleration of Notes or an Event of
Default specified in clause (h) above, in each case prior to October 15, 2002,
the holders of Notes will be entitled to receive only a default amount equal to
the Accreted Value of the Notes (plus any accrued and unpaid interest and
premium, if any, not otherwise included in the Accreted Value to such date),
which until October 15, 2002 will be less than the face amount of such Notes.
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 at maturity 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 at maturity 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.
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
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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 at maturity 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 at maturity 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; (4)
modify any provision of the Indenture relating to the calculation of Accreted
Value; or (5) 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 at maturity 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.
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
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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
"-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 Four Albany Street, New York, New York 10006.
The holders of not less than a majority in principal amount at maturity 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.
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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.
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
January 13, 1998, 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 March 14, 1998,
and (c) to consummate the Exchange Offer by April 13, 1998. 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 at maturity
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
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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 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
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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 15 and October 15, 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.
DESCRIPTION OF CERTAIN INDEBTEDNESS
In March 1997, the Company issued and sold $250.0 million in principal amount
of the Senior Notes, the proceeds of which were used 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 $8.0 million are being amortized over the term of the
Senior Notes. Interest on the Senior 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 Senior Notes is due and payable in full on April 1, 2007. The
indenture for the Senior Notes (the "Senior Note 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 Senior 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 Senior Note Indenture), holders of the
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Senior Notes will have the right to require the Company to purchase all of their
Senior Notes at a price equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest. Generally, the Senior 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 Senior Notes may be redeemed at a premium over par
prior to April 1, 2000 with the proceeds of certain public stock offerings.
In August 1997, the Company completed a registered exchange of new Senior
Notes (with terms identical in all material respects to the originally issued
Senior Notes) for all of the originally issued Senior Notes. The Company
received no proceeds from and recognized no profit on the exchange transaction,
and no change in the financial condition of the Company occurred as a result of
the exchange transaction.
Credit Facilities
QC was 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 was secured by pledges of publicly
traded stock owned by an affiliate of Anschutz Company and was being used to
provide working capital and capital expansion funds to QCC. The credit facility
was structured as a three-year revolving bank credit facility, convertable to a
two-year term loan maturing on April 2, 2001. Borrowings bear interest at an
adjustable rate based on the agent's prime rate or LIBOR plus an applicable
margin. At September 30, 1997, $10.0 million was outstanding under this
facility. In October 1997, the Company repaid the outstanding balance and
terminated this credit facility.
The Company is considering obtaining a new bank credit facility of equal or
lesser amount, which may be secured or unsecured, as permitted under the
Indenture. 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 obtain a new
credit facility 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 equipment credit facility dated
as of May 6, 1997 to finance the transmission electronics equipment to be
purchased from Nortel under a procurement agreement. Under this equipment credit
facility, 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 equipment credit facility 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. As of September
30, 1997, approximately $8.1 million was outstanding under this equipment credit
facility.
The equipment credit facility 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
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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 equipment credit facility 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 equipment
credit facility, 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 equipment credit
facility 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 equipment credit facility agreement permits the agent
to declare all borrowings to be immediately due and payable, terminate loan
commitments and/or proceed against the collateral.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
General
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 cash pursuant to the Offering, exchange the Old
Notes for Exchange Notes pursuant to this Exchange Offer, and hold the Old Notes
and will hold the Exchange Notes as capital assets (such persons are referred to
herein as "Holders"). This discussion is intended only as a descriptive summary
and does not purport to be a complete technical analysis or listing of all
potential tax considerations that may be relevant to holders of the Notes. Qwest
has received an opinion of its counsel, Holme Roberts & Owen LLP, that the
following describes the material United States federal income tax consequences
expected to result to Holders, subject to the conditions and limitations
described herein. This discussion is based on the current provisions of 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, all of which are subject to change,
which changes could be applied retroactively. This discussion is also based on
the information contained in this Prospectus and the related documents, and on
certain representations from Qwest as to factual matters. This discussion does
not 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, particular
Holders 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 "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 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 that hold the Notes as part of a "straddle" or as a
"hedge" against currency risk or in connection with a conversion transaction,
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persons that 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.
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 IS
EXPECTED AND URGED TO CONSULT ITS 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 ALL 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.
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 on its analysis of
applicable law, the 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.
Original Issue Discount
General. Because the Notes are issued at a significant discount from their
stated redemption price at maturity (defined below), the Notes will have
substantial original issue discount for United States federal income tax
purposes. As a result, a U.S. Holder who acquires a Note will generally be
required to include original issue discount in gross income on a constant
yield/economic accrual basis for United States federal income tax purposes,
regardless of the U.S. Holder's regular method of tax accounting. Therefore,
inclusion of original issue discount in gross income will occur in advance of
the receipt of cash payments on the Notes. See "-Taxation of Original Issue
Discount" below.
Amount of Original Issue Discount. The amount of original issue discount with
respect to each Note is the excess of the "stated redemption price at maturity"
of the Note over its "issue price." The "stated redemption price at maturity" of
each Note is the sum of all payments required to be made on the Note through and
including maturity (whether denominated as principal or interest), other than
payments of "qualified stated interest." "Qualified stated interest" is
generally defined as stated interest that is unconditionally payable in cash or
other property (other than debt instruments of the issuer) at least annually and
at a single fixed rate that appropriately takes into account the length of
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intervals between payments. Subject to Qwest's right to elect early commencement
of interest accruals, no cash interest will be payable on the Notes until April
15, 2003; therefore, none of the stated interest will be qualified stated
interest, but instead, all of it will be included in the stated redemption price
at maturity of the Notes. The "issue price" of an Exchange Note should be the
same as the issue price of the Old Notes, which is the first price at which a
substantial amount of the Old Notes were sold to the public for money (excluding
sales to any person acting in the capacity of an underwriter, placement agent,
or wholesaler). Each Note will be issued subject to a very substantial amount of
original issue discount.
Taxation of Original Issue Discount. Each U.S. Holder will be required to
include in gross income an amount equal to the sum of the "daily portions" of
the original issue discount with respect to the Note for each day during the
taxable year on which such U.S. Holder holds the Note. The "daily portions" of
original issue discount are determined by allocating to each day in an accrual
period (generally a six-month period or shorter period from the date of original
issue) a ratable portion of the original issue discount attributable to that
accrual period. The amount of the original issue discount attributable to each
full accrual period will equal the product of the "adjusted issue price" of the
Note at the beginning of the accrual period, multiplied by the "yield to
maturity" of the Notes (determined on the basis of compounding at the close of
each accrual period and properly adjusted for the length of the accrual period).
The "adjusted issue price" of a Note at the beginning of an accrual period is
the original issue price of the Note increased by the aggregate amount of
original issue discount that has accrued in all prior accrual periods previously
includible in the gross income of any holder and decreased by the amount of any
payment previously made on the Note (excluding payments not taken into account
in computing the stated redemption price at maturity of the Note). The "yield to
maturity" of a Note is the discount rate that, when used in computing the
present value of all principal and interest payments to be made on the Note,
produces an amount equal to the issue price of the Note.
Early Commencement of Cash Interest Accruals. On or after October 15, 2000,
and prior to October 15, 2002, Qwest may elect to commence the accrual of cash
interest with respect to the Notes (the "Cash Interest Option"), in which case
cash interest will become payable on the Notes semi-annually thereafter. See
"Description of the Notes-Principal, Maturity and Interest of the Notes." For
purposes of determining the yield to maturity and maturity date of the Notes
under the Regulations, Qwest will be deemed to exercise any option with respect
to the Notes if the exercise of such option would lower the yield to maturity of
the Notes. Qwest has determined that the exercise of the Cash Interest Option,
would not lower the yield to maturity of the Notes. On these facts, and for
purposes of the Regulations, there is a presumption that Qwest will not exercise
the Cash Interest Option. If Qwest does exercise the Cash Interest Option,
contrary to the presumption set forth above, then solely for purposes of
computing original issue discount, the Notes should be treated as having been
retired and then reissued, as of the date of such exercise, for an amount equal
to the adjusted issue price of the Notes on that date. It is possible that the
Service could take the position that payments made on a Note pursuant to the
Cash Interest Option should be treated as a "pro rata prepayment" of a portion
of the Note. A pro rata prepayment would be treated as a payment in retirement
of a portion of the Note, which may result in gain or loss to the U.S. Holder.
See "-Sale, Retirement, or Other Taxable Disposition."
Information Requirements. Qwest is required to furnish certain information to
the Service regarding the original issue discount amounts. Qwest will furnish
annually to record holders of the Notes, information with respect to original
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issue discount that accrued during the calendar year, as well as interest paid
during that year. This information will be based on the adjusted issue price of
the debt instrument as if such holder were the original holder of the debt
instrument. Qwest will classify the Notes as debt under section 385 of the Code.
Effect of Redemption Provisions on Computation of Original Issue Discount
Redemption Rights. Qwest may redeem the Notes, in whole or in part, at any
time on or after October 15, 2002, at the redemption prices set forth herein,
plus accrued and unpaid interest thereon (if any) to the redemption date. See
"Description of the Notes-Optional Redemption." For purposes of determining the
yield to maturity and maturity date of the Notes under the Regulations, Qwest
will be deemed to exercise any redemption option with respect to the Notes if
the exercise of such option would lower the yield to maturity of the debt
instrument. Qwest has determined that the exercise of its right to redeem the
Notes prior to their stated maturity would not lower the yield to maturity of
the Notes. On these facts, and for purposes of the Regulations, there is a
presumption that Qwest will not exercise its right to redeem the Notes prior to
their stated maturity.
Prior to October 15, 2000, Qwest may redeem up to 35 percent of the Notes
(based on Accreted Value) at a redemption price set forth herein, plus accrued
and unpaid interest, 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 percent of the Notes (based on Accreted Value) would
remain outstanding immediately after giving effect to such redemption. See
"Description of the Notes-Optional Redemption." In addition, as described in
"Description of the Notes-Certain Covenants-Change of Control" and "Description
of the Notes-Certain Covenants-Limitation on Asset Dispositions," Qwest will,
upon the occurrence of certain events, be required to make an Offer to Purchase
all outstanding Notes at redemption prices specified under those headings. Such
redemption rights and obligations will be treated by Qwest as not affecting the
determination of the yield to maturity or maturity date of the Notes.
Subsequent Adjustments. If one or more of the contingencies described under
this "-Effect of Redemption Provisions on Computation of Original Issue
Discount" actually occurs, contrary to the presumptions set forth above (a
"change in circumstances"), then solely for purposes of computing original
issue discount, the Notes will be treated as having been retired and then
reissued as of the date of the change in circumstances for an amount equal to
the adjusted issue price of the Notes on that date.
Market Discount
Under the market discount rules of the Code, a U.S. Holder who purchases a
Note at a "market discount" will generally be required to treat any gain
recognized on the disposition of the Note as ordinary income to the extent of
the lesser of such gain or the portion of the market discount that accrued
during the period that the U.S. Holder held such Note. Market discount is
generally defined as the amount by which a U.S. Holder's purchase price for a
Note is less than the revised issue price of the Note on the date of purchase,
subject to a statutory de minimis exception. A U.S. Holder who acquires a Note
at a market discount may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or continued to
purchase or carry such Note until the U.S. Holder disposes of the Note in a
taxable transaction. A U.S. Holder who has elected under applicable Code
provisions to include market discount in income annually as such discount
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accrues will not, however, be required to treat any gain recognized as ordinary
income or to defer any deductions for interest expense under these rules. This
election to include market discount in income currently, once made, applies to
all market discount obligations acquired on or after the first day of the
taxable year to which the election applies and may not be revoked without the
consent of the Service. Holders should consult their tax advisors as to the
portion of any gain that would be taxable as ordinary income under these
provisions and any other consequences of the market discount rules that may
apply to them in particular.
Acquisition Premium
A U.S. Holder who acquires a Note for an amount that is less than or equal to
its stated redemption price at maturity, but in excess of the adjusted issue
price will be considered to have purchased the Note at acquisition premium.
Under the acquisition premium rules, generally, such U.S. Holder will be
permitted to offset a portion of the acquisition premium against the amount of
original issue discount otherwise includible in income with respect to the Note.
The information reported by Qwest to the record holders of the Notes on an
annual basis will not account for an offset against original issue discount for
any portion of the acquisition premium. Accordingly, each holder should consult
its tax advisor as to the determination of the acquisition premium amount and
the resulting adjustments to the amount of reportable original issue discount.
Sale, Retirement, or Other Taxable Disposition
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 attributable to accrued interest not
previously taken into account) and (ii) the U.S. Holder's adjusted tax basis in
the Note. A U.S. Holder's initial tax basis in a Note will equal the price paid
by such U.S. Holder for such Note and will be increased from time to time by the
amount of original issue discount included in gross income to the date of
disposition, as adjusted by acquisition premium (if any) and further increased
by the accruals of market discount (if any) that the U.S. Holder has previously
elected to include in gross income on an annual basis, and decreased from time
to time by the amount of any payments (excluding payments of qualified stated
interest and any other payment that is not taken into account in computing the
stated redemption price at maturity of the debt instrument) received with
respect to the Note. 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 (except as discussed under "-Market Discount"), provided that the
Note was a capital asset in the hands of the U.S. Holder. In the case of an
individual U.S. Holder, such capital gain will be taxable at various
preferential rates, depending on the extent to which such U.S. Holder's holding
period for the Note exceeds one year at the time of disposition.
With respect to tax matters related to legal defeasance and covenant
defeasance in certain circumstances, see "Description of 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
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that the TIN furnished by the payee is incorrect, (iii) the payee has failed to
report properly 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, interest actually paid,
original issue discount, 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.
Certain 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 Untied 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 tax advisors as to the particular
tax consequences to them of Exchanging Old Notes for Exchange Notes and of
owning and disposing of the Exchange Notes.
Portfolio Interest Exemption. A Non-U.S. Holder will generally, under the
portfolio interest exemption 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 original issue discount on the Notes or
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 Qwest entitled to vote, (ii) the Non-U.S.
Holder is not (a) a bank receiving original issue discount or 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 original issue discount or 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 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 it 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 provides for the elimination or reduction in
the rate of United States federal withholding tax. Interest for this purpose
includes income, other than capital gains, received from the sale or exchange of
the Notes or from a payment on the Notes to the extent original issue discount
accrued while the Notes were held by a Non-U.S. Holder and the amounts so
accrued were not previously subject to United States withholding tax.
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If a Non-U.S. Holder is engaged in a trade or business in the United States
and interest (including original issue discount) 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
(including original issue discount) 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.
Disposition of 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 a Note, unless: (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 (including original issue
discount) 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.
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 penalties 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
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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.
Recently promulgated Regulations (the "New Regulations") could affect the
procedures to be followed by Non-U.S. Persons and payors of interest and sale
proceeds in complying with the United States federal withholding, backup
withholding, and information reporting rules, and the availability of any
exemption therefrom. The New Regulations are not currently effective, but will
generally be effective for payments made after December 31, 1998. Each Holder of
Notes is strongly urged to consult its tax advisor regarding the effect of the
New Regulations on the exchange of the Old Notes for Exchange Notes pursuant to
the Exchange Offer and on the ownership and disposition of the Exchange Notes.
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 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
144
<PAGE>
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 consolidated financial statements and schedules of Qwest Communications
International Inc. and subsidiaries 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 incorporated by reference in the Registration Statement in
reliance upon the report, pertaining to such consolidated financial statements,
dated February 19, 1997, except as to note 1, paragraph (i) and note 18, which
are as of May 23, 1997, and the report pertaining to such schedules, dated
February 19, 1997, except as to note 2, which is as of May 23, 1997, of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein and incorporated by reference in the Registration Statement, and upon the
authority of said firm as experts in accounting and auditing.
The Financial Statements of SuperNet, Inc. as of June 30, 1997 and for the
year ended June 30, 1997 have been included in the Registration Statement in
reliance upon the report, dated September 26, 1997 of Dollinger, Smith & Co.,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
145
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
HISTORICAL FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Qwest Communications International Inc. and Subsidiaries
Independent Auditors' Report........................................................ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 and September 30, 1997
(Unaudited)......................................................................... F-4
Consolidated Statements of Operations for the Years Ended December 31, 1996,
1995 and 1994, and for the Nine Month Period Ended September 30, 1997 and 1996
(Unaudited).......................................................................... F-6
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1996, 1995 and 1994, and for the Nine Months Ended September 30, 1997
(Unaudited)......................................................................... F-7
Consolidated Statements of Cash Flows for the Years Ended December 31, 1996,
1995 and 1994, and for the Nine Months Ended September 30, 1997 and 1996
(Unaudited)......................................................................... F-8
Notes to Consolidated Financial Statements (Information as of September 30, 1997,
and for the Nine Months Ended September 30, 1997 and 1996 is Unaudited)............. F-10
SuperNet, Inc.
Independent Auditor's Report........................................................ F-41
Balance Sheet as of June 30, 1997 and September 30, 1997 (Uuaudited)................ F-42
Statements of Operations for the Year Ended June 30, 1997 and for the Three-Month
Period Ended September 30, 1997 and 1996 (Unuaudited)............................... F-43
Statements of Changes in Stockholder's Equity for the Year Ended June 30, 1997 and
for the Three Months Ended September 30, 1997 (Unaudited)........................... F-45
Statements of Cash Flows for the Year Ended June 30, 1997 and for the Three Months
Ended September 30, 1997 and 1996 (Unaudited)....................................... F-46
Notes to Financial Statements for the Year Ended June 30, 1997...................... F-48
(Information as of September 30, 1997, and for the Three Months Ended
September 30,1997 and 1996 is Unaudited).
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Qwest Communications International Inc. and Subsidiaries
Pro Forma Consolidated Balance Sheet as of September 30, 1997 (Unaudited)........... F-64
Pro Forma Consolidated Statement of Operations for the Nine Months Ended
September 30, 1997 (Unaudited)...................................................... F-66
Pro Forma Consolidated Statement of Operations for the Twelve Months Ended
December 31, 1996 (Unaudited)....................................................... F-67
Notes to Pro Forma Consolidated Financial Statements (Unaudited).................... F-68
</TABLE>
F-2
<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-3
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995, and September 30, 1997 (Unaudited)
(Amounts in Thousands)
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
---------- ----------- -----------
(unaudited)
ASSETS
- ------
Current assets:
Cash and cash equivalents............................. $186,731 $6,905 $ 1,484
Accounts receivable, net (notes 5, 4 and 7)........... 64,719 29,248 14,871
Costs and estimated earnings in excess of billings
(note 6)............................................ 164,986 4,989 24,127
Deferred income tax asset (note 12)................... -- 6,301 4,392
Notes and other receivables (note 8).................. 14,936 14,934 6,253
Other current assets (note 14)........................ 7,063 328 1,260
---------- ----------- --------
Total current assets............................ 438,435 62,705 52,387
---------- ----------- --------
Property and equipment, net (notes 5, 9, 11 and 12)....... 444,816 186,535 114,748
Deferred income tax asset (note 12)....................... 8,902 -- --
Notes and other receivables (note 8)...................... 115 11,052 8,430
Intangible and other long-term assets, net of amortization
(notes 11 and 14)....................................... 16,210 3,967 8,613
---------- ----------- --------
Total assets.................................... $908,478 $264,259 $184,178
========== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995, and September 30, 1997
(Unaudited) (Amounts in Thousands, Except
Share Information)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C> <C>
1997 1996 1995
-------- -------- ------
(unaudited)
Current liabilities:
Accounts payable and accrued expenses (note 10)...... $178,676 $80,129 $ 26,748
Payable to related parties, net (note 13)............ -- -- 2,983
Deferred revenue..................................... 4,044 2,649 3,969
Billings in excess of costs and estimated earnings
(note 6)........................................... 12,440 5,034 --
Deferred income tax liability (note 12).............. 6,432 -- --
Current portion of long-term debt (note 11).......... 15,782 25,193 21,270
Advances from parent (note 13)....................... -- 19,138 --
---------- ----------- --------
Total current liabilities....................... 217,374 132,143 54,970
Long-term debt (note 11)............................. 268,946 109,268 68,793
Advances from Parent (note 13)....................... -- -- 27,119
Deferred income tax liability (note 12).............. -- 1,708 922
Other liabilities (notes 10 and 15).................. 53,307 11,698 5,899
---------- ----------- --------
Total liabilities............................... 539,627 254,817 157,703
---------- ----------- --------
Stockholders' equity (note 18):
Preferred Stock, $.01 par value. Authorized
25,000,000 shares. No shares issued and outstanding. -- -- --
Common Stock, $.01 par value. Authorized
400,000,000 shares. 103,320,766 shares
issued and outstanding at September 30, 1997,
and 86,500,000 shares issued and outstanding at
December 31, 1996 and 1995........................... 1,033 865 865
Additional paid-in capital............................ 412,005 55,027 65,093
Accumulated deficit................................... (44,187) (46,450) (39,483)
---------- ----------- --------
Total stockholders' equity....................... 368,851 9,442 26,475
---------- ----------- --------
Commitments and contingencies (note 14)
Total liabilities and stockholders' equity....... $908,478 $264,259 $184,178
========== =========== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Per Share Information)
<TABLE>
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, Year ended December 31,
1997 1996 1996 1995 1994
---------- ---------- --------- ---------- ----------
(unaudited)
Revenue:
Carrier services........................... $ 39,062 $ 45,106 $57,573 $67,789 $50,240
Commercial services (note 13).............. 38,033 25,475 34,265 20,412 8,712
---------- ---------- --------- ---------- ----------
77,095 70,581 91,838 88,201 58,952
Network construction services (note 6)..... 413,226 59,255 139,158 36,901 11,921
---------- ---------- --------- ---------- ----------
490,321 129,836 230,996 125,102 70,873
---------- ---------- --------- ---------- ----------
Operating expenses:
Telecommunications services................ 65,310 62,399 80,368 81,215 48,239
Network construction services (note 13).... 282,472 37,661 87,542 32,754 9,369
Selling, general and administrative
(notes 2 and 13)........................... 59,987 34,230 45,755 37,195 21,516
Growth share plan (note 15)................ 69,320 - 13,100 - -
Depreciation and amortization.............. 13,114 11,890 16,245 9,994 2,364
---------- ---------- --------- ---------- ----------
490,203 146,180 243,010 161,158 81,488
---------- ---------- --------- ---------- ----------
Income (loss) from operations.............. 118 (16,344) (12,014) (36,056) (10,615)
Other income (expense):
Gain on sale of contract rights (note 3) 9,296 - - - -
Gain on sale of telecommunications
service agreements (note 4)............ - 6,126 6,126 - -
Interest expense, net...................... (8,886) (5,004) (6,827) (4,248) (219)
Interest income............................ 5,912 1,898 2,454 1,782 191
Other (expense) income, net (note 4)....... (1,986) 113 60 55 (42)
---------- ---------- --------- ---------- ----------
Income (loss) before income tax
expense (benefit)............. 4,454 (13,211) (10,201) (38,467) (10,685)
Income tax expense (benefit)(note 12)...... 2,191 (4,310) (3,234) (13,336) (3,787)
---------- ---------- --------- ---------- ----------
Net income (loss) $ 2,263 $(8,901) $(6,967) $(25,131) $(6,898)
========== ========== ========= ========== ==========
Net income (loss) per share $ 0.02 $ (0.10) $(.08) $(.29) $(.08)
========== ========== ========= ========== ==========
Weighted average common and common
equivalent shares ...................... 93,945 88,158 88,158 88,158 88,158
========== ========== ========= ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1996, 1995 and 1994 and the Nine
Months Ended September 30, 1997 (Unaudited)
(Amounts in Thousands, Except Share Amounts)
<TABLE>
<S> <C> <C> <C> <C> <C>
Common stock
--------------------- Additional Total Total
Number paid-in Accumulated stockholders'
of shares Amount capital deficit equity
---------- -------- ---------- ----------- -----------
Balances, January 1, 1994.............. 86,500,000 $865 $18,668 $(7,454) $12,079
Contribution from Parent............... - - 20,900 - 20,900
Repurchase of warrants................. - - (1,500) - (1,500)
Net loss............................... - - - (6,898) (6,898)
----------- -------- --------- ----------- -----------
Balances, December 31, 1994............ 86,500,000 865 38,068 (14,352) 24,581
Contribution from Parent............... - - 28,000 - 28,000
Reduction in additional paid-in capital
attributable to effect of the tax
allocation agreement with Parent
(note 12)............................ - - (975) - (975)
Net loss............................... - - - (25,131) (25,131)
----------- -------- --------- ----------- -----------
Balances, December 31, 1995............ 86,500,000 865 65,093 (39,483) 26,475
Cancellation of income tax benefit
receivable from Parent (note 12)....... - - (11,088) - (11,088)
Expenses incurred by Parent on
Company's behalf (note 13)........... - - 1,022 - 1,022
Net loss............................... - - - (6,967) (6,967)
----------- -------- --------- ----------- -----------
Balances, December 31, 1996............ 86,500,000 865 55,027 (46,450) 9,442
Issuance of common stock, net
(unaudited).(note 18)................ 15,525,000 155 319,381 - 319,536
Issuance of common stock warrants
(unaudited).(note 18)................ - - 2,300 - 2,300
Issuance of common stock for
growth shares (unaudited) (note 15).. 1,295,766 13 35,297 - 35,310
Net income (unaudited)................. - - - 2,263 2,263
----------- -------- --------- ----------- -----------
Balances, September 30, 1997
(Unaudited)........................... .103,320,766 $1,033 $412,005 $(44,187) $368,851
=========== ======== ========= =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Amounts in Thousands)
<TABLE>
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, Year ended December 31,
---------------------- --------------------------------
1997 1996 1996 1995 1994
----------- ---------- ---------- ---------- ----------
(unaudited)
Cash flows from operating activities:
Net income (loss)........................................................ $2,263 $(8,901) $(6,967) $(25,131) $(6,898)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Gain on sale of contract rights (note 3)............................. (9,296) - - - -
Gain on sale of telecommunications service agreements (note 4)....... - (6,126) (6,126) - -
Depreciation and amortization........................................ 13,114 11,890 16,245 9,994 2,364
Deferred income tax expense (benefit) (note 12)...................... 2,123 4,173 (1,123) (2,839) 6,920
Changes in operating assets and liabilities:
Receivables-accounts and notes, net........................................ (24,536) (23,200) (25,680) (21,379) 910
Costs and estimated earnings in excess of billings................... (159,997) 14,706 19,138 (21,650) (2,210)
Accounts payable and accrued expenses................................ 59,848 (3,412) 25,381 4,339 5,795
Payable to related parties, net...................................... - (508) (2,983) 1,263 1,560
Billings in excess of costs and estimated earnings................... 7,406 3,158 5,034 - (831)
Accrued growth share plan expense and deferred compensation.......... 33,953 - 9,290 - -
Other changes........................................................ 15,050 (1,120) 315 (1,232) (4,304)
----------- ---------- ---------- ---------- ---------
Net cash (used in) provided by operating activities........................ (60,072) (9,340) 32,524 (56,635) 3,306
----------- ---------- ---------- ---------- ---------
Cash flows from investing activities:
Proceeds from sale of contract rights (note 3)........................... 9,000 - - - -
Proceeds from sale of telecommunications service agreements (note 4)..... - 4,500 4,500 - -
Expenditures for property and equipment, net............................. (205,304) (48,853) (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.................................... (196,304) (44,353) (52,622) (58,858) (41,712)
----------- ---------- ---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock, net (note 18).................... 319,536 - - - -
Proceeds from issuance of common stock warrants (note 18)................ 2,300 - - - -
Borrowings of long-term debt............................................. 328,000 51,000 65,000 62,606 25,401
Repayments of long-term debt............................................. (185,858) (14,689) (21,322) (2,331) (173)
Debt issuance costs...................................................... (8,638) (459) (112) (591) (190)
Net (payments to) advances from Parent................................... (19,138) 20,486 (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 - -
F-8
<PAGE>
Repurchase of common stock warrants...................................... - - - - (1,500)
----------- ---------- ---------- ---------- ----------
Net cash provided by financing activities................................ 436,202 56,338 25,519 113,940 34,264
----------- ---------- ---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents..................... 179,826 2,645 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................................. $186,731 $4,129 $6,905 $1,484 $3,037
=========== ========== ========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid for interest, net.............................................. $4,473 $ 4,786 $8,825 $3,972 $128
=========== ========== ========== ========== ==========
Cash paid for taxes, other than Parent................................... $195 $132 $160 $725 $2,232
=========== ========== ========== ========== ==========
Supplemental disclosure of significant non-cash investing and financing
activities:
Capital lease obligation................................................. $- $720 $720 $2,419 $-
=========== ========== ========== ========== ==========
Accrued capital expenditures............................................. $57,903 $- $28,000 $- $-
=========== ========== ========== ========== ==========
Issuance of common stock in settlement of a portion of accrued
Growth Share liability (note 15)....................................... $ 35,310 $- $- $- $-
========= ========= ========== ========== ==========
Capital expenditures financed with equipment credit facility............. $ 8,125 $- $- $- $-
========= ========= ========== ========== ==========
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-9
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996, 1995 and 1994
(Information as of September 30, 1997, and for the Nine Months Ended
September 30, 1997 and 1996 is Unaudited)
(1) Summary of Significant Accounting Policies
(a) General and Business
Qwest Communications International Inc. (the Company) was wholly-owned by
Anschutz Company (the Parent) until June 27, 1997, when the Company issued
common stock in an initial public offering (as described in note (18)-Securities
Offering). Subsequent to the initial public offering, the Parent owns
approximately 83.7% of the outstanding common stock of the Company. 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 Servicios 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 audited consolidated financial statements as of December 31,
1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, and the
accompanying unaudited interim consolidated financial statements as of September
30, 1997 and for the nine month periods ended September 30, 1997 and 1996
include the accounts of the Company and all majority-owned subsidiaries.
Intercompany balances and transactions have been eliminated in consolidation.
F-10
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(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.
(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 nine months ended September 30, 1997 and 1996, and in the years ended
December 31, 1996, 1995 and 1994 was approximately $11.2 million, $1.6 million,
$2.4 million, $1.9 million and $0.3 million, respectively.
The useful lives of property and equipment is as follows:
Facility and leasehold improvements......... 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
F-11
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
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 nine months ended September 30, 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,
and a tax sharing agreement provides for allocation of tax liabilities and
benefits to the Company, in general, as though it filed a separate return. The
Company uses the asset and liability method of accounting for income taxes
whereby deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Income taxes 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.
F-12
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(i) Net Income (Loss) Per Share
Net income (loss) per share for the nine months ended September 30, 1997 and
1996, and for the years ended December 31, 1996, 1995 and 1994 was computed by
dividing net income (loss) by the weighted average number of common shares
outstanding during such periods. Common stock equivalent shares from options,
warrants and common stock issuable for Growth Shares (as described in note
(15)-Growth Share Plan) are included in the computation when their effects are
dilutive, 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 twelve 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.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128
requires the presentation of basic earnings per share (EPS) and, for companies
with potentially dilutive securities, such as convertible debt, options and
warrants, diluted EPS. SFAS 128 is effective for annual and interim periods
ending after December 15, 1997. The Company does not believe that the adoption
of SFAS 128 will significantly affect the calculation of the Company's net loss
per common share.
(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 September 30, 1997, and
for the nine months ended September 30, 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.
F-13
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(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 current year
presentation.
(2) Relocation and Restructuring
Relocation and restructuring costs of approximately $1.6 million were
recognized in the first nine months of 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 $2.0 million 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 telecommunications capacity rights and options of the
Company exercisable against the Purchaser, for $9.0 million (the Termination
Agreement Consideration). In the first quarter of 1997, the Company received
$7.0 million 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 $0.7 million and has included the
adjustment in gain on sale of contract rights.
During the second quarter of 1997, the Company satisfied its Capacity
Obligation and received the remaining $2.0 million cash consideration due under
the Termination Agreement.
F-14
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(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 $5.5 million. As of December 31, 1996, the Company received $4.5 million 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 $3.9 million 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 $1.7 million and approximately $0.6
million 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 September 30, 1997 and December 31, 1996, net amounts of
approximately $3.5 million and $2.0 million, respectively, is due to the Company
for such costs. On March 31, 1997, the arrangement relating to transition
services expired and has not yet been renegotiated. The Company made a provision
of $2.0 million in the first quarter of 1997. Negotiations with the Buyer are
continuing. The Company believes that the receivable balance as of September 30,
1997 is collectible.
(5) Acquisitions
On January 31, 1995, the Company purchased all of the outstanding stock of QTI
and Subsidiaries (formerly Qwest Communications, Inc.) for approximately $18.8
million. The purchase was initially financed with an advance from the Parent.
The Company repaid a substantial portion of this advance with the proceeds from
two term notes issued in July 1995 (as described in note (11)-Long-Term Debt).
The purchase price was allocated as follows (in thousands):
Working capital.......... $7,744
Property and equipment... 11,012
Other.................... 14
-------
$18,770
=======
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.
F-15
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
Year ended
December 31, 1994
---------------------
(in thousands, except
per share amount)
Revenue.......... $84,865
Net loss......... $ 6,643
Loss per share... $ .08
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 approximately $1.8 million.
In October, Qwest and an unrelated third party consummated an agreement
whereby Qwest acquired from the third party all of the issued and outstanding
shares of capital stock of the third party's then wholly owned Internet Service
Provider (the ISP), and the capital stock of the ISP issued at the closing of
the acquisition, for $20.0 million in cash. The acquisition will be allocated to
the assets and liabilities acquired based upon the estimated fair values of such
assets and liabilities.
(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):
December 31,
September 30, -----------------
1997 1996 1995
----------- --------- -------
(unaudited)
Costs incurred on uncompleted contracts........... $359,338 $82,840 $23,339
Estimated earnings................................ 185,032 48,853 10,610
----------- --------- -------
544,370 131,693 33,949
Less: billings to date............................ 391,824 131,738 9,822
----------- --------- -------
$152,546 $(45) $24,127
=========== ========= =======
Included in the accompanying balance sheets under the following captions:
Costs and estimated earnings in excess of
billings................................... $164,986 $4,989 $24,127
Billings in excess of costs and estimated
earnings................................... (12,440) (5,034) -
----------- --------- -------
$152,546 $(45) $24,127
=========== ========= =======
Revenue the Company expects to realize for work to
be performed on the above uncompleted
contracts....................................... $577,886 $328,688 $6,692
=========== ========= =======
F-16
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 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 $457.0
million. Under the agreements, the third-parties are entitled to require the
Company to provide IRUs along optional routes, as defined, for an additional
$65.0 million. 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 $888.0 million. 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 $175.0 million which have been
guaranteed by the Parent. As a result of activity on these contracts, the
Company has recorded approximately $193.2 million and $121.0 million of network
construction service revenue in the nine months ended September 30, 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 $985.0 million.
F-17
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(7) Accounts Receivable
Accounts receivable consists of the following (in thousands):
December 31,
September 30, -----------------
1997 1996 1995
----------- -------- --------
(unaudited)
Carrier services....................... $10,847 $ 9,978 $12,634
Commercial services.................... 14,029 5,736 3,595
Network construction services.......... 39,423 13,751 111
Transition costs (note 4).............. 3,527 1,988 -
Interest receivable (note 8)........... 654 1,289 1,088
Other.................................. 658 175 64
----------- -------- --------
69,138 32,917 17,492
Less allowance for doubtful accounts... (4,419) (3,669) (2,621)
----------- -------- --------
Accounts receivable, net............... $64,719 $29,248 $14,871
=========== ======== ========
(8) Notes and Other Receivables
On November 16, 1994, a third party entered into a $45.0 million 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 $3.1 million, $29.7 million, and $2.0 million 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
$13.0 million to the third party in the event of the sale of the Company-owned
conduits.
F-18
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 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 $4.1 million representing
one-third of the route's contract price, including cost recoveries, and $0.5
million representing interest earned during construction. In addition, the
Company received a promissory note for approximately $8.2 million representing
the remaining two-thirds of the contract price, including cost recoveries. The
second installment of approximately $4.1 million 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 $10.9 million representing
one-third of the route's contract price, including cost recoveries, and $1.3
million representing interest earned during construction. In addition, the
Company received two promissory notes for approximately $19.7 million and $2.2
million 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 $10.9
million was received in February 1997.
F-19
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(9) Property and Equipment
Property and equipment consists of the following (in thousands):
December 31,
September 30,-------------------
1997 1996 1995
----------- --------- ---------
(unaudited)
Land........................................... $ 558 $ 506 $ 420
Facility and leasehold improvements............ 12,761 7,951 5,040
Communications and construction equipment...... 74,751 52,076 41,104
Fiber and conduit systems...................... 92,924 42,446 42,414
Office equipment and furniture................. 8,324 6,360 5,925
Network construction and other assets held under
capital leases (note 11)...................... 3,071 3,197 2,419
Work in progress................................ 288,710 99,915 29,618
----------- --------- ---------
481,099 212,451 126,940
Less accumulated depreciation and amortization. (36,283) (25,916) (12,192)
----------- --------- ---------
Property and equipment, net.................... $444,816 $186,535 $114,748
=========== ========= =========
F-20
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(10) Accounts Payable, Accrued Expenses and Other Liabilities
Accounts payable and accrued expenses consists of the following (in
thousands):
December 31,
September 30, -----------------
1997 1996 1995
----------- -------- --------
(unaudited)
Accounts payable........................ $ 40,163 $ 44,766 $ 13,587
Construction accounting accrual......... 66,976 18,071 -
Capacity service obligation............. 8,971 3,658 3,719
Property, sales and other taxes......... 28,551 3,793 2,395
Accrued interest........................ 14,594 707 299
Other................................... 19,421 9,134 6,748
----------- -------- --------
Accounts payable and accrued expenses... $178,676 $ 80,129 $ 26,748
=========== ======== ========
Accounts payable as of September 30, 1997 and December 31, 1996 includes
approximately $3.4 million and $37.0 million, respectively, payable for fiber
purchases under the materials purchase agreement (as described in note
(14)-Network Construction Project).
Other liabilities consists of the following (in thousands):
<TABLE>
<S> <C> <C> <C>
September 30, December 31, December 31,
1997 1996 1995
------------------------ --------------------- ----------------------
(unaudited)
Right-of-way obligation $ 31,295 $ 1,297 $ 1,513
Growth share accrual 13,996 9,291 -
Telecommunications service - - 2,914
agreement liability
Other 8,016 1,110 1,472
------------------------ --------------------- ----------------------
Other liabilities $ 53,307 $ 11,698 $ 5,899
======================== ===================== ======================
</TABLE>
F-21
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(11) Long-Term Debt
Long-term debt consists of the following (in thousands):
December 31,
September 30, -------------------
1997 1996 1995
----------- --------- ---------
(unaudited)
Senior notes........................ $250,000 $- $-
Revolving credit facility........... 10,000 60,000 -
Customer contract credit facility... 15,000 25,918 40,418
Equipment credit facility........... 8,125 - -
Network credit facility............. - 27,077 29,273
Equipment loans..................... - 9,820 6,765
Term notes.......................... - 9,416 11,100
Capital lease obligation............ 1,423 2,010 2,187
Other............................... 180 220 320
----------- --------- ---------
Total debt.......................... 284,728 134,461 90,063
Less current portion................ (15,782) (25,193) (21,270)
----------- --------- ---------
Long-term debt...................... $268,946 $109,268 $68,793
=========== ========= =========
On March 31, 1997, the Company issued 10 7/8% Senior Notes (the Senior Notes)
due 2007 having an aggregate principal amount of $250.0 million. The net
proceeds of the Senior Notes were approximately $242.0 million, after deducting
offering costs which are included in intangible and other long-term assets. The
net proceeds were used to repay amounts due under the revolving credit facility,
network credit facility, equipment loans and term notes, described below, 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)-Commitments and Contingencies).
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, for
the Senior Notes or, alternatively, to file a shelf registration statement under
the Act with respect to the Senior Notes. In July 1997, the Company's
registration statement (no. 333-30449) on Form S-4 relating to its 10 7/8%
Series B Senior Notes (the Exchange Notes), having terms identical in all
material respects to the Senior Notes, became effective. The Company expects to
consummate an exchange of the Exchange Notes for all of the Senior Notes in the
third quarter of 1997. The Company will receive no proceeds from and will
recognize no profit on the exchange transaction, and no change in financial
position of the Company will occur as a result of the exchange transaction if it
occurs. If certain conditions to closing the exchange offer have not been
satisfied within specified time periods (each a Registration Default) and a
shelf registration statement has not been made effective and available for
resale of the Senior Notes, additional interest will accrue at a rate per annum
F-22
<PAGE>
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 August 1997, the Company completed an exchange of the Exchange Notes,
registered under the Act, for all of the Senior Notes. The Exchange Notes are
identical in all material respects to the originally issued Senior Notes. The
Company received no proceeds from and recognized no profit on the exchange
transaction, and no change in the financial condition of the Company occurred as
a result of the exchange transaction.
F-23
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
In April 1996, the Company entered into a $100.0 million 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 $100.0
million 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 $10.0
million. There were no letters of credit outstanding at December 31, 1996 and
September 30, 1997. At September 30, 1997, $10.0 million was outstanding under
the Facility. In October 1997, the Company repaid the outstanding balance and
terminated the Facility.
In February 1997, the Company entered into a one-year $50.0 million line of
credit with a commercial bank at substantially identical terms as the $100.0
million credit facility described above. No amounts were ever drawn under this
credit line, and the facility was canceled by the Company in July 1997.
In April 1995, the Company entered into a $45.0 million customer contract
credit facility agreement to finance certain construction projects undertaken at
that time. The facility converted to a term loan upon completion of the
construction projects in 1996 and 1995 and is now secured by notes receivable
issued in connection with these construction projects (as described in note
(8)-Notes and Other Receivables). The facility bears interest at the Company's
option at either (a) the higher of (i) the bank's base rate of interest, or (ii)
the Federal Funds Rate plus 1/2%; or (b) LIBOR plus 9/16%. The outstanding
balance at December 31, 1996 is due in installments on the anniversary dates of
the completion of the projects, through February 1998.
In June 1994, the Company entered into a $27.6 million 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 $1.4 million and $0.3 million 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
$5.0 million 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.
F-24
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
In 1996, the Company executed three equipment loans aggregating approximately
$5.0 million. 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
$2.6 million. 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 $12.0 million, 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 $0.5 million, 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.
In May 1997, the Company entered into a $90.0 million credit agreement (the
Equipment Credit Facility) 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 Equipment Credit
Facility, 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 $100.0 million of such equipment and services under a
separate procurement agreement which was executed in May 1997. Principal amounts
outstanding under the Equipment Credit Facility will be payable in quarterly
installments commencing on June 30, 2000, with repayment in full due and payable
on May 31, 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. Approximately $8.1
million was outstanding on this Equipment Credit Facility as of September 30,
1997.
F-25
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
Under the terms of certain loan agreements described above, at September 30,
1997 and December 31, 1996 certain assets of the Company's subsidiaries are
restricted.
The Company leases certain network construction equipment under capital lease
agreements. The amortization charge applicable to capital leases is included in
depreciation expense. Future minimum payments under capital lease obligations is
included in contractual maturities of long-term debt summarized below.
Contractual maturities of long-term debt as of September 30, 1997 and December
31, 1996 are as follows (in thousands):
September 30, 1997 December 31, 1996
------------------ -----------------
(unaudited)
Year ended December 31:
1997................... $4,242 $ 25,193
1998.................. 11,702 21,533
1999................... 4,169 34,458
2000................... 6,432 41,430
2001................... 3,084 11,847
Thereafter............. 255,099 -
------- --------
$284,728 $134,461
======== ========
In October 1997, the Company issued $555,890,000 in principal amount at
maturity of Senior Discount Notes, due 2007 (the Discount Notes), generating net
proceeds of approximately $342.6 million, after deducting offering costs which
are included in intangible and other long-term assets. Such net proceeds will be
used to fund capital expenditures for continuing construction and activation of
the Network and to fund further growth in the business. The Discount Notes will
accrete at a rate of 9.47% per annum, compounded semi-annually, to an aggregate
principal amount of $555,890,000 by October 15, 2002. The principal amount of
the Discount Notes is due and payable in full on October 15, 2007. The Discount
Notes are redeemable at the Company's option, in whole or in part, at any time
on or after October 15, 2002, at specified redemption prices. In addition, prior
to October 15, 2000, the Company may use the net cash proceeds from certain
equity transactions to redeem up to 35% of the Discount Notes at specified
redemption prices. Cash interest on the Discount Notes will not accrue until
October 15, 2002, and thereafter will accrue at a rate of 9.47% per annum, and
will be payable semi-annually in arrears commencing on April 15, 2003 and
thereafter on April 15 and October 15 (each an interest payment date) of each
year. The Company has the option of commencing the accrual of cash interest on
an interest payment date on or after October 15, 2000, in which case the
outstanding principal amount at maturity of the Discount Notes will, on such
interest payment date, be reduced to the then accreted value, and cash interest
will be payable on each interest payment date thereafter.
F-26
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
In connection with the sale of the Discount Notes, the Company agreed to make
an offer to exchange new notes, registered under the Act and with terms
identical in all material respects to the Discount Notes, for the Discount Notes
or, alternatively, to file a shelf registration statement under the Act with
respect to the Discount 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 Discount Notes
during specified time periods (each a Registration Default), additional cash
interest will accrue at a rate per annum equal to 0.50% of the principal amount
at maturity of the Discount Notes during the 90-day period immediately following
the occurrence of a Registration Default and increasing in increments of 0.25%
per annum of the principal amount at maturity of the Discount Notes up to a
maximum of 2.0% per annum, at the end of each subsequent 90-day period until the
Registration Default is cured.
(12) Income Taxes
Income tax benefit for years ended December 31, 1996, 1995 and 1994 is as
follows (in thousands):
1996 1995 1994
------ ------- --------
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
====== ======= ========
F-27
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 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):
1996 1995 1994
------- -------- -------
Expected income tax benefit........................ $3,570 $13,463 $3,740
State income taxes, net of federal income tax
benefit.......................................... 279 - 281
Goodwill and other intangible asset amortization... (568) (56) (67)
Other, net......................................... (47) (71) (167)
------- -------- -------
Total income tax benefit...................... $3,234 $13,336 $3,787
===== ======= ======
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):
December 31,
------------------
1996 1995
--------- --------
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)
========= ========
F-28
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
The Company has analyzed the sources and expected reversal periods of its
deferred tax assets. The Company believes that the tax benefits attributable to
deductible temporary differences will be realized by recognition of future
taxable amounts. Accordingly, the Company believes a valuation allowance for its
federal deferred tax assets is not necessary.
The Company is included in the consolidated federal income tax return of its
Parent, which has a July 31 year-end for income tax purposes. A tax allocation
agreement between the Company and its Parent was implemented effective November
4, 1993 which encompasses U.S. federal tax consequences. The Company is
responsible to its Parent for its share of current consolidated income tax
liabilities. The Parent is responsible to the Company to the extent that the
Company's income tax attributes are utilized by the Parent to reduce its
consolidated income tax liabilities, subject to certain limitations on net
operating loss and credit carryforwards. At December 31, 1996, the income tax
benefit receivable from Parent of approximately $11.1 million 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 is 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 approximately $1.0 million 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.
F-29
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(13) Related Party Transactions
(a) Transactions with Parent
Advances from Parent at December 31, 1996 and 1995, which were non-interest
bearing, included costs charged to the Company by the Parent and advances
received from the Parent to fund operations, net of repayments.
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 $3.0 million, $1.4 million, $2.1 million and $2.5 million in the
nine months ended September 30, 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).
In May 1997, all outstanding advances from Parent, totaling approximately
$28.0 million, were repaid.
F-30
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
The Company has agreed to indemnify the Parent and its subsidiaries against
any costs or losses incurred by any of them as a result of their providing
credit support to the Company (in the form of collateral pledges, guarantees,
bonds or otherwise).
(b) Transactions with Other Related Parties
The Parent owned approximately 25% of Southern Pacific Rail Corporation and
its subsidiaries (SPRC) at December 31, 1995. In September 1996, SPRC was
acquired by Union Pacific Corporation. As a result of this transaction, the
Parent owns approximately 5% of Union Pacific Corporation, and SPRC ceased to be
a related party.
The Company provides telecommunication services to SPRC and charged SPRC
approximately $1.6 million, $3.6 million and $3.4 million in the years ended
December 31, 1996, 1995 and 1994, respectively, for these services. Amounts due
to the Company for telecommunication services totaled approximately $0.4 million
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 $3.5 million,
$2.2 million and $0.9 million for these services in the years ended December 31,
1996, 1995 and 1994, respectively. Amounts due to SPRC for these activities
totaled approximately $3.4 million 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 $0.9 million and $0.8 million in the nine months ended
September 30, 1997 and 1996, $1.2 million and $1.0 million 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 $1.0 million. 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.
F-31
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(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 $765.0 million.
This amount includes the Company's commitment to purchase a minimum quantity of
materials for approximately $257.0 million 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).
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 projects its
total remaining cost at September 30, 1997 for completing the construction of
the Network will be approximately $1.9 billion. This includes the Company's
remaining commitment to purchase a minimum quantity of materials for
approximately $200.5 million as of September 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 September 30, 1997 are as
follows (in thousands):
As of December 31, 1996
Capacity
service Operating
commitments leases Total
----------- --------- -------
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
=========== ========= =======
F-32
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
As of September 30, 1997 (unaudited)
Capacity
service Operating
commitments leases Total
----------- --------- -------
Year ended December 31:
1997..................... $ 827 $1,251 $2,078
1998..................... 3,077 3,392 6,469
1999..................... 250 2,592 2,842
2000..................... - 1,410 1,410
2001..................... - 581 581
Thereafter............... - 3,069 3,069
----------- --------- -------
Total minimum payments $4,154 $12,295 $16,449
=========== ========= =======
Capacity service expenses are included in telecommunications service costs.
Amounts expensed in the nine months ended September 30, 1997 and 1996, and in
the years ended December 31, 1996, 1995 and 1994 were approximately $5.6
million, $18.6 million, $19.0 million, $19.6 million and $17.2 million,
respectively.
Amounts expensed in the nine months ended September 30, 1997 and 1996, and in
the years ended December 31, 1996, 1995 and 1994 related to operating leases
were approximately $4.3 million, $3.5 million, $5.0 million, $4.6 million, and
$3.1 million, respectively.
(c) Easement Agreements
The Company has Master Easement Agreements (the Original Agreements) with SPRC
and its affiliated railroads which provide for payment of specified amounts
based on miles of conduit used by the Company or sold to third parties. The
Company has the option under the Original Agreements to either make annual
payments for the term of the easement or to make lump sum payments at a
discount. The Company has made annual payments through 1996 and retains the
option to make the discounted lump sum payments in the future.
The Original Agreement was amended effective August 20, 1996 (the Agreement
Amendment). The Agreement Amendment grants the Company the right to install up
to approximately 3,300 miles of new conduit in specified SPRC rail corridor,
through August 9, 2001. The Company is required to construct a minimum of two
conduits on a minimum of 1,200 route miles, as follows: (i) 400 miles on or
before August 9, 1997; (ii) 400 additional miles on or before August 9, 1998;
and (iii) 400 additional miles on or before August 9, 1999. In addition, the
Company is required to provide SPRC with limited communications capacity as
defined, for its own internal use.
F-33
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
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 February 1997, the Company entered into a right-of-way agreement with an
unrelated third party which provides for advance payment of $1.9 million for the
initial five-year period of the agreement and $1.9 million in advance of each
subsequent five-year period during the remainder of the 25-year term of the
agreement.
In July 1997, the Company entered into a 25-year right-of-way agreement with
an unrelated third party that allows the Company to construct and operate a
fiber optic network over up to approximately 1,000 route miles along such
right-of-way. The agreement provides for annual payments of approximately $2,500
per route mile based upon the number of miles used by the Company.
In October 1997, the Company entered into a perpetual right-of-way agreement
with an unrelated third party that allows the Company to install conduit in up
to approximately 300 route miles along such right-of-way. The agreement provides
for a total payment in advance of approximately $4.9 million, which was paid by
the Company in October 1997.
In October 1997, the Company entered into a 25-year right-of-way agreement
with an unrelated third party that allows the Company to construct and operate a
fiber optic network over up to approximately 370 route miles along such
right-of-way. The agreement provides for advance annual payments of
approximately $4,500 per route mile.
In addition to the above, 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 $81.0 million and approximately $82.0 million at September
30, 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 September 30,
1997 are as follows (in thousands):
F-34
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
As of December 31, 1996
Year ended December 31:
1997................... $15,048
1998................... 140
1999................... 101
2000................... 610
2001................... 1,194
Thereafter............. 2,170
-------
$19,263
=======
As of September 30, 1997 (unaudited)
Year ended December 31:
1997................... $21,818
1998................... 171
1999................... 133
2000................... 643
2001................... 1,227
Thereafter............. 3,180
-------
$27,172
=======
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. In the first
quarter of 1997, the Company accrued approximately $2.5 million 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 nine months ended September 30, 1997 and
1996, and for years ended December 31, 1996, 1995 and 1994 were approximately
$15.4 million, $4.3 million, $2.6 million, $3.0 million and $2.7 million,
respectively. Amounts charged to selling, general and administrative expenses
for easements retained by the Company were approximately $2.0 million and $3.1
million in the nine months ended September 30, 1997 and 1996, respectively, $3.5
million in year ended December 31, 1996 and was not material in 1995 and 1994.
F-35
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(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 $7.7 million, including $1.1
million 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 $13.0 million as of December 31, 1996.
In July 1997, the Company entered into an agreement with an unrelated third
party whereby the Company will receive (i) four dark fibers along a 2,270
kilometer route to be constructed in Mexico (the Mexico Network) by the third
party, and (ii) certain construction inventory and value-added tax refunds,
totaling approximately $2.9 million. In exchange for these assets, the third
party will receive the stock of the Company's subsidiary, SP Servicios de Mexico
S.A. de C.V. (SPS), and approximately $6.7 million in cash. Upon completion of
the Mexico Network and the extension of the Qwest Network to the Mexican border,
the Qwest Network will be linked to Mexico City, Mexico.
(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 approximately $10.7 million 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 $7.2 million paid in January 1997. The remaining
two installments of approximately $1.5 million and $2.0 million are payable on
January 1, 1998 and 1999, respectively, 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 September 30,
1997, $3.6 million of such costs is included in other current assets, and $4.5
million is 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-36
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(15) Growth Share Plan
The Company has a Growth Share Plan (the Plan) for certain of its employees
and directors. A "Growth Share" is a unit of value based on the increase in
value of the Company over specified measuring period. All Growth Share grants
made through September 1997 have generally been made 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 million 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 $13.1 million of
additional compensation expense in 1996, approximately $9.0 million of which is
payable subsequent to December 31, 1997. Such expense is included in selling,
general and administrative expenses in the consolidated financial statements. 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.
The Company has recorded approximately $69.3 million of additional
compensation expense in the nine months ended September 30, 1997 relating to the
Growth Share Plan. Upon completion of the common stock offering in June 1997,
certain Growth Shares vested in full, which resulted in substantial compensation
expense under the Growth Share Plan in the second quarter of 1997, and the
issuance in July 1997 of 1,295,766 shares of Common Stock, which were net of
amounts related to tax withholdings, in settlement of the accrued liability
F-37
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
related to these Growth Shares. Effective with the initial public offering, all
holders of Growth Shares not vested by virtue of the initial public offering
have been granted nonqualified stock options under the Company's Equity
Incentive Plan (as described in note (19)-Equity Incentive Plan), and the value
of these Growth Shares has been capped based upon the initial public offering
price of $22.00 per share. Compensation expense relating to these nonvested
Growth Shares will be recognized over the remaining approximately four-year
vesting period and is estimated to be up to approximately $27.7 million in
total. The Company does not anticipate any future grants under the Growth Share
Plan. The following table summarizes Growth Share grants and Growth Shares
outstanding:
Outstanding
Growth Shares
-------------
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........................ 358,050
1997 settlements................... (253,950)
-------------
September 30, 1997................. 379,500
=============
(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 $.6 million,
$0.5 million, $0.7 million, $0.4 million and $0.3 million in the nine months
ended September 30, 1997 and 1996, and in years ended December 31, 1996, 1995
and 1994, respectively.
F-38
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
(17) Significant Customers
During the nine months ended September 30, 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:
Customer A Customer B Customer C Customer D
---------- ---------- ---------- ----------
1997... 6.3% 33.4% 36.9% .9%
1996... 27.8% 26.3% - 4.0%
1995... 6.8% - - 35.4%
1994... 18.0% - - 5.9%
(18) Securities Offering
In April 1997, the Company filed a registration statement with the Securities
and Exchange Commission for an initial public offering (the Offering) of
13,500,000 shares of Common Stock. On May 23, 1997, the Board of Directors
approved a change in the Company's capital stock to authorize 400 million shares
of $.01 par value Common Stocks, of which 10 million shares are reserved for
issuance under the Equity Incentive Plan (as described below), 2 million shares
are reserved for issuance under the Growth Share Plan, and 4.3 million shares
are reserved for issuance upon exercise of warrants (as described below), and 25
million shares of $.01 par value Preferred Stock. 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 million 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 of the Parent for
$2.3 million in cash, a warrant to acquire 4.3 million shares of Common Stock at
an exercise price on $28.00 per share, exercisable on May 23, 2000. The warrant
is not transferable. Stock issued upon exercise of the warrant will be subject
to restriction on sale or transfer for two years after exercise.
F-39
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
(Information as of September 30, 1997, and for the Nine Months Ended September
30, 1997 and 1996 is Unaudited)
The Company completed the initial public offering of 15,525,000 shares of
Common Stock (including the over allotment option of 2,025,000 Common Shares) on
June 27, 1997, raising net proceeds of approximately $319.5 million.
(19) Equity Incentive Plan
Effective June 23, 1997, the Company adopted the Qwest Communications
International Inc. Equity Incentive Plan (the Equity Incentive Plan). This 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 who are responsible for the Company's growth
and profitability. A maximum of 10 million shares of Common Stock may be subject
to awards under the Equity Incentive Plan. The Company's Compensation Committee
(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 option is granted,
subject to certain restrictions. All awards granted under the Equity Incentive
Plan will immediately vest upon any change in control of the Company, as
defined, unless provided otherwise by the Committee at the time of grant. All
outstanding options will automatically terminate upon the occurrence of certain
merger and reorganization transactions and appropriate notice by the Company to
all option holders, as defined.
For the nine months ended September 30, 1997, the Company granted options to
purchase a total of 5,800,500 shares of Common Stock of the Company. The options
are exercisable over five years from the date of grant and have a weighted
average exercise price of approximately $29.00 per share.
F-40
<PAGE>
SUPERNET, INC.
Financial Statements As Of
June 30, 1997
Together With Independent Auditor's Report
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of SuperNet, Inc.:
We have audited the accompanying balance sheet of SuperNet, Inc. as of June 30,
1997 and the related statements of operations, changes in stockholder's equity
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SuperNet, Inc. as of June 30,
1997, and the results of its operations and its cash flows for the year then
ended, in conformity with generally accepted accounting principles.
Dollinger Smith & Co.
Englewood, Colorado
September 26, 1997
F-41
<PAGE>
SUPERNET, INC.
<TABLE>
<S> <C> <C>
Balance Sheet
As Of June 30, 1997 and September 30, 1997 September 30, June 30
1997 1997
-------------- ------
(unaudited)
ASSETS
Current Assets:
Cash $ 38,058 $ 29,536
Accounts receivable, net of allowance for
doubtful accounts of $93,317 and $81,117
as of September 30, 1997 and June 30, 1997,
respectively 625,854 734,392
Prepaid expenses 116,009 76,239
Current portion of deferred tax asset, less valuation allowance of $1,294,285
and $1,257,965 as of September 30, 1997 and June 30, 1997,
respectively (Note 3) 324,662 324,662
----------- -----------
Total Current Assets 1,104,583 1,164,829
----------- -----------
Property And Equipment:
Equipment 3,304,007 3,254,534
Equipment under capital leases (Note 5) 1,158,119 1,066,785
Computer software 91,113 91,113
Office furniture 112,590 112,590
Leasehold improvements 202,523 202,523
----------- -----------
Total Property And Equipment 4,868,352 4,727,545
Less accumulated depreciation and amortization 1,940,520 1,733,029
----------- -----------
Net Property And Equipment 2,927,832 2,994,516
----------- -----------
TOTAL ASSETS $ 4,032,415 $ 4,159,345
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable $ 816,965 $ 1,158,951
Accrued liabilities (Note 11) 497,379 454,379
Bank line of credit (Note 6) 600,000 600,000
Current portion of long-term obligations (Note 4) 306,114 303,139
Deferred revenue 461,856 329,318
----------- -----------
Total Current Liabilities 2,682,314 2,845,787
----------- -----------
Long-Term Liabilities:
F-42
<PAGE>
Long-term obligations (Note 4) 453,904 448,697
Deferred tax liability (Note 3) 45,408 45,408
----------- -----------
Total Long-Term Liabilities 499,312 494,105
----------- -----------
Commitments (Note 10)
Stockholder's Equity:
Common stock, $.01 par, 10,000,000 shares
authorized, 100,000 shares issued and outstanding 1,000 1,000
Additional paid-in capital 4,513,600 4,418,020
Retained earnings (deficit) (3,663,811) (3,599,567)
------------ ------------
Total Stockholder's Equity 850,789 819,453
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 4,032,415 $ 4,159,345
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
SUPERNET, INC.
Statement Of Operations
For The Year Ended June 30, 1997 and
The Three Months Ended September 30, 1997 and 1996
<TABLE>
<S> <C> <C> <C>
Three Months Ended September 30, Year Ended
1997 1996 June 30, 1997
(unaudited) (unaudited)
Revenues:
Dialin fees for services $ 634,545 $ 590,381 $ 2,485,160
Dedicated service subscriptions 733,054 468,173 2,299,732
Internet information services 354,870 526,681 1,735,390
Other income -- -- 59,474
----------- ------------ ----------
Total Revenues 1,722,469 1,585,235 6,579,756
----------- ------------ ----------
Operating Costs And Expenses:
Cost of revenues 327,928 278,978 1,270,442
Selling 198,761 253,993 769,143
Technical service 490,275 483,700 2,150,575
General and administrative 414,156 309,833 1,681,533
F-43
<PAGE>
Depreciation and amortization 207,491 146,216 690,236
Stock option plan (Note 7) 95,580 -- 3,744,958
----------- ------------ ----------
Total Operating Costs And Expenses 1,734,191 1,472,720 10,306,887
----------- ------------ ----------
Net (Loss) Income From Operations (11,722) 112,515 (3,727,131)
Interest Expense (Notes 4 and 6) 33,315 29,647 119,411
----------- ------------ ----------
Net (Loss) Income Before Income Taxes (45,037) 82,868 (3,846,542)
Income Taxes (Benefit) 19,207 31,490 (203,808)
----------- ------------ -----------
NET (LOSS) INCOME $ (64,244) $ 51,378 $ (3,642,734)
============ ============ ===========
(Loss) Earnings Per Share $ (.64) $ .44 $ (36.43)
=========== ============ ===========
Weighted Average Common and Common Equivalent Shares 100,000 116,260 100,000
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-44
<PAGE>
SUPERNET, INC.
Statement Of Changes In Stockholder's Equity
For The Year Ended June 30, 1997, and The Three Months Ended September 30, 1997
<TABLE>
<S> <C> <C> <C> <C> <C>
Additional Retained Total
Common Stock Paid-in Earnings Stockholder's
Shares Amount Capital (Deficit) Equity
Balance, June 30, 1996 100,000 $ 1,000 $ 573,062 $ 43,167 $ 617,229
Increase in additional paid-in
capital attributable to issuance
of stock options (Note 7) 3,844,958 3,844,958
Net (loss) (3,642,734) (3,642,734)
------- -------- ------------- ----------------- -----------------
Balance, June 30, 1997 100,000 $ 1,000 $ 4,418,020 $ (3,599,567) $ 819,453
Increase in additional paid-in
capital attributable to issuance
of stock options (unaudited) 95,580 95,580
Net loss (unaudited) (64,244) (64,244)
------- ----------- -------------- ---------------- ------------------
Balance, September 30, 1997 (unaudited) 100,000 $ 1,000 $ 4,513,600 $ (3,663,811)$ 850,789
======= =========== ============== ================ ==================
</TABLE>
The accompanying notes are an integral part of the financial statements
F-45
<PAGE>
SUPERNET, INC.
Statement Of Cash Flows
For The Year Ended June 30, 1997, and
The Three Months Ended September 30, 1997 and 1996
<TABLE>
<S> <C> <C> <C>
Three Months Ended September 30, Year Ended
1997 1996 June 30, 1997
-------------- -------------- -------------
Cash flows from operating activities:
Net income (loss) $ (64,244) $ 51,378 $ (3,642,734)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operating activities:
Stock option plan expense 95,580 -- 3,744,958
Depreciation and amortization 207,491 146,216 690,236
Changes in operating assets and liabilities -
Decrease (increase) in accounts receivable 108,538 (116,075) (138,642)
(Increase) decrease in prepaid expenses (39,770) (24,863) (23,357)
(Increase) in deferred tax assets -- -- (239,167)
(Decrease) increase in accounts payable and accrued liabilities (298,986) (334,318) 810,383
Increase (decrease) in bank overdrafts liability -- 219,441 (130,223)
Increase in deferred tax liability -- -- 2,144
Increase (decrease) in deferred revenue 132,538 (86,716) 14,213
-------------- -------------- --------------
Net cash provided by (used in) operating activities 141,147 (144,937) 1,087,811
-------------- -------------- --------------
Cash flows from investing activities:
Acquisitions of property and equipment (140,807) (254,740) (1,554,573)
-------------- -------------- ---------------
Net cash used in investing activities (140,807) (254,740) (1,554,573)
-------------- -------------- ---------------
Cash flows from financing activities:
Borrowings under bank line of credit -- 225,000 575,000
Payments on line of credit -- -- (275,000)
Equipment purchased under capital leases 91,334 238,934 475,821
Principal payments on capital lease obligations (83,152) (64,648) (279,914)
--------------- -------------- --------------
Net cash provided by financing activities 8,182 399,286 495,907
-------------- -------------- --------------
NET INCREASE IN CASH 8,522 (391) 29,145
Cash, Beginning Of Year 29,536 391 391
-------------- -------------- --------------
CASH, END OF YEAR $ 38,058 $ -- $ 29,536
============== ============== ==============
Supplemental Cash Flow Information:
Interest paid $ 33,315 $ 29,647 $ 119,411
============== ============== ==============
Income taxes paid $ -- $ -- $ --
============== ============== ============
</TABLE>
F-46
<PAGE>
In fiscal year ended June 30, 1997, the $100,000 liability for the Company's
Stock Appreciation Rights Plan was eliminated upon the adoption of the Company's
Stock Option Plan (Note 7).
The accompanying notes are an integral part of the financial statements
F-47
<PAGE>
SUPERNET, INC.
Notes To Financial Statements
For The Year Ended June 30, 1997
(Information as of September 30, 1997, and for the Three Months Ended September
30, 1997 and 1996 Is Unaudited)
- ----------------------------------------------------------------------------
(1) Nature Of Organization
SuperNet, Inc. (the "Company") is engaged in providing a comprehensive
range of Internet access options, applications and consulting services
to businesses and individuals. The Company is a wholly owned subsidiary
of NewSuperNet ("NSN"). NSN is a not-for-profit entity and the Company
is a for-profit corporation organized under the laws of the State of
Colorado. The accompanying financial statements pertain only to the
operations of the Company. The majority of the Company's revenues are
derived from business and individual Internet access service. The
majority of the Company's clients are located in Colorado.
F-48
<PAGE>
(2) Summary Of Significant Accounting Policies
Basis Of Accounting
The financial statements of the Company have been prepared on the
accrual basis.
Property And Equipment
Property and equipment is stated at cost and depreciated over the
following estimated useful lives using the straight-line method:
Estimated
Useful Lives
Equipment 5 years
Equipment under capital leases 5 years
Computer software 3-5 years
Office furniture 7 years
Leasehold improvements 7 years
Expenditures for maintenance, repairs and minor replacements are charged
to operations, and expenditures for major replacements and betterments
are capitalized.
Revenue Recognition
Dedicated service subscriptions are recognized ratably over the term of
the membership period. Other revenue is recognized as earned. As of June
30, 1997, the Company recorded deferred revenue which represents funds
collected during the fiscal year that will be earned in subsequent
years. Deferred revenue consisted of dedicated service subscriptions,
Internet information services and dialin fees for services as of June
30, 1997.
F-49
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
Use Of 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 reported period. Actual results could
differ from those estimates.
(3) Deferred Taxes
Under Statement of Financial Accounting Standards ("SFAS") No. 109,
Accounting For Income Taxes, deferred income taxes reflect the net tax
effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used
for income tax purposes. Significant components of the Company's
deferred tax assets (liabilities) as of June 30, 1997 are as follows:
Deferred tax assets:
Bad debt allowance $ 30,338
Accrued vacation 15,165
Accrued compensation 56,100
Other accrued costs 43,010
Accrued stock option plan costs 1,438,014
-----------
Total deferred tax assets, current 1,582,627
Less: valuation allowance (1,257,965)
F-50
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
Net deferred tax assets $ 324,662
===========
Deferred tax liability:
Accelerated depreciation (45,408)
------------
Total deferred tax liability, non-current $ (45,408)
===========
Management currently believes that it is more likely than not that the
Company will be unable to generate sufficient taxable income to realize
the entire tax benefit associated with future deductible temporary tax
differences prior to their expiration. This belief is based upon, among
other factors, historical operations, average taxable income since
inception and industry conditions. If the Company is unable to generate
taxable income in the future, increases in the valuation allowance may
be required through a charge to expense. However, if the Company
achieves sufficient profitability in the future to utilize a greater
portion of the deferred tax asset, the valuation allowance may be
reduced through a credit to income.
F-51
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
September 30, June 30,
1997 1997
(unaudited)
(4) Long-Term Obligations
Due in monthly installments of principal
and interest of $5,257 through July 1997,
interest rate of 8.82%, secured by equipment. $ -- $ 5,213
Due in monthly installments of principal
and interest of $2,594 through July 1999,
interest rate of 9.37%, secured by equipment. 52,245 58,702
Due in monthly installments of principal and
interest of $1,610 through January 1998,
interest rate of 12.00%, secured by software. 6,282 10,832
Due in monthly installments of principal and interest of $5,384 through
January 1999, with a balloon payment of $62,538 in February 1999,
interest rate of 8.36%,
secured by equipment. 137,816 151,015
Due in monthly installments of principal and
interest of $2,284 through February 1999,
interest rate of 8.54%, secured by equipment. 36,711 42,613
Due in monthly installments of principal and
interest of $6,121 through April 1999,
interest rate of 9.28%, secured by equipment. 112,166 127,906
Due in monthly installments of principal and
interest of $1,707 through May 2000,
interest rate of 9.89%, secured by equipment. 47,825 51,697
F-52
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- -------------------------------------------------------------------------------------------------------------------
Due in monthly installments of principal and
interest of $2,266 through January 2000,
interest rate of 9.49%, secured by equipment. 56,711 62,077
Due in monthly installments of principal and
interest of $5,003 through August 1999,
interest rate of 9.62%, secured by equipment. 104,711 117,005
Due in monthly installments of principal and interest of $3,463 through
June 2001, with a balloon payment of $6,568 in July 2001,
interest rate of 10.55%, secured by equipment. 117,123 124,776
Due in monthly installments of principal and
interest of $951 through July 2000,
interest rate of 9.60%, secured by equipment. 28,437 --
Due in monthly installments of principal and
interest of $484 through August 2000,
interest rate of 9.75%, secured by equipment. 14,815 --
Due in monthly installments of principal and
interest of $1,494 through August 2000,
interest rate of 10.65%, secured by equipment. 45,176 --
--------- ------
Total obligations 760,018 751,836
Less current portion 306,114 303,139
--------- --------
Total long-term obligations $453,904 $448,697
========= ========
Future annual maturities of long-term obligations outstanding as of
June 30, 1997, are as follows:
Year ended June 30,
September 30, June 30,
1997 1997
(unaudited)
1998 $244,821 $303,139
1999 360,754 331,185
2000 111,747 80,337
2001 42,696 37,175
--------- --------
F-53
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- -------------------------------------------------------------------------------------------------------------------
Total obligations 760,018 751,836
Less current portion 306,114 303,139
-------- --------
Total long-term portion 453,904 $448,697
======== ========
</TABLE>
(5) Equipment Under Capital Leases
Amounts under capital leases, which are included in property and
equipment, are as follows:
<TABLE>
<S> <C> <C>
September 30, June 30,
1997 1997
Equipment under capital leases $1,158,119 $1,066,785
Less accumulated amortization (382,828) (283,431)
----------- -----------
Net equipment under capital leases $ 775,291 $ 783,354
=========== ===========
</TABLE>
Amortization expense related to the capital leases was $179,112,
$99,397 and $33,414 for the year ended June 30, 1997 and the three
months ended September 30, 1997 and 1996, respectively, and is included
in depreciation and amortization expense.
(6) Bank Line Of Credit
On December 31, 1995, the Company entered into a Line of Credit
Agreement (the "Agreement") with a bank whereby the Company may borrow
up to a maximum principal amount of the lesser of $600,000 or 50% of
eligible dialin accounts receivable plus 80% of eligible dedicated
accounts receivable plus 30% of the net depreciated value of wholly
owned computer equipment capped at no more than 50% of the committed,
revolving line of $600,000. As of June 30, 1997 and September 30, 1997,
F-54
<PAGE>
the Company was eligible to borrow $600,000 under the Agreement.
Interest is payable monthly at a rate of prime plus 1.5%. In addition,
the terms of the Agreement provide for maintenance of certain financial
covenants. As of June 30, 1997 and September 30, 1997, the Company was
not in compliance with the majority of these financial ratio covenants.
The bank has not taken any action or requested any modification to
present terms as a result of these
F-55
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
noncompliance conditions. The Agreement expired on August 31, 1997, but
has been extended through October 31, 1997, and is secured by
substantially all of the Company's assets.
(7) Stock Option Plan
The 1995 Performance Stock Option Plan (the "Plan") was approved and
ratified during the 1997 fiscal year. The Plan allows up to 30,000
stock options to be issued to certain employees, officers, directors,
and consultants of the Company. The individuals to receive options,
exercise price of the options, and the vesting periods are determined
by the Company's Board of Directors.
Options under the Plan are subject to adjustment in the event of change
in capital structure of the Company. In the event that an acquisition
occurs with respect to the Company, the Company has the right to cancel
the options outstanding as of the effective date of the acquisition,
whether or not such options are exercisable, in return for payment to
the option holders of the difference between the net amount per share
payable in the acquisition, less the exercise price of the option. In
the event of a change in control of the Company, all then outstanding
options shall immediately become exercisable.
During fiscal year 1997, the Company granted 28,000 options to certain
employees of the Company as full settlement of these employees'
previously issued stock appreciation rights. The following is a summary
of stock option activity pertaining to the Plan:
F-56
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Option Price Number
Per Share Of Shares
Balance as of July 1, 1996 0
Granted $.87 to $8.17 28,000
Exercised 0
Forfeited 0
------------------ -------------
Balance as of June 30, 1997 and September 30, 1997 $.87 to $8.17 28,000
============= ==========
Vested and exercisable as of June 30, 1997 and September 30, 1997 $.87 to $8.17 24,665
============== ===========
Weighted-average ranges for exercise prices and weighted-average
remaining contractual life for all outstanding options as of June 30,
1997, were as follows:
Weighted-Average
Option Price Remaining Number of Weighted-Average
Per Share Contractual Life Shares Exercise Price
$ .87 9.5 years 14,666 $ .87
$2.36 to $2.78 9.5 years 5,334 2.47
$3.42 9.5 years 2,666 3.42
$6.08 to $8.17 9.5 years 5,334 7.91
</TABLE>
F-57
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
Compensation under the Plan is measured pursuant to Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, based on the
estimated market price per share of common stock on the grant date in excess of
the exercise price of the option. Such compensation is amortized to expense over
the vesting period of the stock option. All of the options granted in 1997 were
granted for an exercise price which was less than the indicated value of the
Company's stock. The Company's stock is not traded. The fair value of options at
the grant date was determined based upon the indicated value of the Company's
stock as of the date of grant. Total compensation cost recognized for the stock
option plan was $3,744,958, $95,580 and $0 for the year ended June 30, 1997, and
the three months ended September 30, 1997 and 1996, respectively.
F-58
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock- Based Compensation. This new standard
defines a fair value based method of accounting for an employee stock
option or similar equity instrument. The Company intends to continue
using the measurement prescribed by APB No. 25, and accordingly, this
pronouncement will not affect the Company's financial position or
results of operations. Had compensation for the Company's Plan been
determined based on SFAS No. 123, the Company's net loss would have
been substantially the same. Proforma determinations under SFAS No. 123
are based upon a fair value of each option grant estimated on the date
of grant using the Black-Scholes option-pricing model with the
following assumptions used for grants in 1997: dividend yield of 0%;
expected volatility of 0%; risk-free interest rate of 5.12% and
expected lives of two years from grant.
(8) Pension Plan
Effective January 1, 1997, the Company became sponsor of a defined
contribution plan (the "Plan"), covering substantially all employees. Employer
contributions to the Plan are determined annually by the Board of Directors.
Employees may also contribute up to 15% of their salary annually. There were no
contributions to the Plan as of June 30, 1997 or during the three months ended
September 30, 1997 and 1996.
(9) Advertising Costs
The Company expenses the costs of advertising the first time the
advertising takes place. Advertising expense amounted to $127,605, $15,614 and
$90,325 for the year ended June 30, 1997, and the three months ended September
30, 1997 and 1996, respectively.
F-59
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
(10) Commitments
The Company has obligations under noncancelable operating lease
commitments for office space. Future scheduled rental payments for the
operating leases in excess of one year are as follows:
<TABLE>
<S> <C> <C>
September 30, June 30,
1997 1997
(unaudited)
Year ended June 30,
1998 $ 290,613 $ 387,484
1999 418,276 418,276
2000 281,461 281,461
2001 261,422 261,422
2002 270,576 270,576
Thereafter 588,558 588,558
----------- -----------
$2,110,906 $2,207,777
============ =============
</TABLE>
In addition to the minimum lease payments, the Company must pay its
proportionate share of the operating expenses incurred by the Landlord.
Lease expense amounted to $268,971, $97,200, and $51,018 for the year
ended June 30, 1997 and the three months ended September 30, 1997 1996,
respectively.
(11) Contingencies
Claims of compensation discrimination have been alleged by two present
F-60
<PAGE>
employees of the Company. Although the Company denies the allegations,
the Company made offers of settlement to those employees and has
accrued a liability on the financial statements in the amount of the
proposed settlement offers. The settlement offers expired, however,
without response from either employee. If formal administrative claims
F-61
<PAGE>
SUPERNET, INC.
Notes To Financial Statements (Continued)
- --------------------------------------------------------------------------------
or litigation actions are filed, the Company intends to vigorously
defend the allegations. At this time, it is not reasonably possible to
determine if any additional liability should be accrued by the Company.
(12) Subsequent Event
On August 25, 1997, NSN received a letter of intent to acquire 100% of
the Company's outstanding stock subject to certain terms and
conditions. Under the terms of the offer to purchase, the closing date
for purchase of the stock would be 45 days after execution of a
definitive agreement. Under the provisions of the Company's stock
option plan, all currently granted options will become exercisable if
this change in ownership is concluded.
F-62
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
The unaudited pro forma financial statements presented below are derived
from the historical financial statements of the Company and SuperNet, Inc., a
Colorado Corporation ("SuperNet"). The unaudited pro forma balance sheet as of
September 30, 1997 gives pro forma effect to the acquisition by the Company of
all issued and outstanding shares of capital stock, and capital stock issued at
the closing of the acquisition in October 1997, of SuperNet (the "acquisition")
and the issuance of $555,890,000 aggregate principal amount at maturity of 9.47%
Senior Discount Notes (the "Senior Discount Notes") as if the acquisition and
the issuance of the Senior Discount Notes had occurred on September 30, 1997.
The unaudited pro forma consolidated statement of operations for the nine months
ended September 30, 1997 and for the year ended December 31, 1996 give pro forma
effect to the acquisition as if it had occurred on January 1, 1996. There are no
pro forma operating statement effects of the Senior Discount Notes since they
have been issued to fund the future construction and activation of the Qwest
Network. Further, primarily all interest expense attributable to these notes
will be capitalized as a cost of constructing the Qwest Network.
The unaudited pro forma financial statements give effect to the acquisition
described above under the purchase method of accounting and are based on the
assumptions and adjustments described in the accompanying notes to the unaudited
pro forma financial statements presented on the following pages. The allocations
of the total purchase price for the acquisition presented are based on
preliminary estimates and are subject to final allocation adjustments.
The unaudited pro forma financial statements do not purport to represent what
the Company's results of operations or financial condition would have actually
been or what operations would be if the transactions that give rise to the pro
forma adjustments had occurred on the dates assumed. The unaudited pro forma
financial statements presented below should be read in conjunction with the
audited and unaudited historical financial statements and related notes thereto
of the Company and SuperNet and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
F-63
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1997
(Amounts in Thousands)
<TABLE>
<S> <C> <C> <C> <C>
Historical
----------------------- Pro forma Pro forma
Qwest SuperNet adjustments consolidated
------------ -----------
--------------- --------- (unaudited)
(unaudited) (unaudited)
Assets
Current assets:
Cash and cash equivalents.................... $186,731 38 (20,100)(2) $509,269
342,600 (3)
Accounts receivable, net..................... 64,719 626 65,345
Costs and estimated earnings in excess of
billings..................................... 164,986 - 164,986
Deferred income tax asset.................... - 325 (325)(4) --
Notes and other receivables.................. 14,936 - 14,936
Other current assets......................... 7,063 116 7,179
----------- ----------- --------------- ------------
Total current assets......................... 438,435 1,105 322,175 761,715
Property and equipment, net.................. 444,816 2,928 447,744
Deferred income tax asset.................... 8,902 - 8,902
Notes and other receivables.................. 115 - 115
Intangible and other long-term assets, net... 16,210 - 19,574 (4) 43,183
7,399 (5)
----------- ----------- --------------- ------------
Total assets................................. $908,478 4,033 349,148 $1,261,659
=========== =========== =============== ============
See accompanying notes to unaudited pro forma consolidated financial statements.
F-64
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 1997
(Amounts in Thousands)
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses........ $178,676 1,315 $179,991
Bank line of credit.......................... - 600 600
Deferred revenue............................. 4,044 462 4,506
Billings in excess of costs and estimated
earnings..................................... 12,440 - 12,440
Deferred income tax liability................ 6,432 - 6,432
Current portion of long-term debt............ 15,782 306 16,088
----------- ----------- --------------- ------------
Total current liabilities.................... 217,374 2,683 220,057
Long-term debt............................... 268,946 454 349,999 (3) 619,399
Deferred income tax liability................ - 45 45
Other liabilities............................ 53,307 - 53,307
----------- ----------- --------------- ------------
Total liabilities............................ 539,627 3,182 349,999 892,808
----------- ----------- --------------- ------------
Stockholders' equity:
Preferred stock.............................. - - -
Common stock................................. 1,033 1 (1)(6) 1,033
Additional paid-in capital................... 412,005 4,514 (4,514)(6) 412,005
Accumulated deficit.......................... (44,187) (3,664) 3,664 (6) (44,187)
----------- ----------- --------------- ------------
Total stockholders' equity................... 368,851 851 (851) 368,851
----------- ----------- --------------- ------------
Commitments and contingencies
Total liabilities and stockholders' equity... $908,478 4,033 349,148 $1,261,659
=========== =========== =============== ============
</TABLE>
See accompanying notes to unaudited pro forma consolidated financial statements.
F-65
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1997
(Amounts in Thousands, Except Per Share Information)
<TABLE>
<S> <C> <C> <C> <C>
Historical
----------------------- Pro forma Pro forma
Qwest SuperNet adjustments consolidated
----------- ----------- ------------- ------------
(unaudited) (unaudited) (unaudited)
Revenue:
Carrier services...................... $39,062 - $39,062
Commercial services................... 38,033 5,128 43,161
----------- ----------- ------------- ------------
77,095 5,128 82,223
Network construction services......... 413,226 - 413,226
----------- ----------- ------------- ------------
490,321 5,128 495,449
Operating expenses:
Telecommunications services........... 65,310 2,624 67,934
Network construction services......... 282,472 - 282,472
Selling, general and administrative... 59,987 1,950 61,937
Growth share and stock option plans... 69,320 341 69,661
Depreciation and amortization......... 13,114 586 2,936 (7) 16,636
----------- ----------- ------------- ------------
490,203 5,501 2,936 498,640
----------- ----------- ------------- ------------
Income (loss) from operations......... 118 (373) (2,936) (3,191)
Other income (expense):
Gain on sale of contract rights....... 9,296 - 9,296
Interest expense, net................. (2,974) (98) - (3,072)
Other expense, net.................... (1,986) - (1,986)
----------- ----------- ------------- ------------
Income (loss) before income tax
expense (benefit).................... 4,454 (471) (2,936) 1,047
Income tax expense (benefit).......... 2,191 (3) (8) 2,188
----------- ----------- ------------- ------------
Net income (loss)..................... $ 2,263 (468) (2,936) $ (1,141)
=========== =========== ============= ============
Net income (loss) per share........... $ 0.02 $(0.01)
=========== ============
</TABLE>
F-66
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED DECEMBER 31, 1996
(Amounts in Thousands, Except Per Share Information)
<TABLE>
<S> <C> <C> <C> <C>
Historical
----------------------- Pro forma Pro forma
Qwest SuperNet adjustments consolidated
----------- ----------- ------------- -------------
(unaudited) (unaudited) (unaudited)
Revenue:
Carrier services...................... $57,573 - $57,573
Commercial services................... 34,265 5,542 39,807
----------- ----------- ------------- -------------
91,838 5,542 97,380
Network construction services......... 139,158 - 139,158
----------- ----------- ------------- -------------
230,996 5,542 236,538
Operating expenses:
Telecommunications services........... 80,368 2,994 83,362
Network construction services......... 87,542 - 87,542
Selling, general and administrative... 45,755 2,011 47,766
Growth share and stock option plans... 13,100 3,500 16,600
Depreciation and amortization......... 16,245 563 3,915 (7) 20,723
----------- ----------- ------------- -------------
243,010 9,068 3,915 255,993
----------- ----------- ------------- -------------
Income (loss) from operations......... (12,014) (3,526) (3,915) (19,455)
Other income (expense):
Gain on sale of telecom service
agreements.......................... 6,126 - 6,126
Interest expense, net................. (4,373) (84) - (4,457)
Other income, net..................... 60 - 60
----------- ----------- ------------- -------------
Income (loss) before income tax
expense (benefit)..................... (10,201) (3,610) (3,915) (17,726)
Income tax expense (benefit).......... (3,234) (191) (8) (3,425)
----------- ----------- ------------- -------------
Net loss.............................. $(6,967) $(3,419) $(3,915) $(14,301)
=========== =========== ============= =============
Net loss per share.................... $(0.08) $(0.16)
=========== =============
See accompanying notes to unaudited pro forma consolidated financial statements.
</TABLE>
F-67
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
(1) On September 30, 1997, the Company entered into a Stock Purchase Agreement
with NEWSUPERNET, a Colorado nonprofit corporation and the sole shareholder of
SuperNet, for all the issued and outstanding shares of capital stock, and
capital stock to be issued at the closing of the acquisition of SuperNet. For
accounting purposes the acquisition will be accounted for using the purchase
method of accounting. The fair value of the cash consideration will be allocated
to the assets and liabilities acquired based upon the estimated fair values of
such assets and liabilities. The estimated fair values of the assets and
liabilities acquired, as reflected in the accompanying unaudited pro forma
financial statements, is based upon information available at the date of
preparation of these unaudited pro forma financial statements, and will be
adjusted upon the final determination of such fair values. Although management
is not presently aware of any circumstances which would cause the final purchase
price allocation to be significantly different from that which is reflected in
the accompanying unaudited pro forma balance sheet, actual allocations may
differ from those reflected therein.
The acquisition was consummated in October 1997.
(2) Represents the purchase by the Company of SuperNet's outstanding capital
stock and capital stock issued at the closing of the acquisition and the
incurrence of related transaction costs. Additional information regarding the
aggregate purchase price is set forth below (amounts in thousands):
Cash consideration paid for all the issued and outstanding capital stock of
SuperNet................................................................ $15,900
Cash consideration paid for the capital stock issued at the closing of
the acquisition......................................................... 4,100
Estimated direct costs of the acquisition............................... 100
-------
Aggregate purchase price to be allocated to net assets acquired......... $20,100
=======
(3) Represents the issuance of the Senior Discount Notes. The Senior Discount
Notes were issued at a price of 62.962% of their principal amount at maturity,
representing a yield to maturity of 9.47% and yielding proceeds to the Company
of approximately $350 million. The Senior Discount Notes will mature on October
15, 2007.
(4) Represents the increase to SuperNet's intangible assets to reflect the
anticipated allocation of the purchase price. The increase to SuperNet's
intangible assets represents the excess of the purchase price over the
identifiable net tangible assets of SuperNet and the establishment of a
valuation allowance for SuperNet's deferred tax assets. Such intangible assets
are
F-68
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1997
(unaudited)
assumed to be primarily associated with the customer base, trademarks, and
goodwill of SuperNet, and, for pro forma purposes, have been amortized over an
assumed weighted average useful life of five years. The actual purchase price
allocation that will be made may differ from such assumptions, and the actual
useful lives assigned to the intangible assets may differ from the assumed
weighted average useful life used in preparing the pro forma financial
statements.
(5) Represents deferred issuance costs related to the Senior Discount Notes.
(6) Represents the elimination of the historical equity of SuperNet.
(7) Represents the amortization of the intangible assets that results from the
preliminary purchase price allocation. Such amortization is calculated using an
estimated weighted average useful life of five years. See note 3.
(8) The pro forma adjustments are not expected to have an income tax impact
because substantially all of the excess purchase price has been assumed to be
goodwill.
F-70
<PAGE>
GLOSSARY
Access charges ...
The fees paid by long distance carriers to LECs for originating and terminating
long distance calls on the LECs' local networks.
ATM (Asynchronous Transfer Mode) ... An information transfer standard that
is one of a general class of packet technologies that relay traffic by way of an
address contained within the first five bytes of a standard fifty-three-byte
long packet or cell. The ATM format can be used by many different information
systems, including local area networks, to deliver traffic at varying rates,
permitting a mix of voice, data and video (multimedia).
AT&T ...
AT&T Corp.
Backbone ...
The through-portions of a transmission network, as opposed to spurs which branch
off the through-portions.
Band ...
A range of frequencies between two defined limits.
Bandwidth ...
The relative range of analog frequencies or digital signals that can be passed
through a transmission medium, such as glass fibers, without distortion. The
greater the bandwidth, the greater the information carrying capacity. Bandwidth
is measured in Hertz (analog) or Bits Per Second (digital).
Bit Error Rate ...
A measure of transmission quality stated as the expected probability of error
per bit transmitted.
Capacity ...
Refers to transmission.
Carrier ...
A provider of communications transmission services by fiber, wire or radio.
CLEC (Competitive Local
Exchange Carrier) ...
A company that competes with LECs in the local services market.
Common Carrier ...
A government-defined group of private companies offering telecommunications
services or facilities to the general public on a non-discriminatory basis.
Dark Fiber ...
Fiber that lacks the requisite electronic and optronic equipment necessary to
use the fiber for transmission.
Digital ...
Describes a method of storing, processing and transmitting information through
the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission/ switching technologies employ a sequence
of discrete, distinct pulses to represent information, as opposed to the
continuously variable analog signal.
G-1
<PAGE>
DS-0, DS-1, DS-3 ...
Standard telecommunications industry digital signal formats, which are
distinguishable by bit rate (the number of binary digits (0 and 1) transmitted
per second). DS-0 service has a bit rate of 64 kilobits per second and typically
transmits only one voice conversation at a time. DS-1 service has a bit rate of
1.544 megabits per second and typically transmits 24 simultaneous voice
conversations. DS-3 service has a bit rate of 45 megabits per second and
typically transmits 672 simultaneous voice conversations.
DWDM (Dense Wave Division
Multiplexing) ...
A technique for transmitting 8 or more different light wave frequencies on a
single fiber to increase the information carrying capacity.
DS-3 miles ...
A measure of the total capacity and length of a transmission path, calculated as
the capacity of the transmission path in DS-3s multiplied by the length of the
path in miles.
Equal access ...
The basis upon which customers of interexchange carriers are able to obtain
access to their Primary Interexchange Carriers' (PIC) long distance telephone
network by dialing "1", thus eliminating the need to dial additional digits and
an authorization code to obtain such access.
FBCs (Facilities Based Carriers) ...
Facilities based carriers that own and operate their own network
and equipment.
FCC ...
Federal Communications Commission.
Frame Relay ...
A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access speeds
ranging from 56 kilobits per second to 1.5 megabits per second. This service is
well-suited for connecting local area networks, but is not presently well suited
for voice and video applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on modern fiber optic
networks.
Gbps ...
Gigabits per second, which is a measurement of speed for digital signal
transmission expressed in billions of bits per second.
GTE ...
GTE Intelligent Network Services Incorporated.
Hertz ...
The unit for measuring the frequency with which an electromagnetic signal cycles
through the zero-value state between lowest and highest states. One Hz (Hertz)
equals one cycle per second. KHz (kilohertz) stands for thousands of Hertz; MHz
(megahertz) stands for millions of Hertz.
ISP (Internet Service Provider) ...
A company that provides businesses and consumers with
access to the Internet.
10XXX Service ...
The ability for a user to access any carrier's long distance network by dialing
the carrier's Carrier Identification Code (CIC) which is a 1 plus 0 plus three
specifically assigned digits, thereby bypassing the user's primary interexchange
carrier.
G-2
<PAGE>
Interconnect ...
Connection of a telecommunications device or service to the public switched
telephone network ("PSTN").
Interexchange carrier ...
A company providing inter-LATA or long distance services between LATAs on an
intrastate or interstate basis.
Kbps ...
Kilobits per second, which is a measurement of speed for digital signal
transmission expressed in thousands of bits per second.
LATAs (Local Access and
Transport Areas) ...
The approximately 200 geographic areas that define the areas between which the
RBOCs currently are prohibited from providing long distance services.
LEC (Local Exchange Carrier) ...
A company historically providing local telephone services.
Lit fiber ...
Fiber activated or equipped with the requisite electronic and optronic equipment
necessary to use the fiber for transmission.
Local loop ...
A circuit that connects an end user to the LEC central office within a LATA.
Long-haul circuit ...
A dedicated telecommunications circuit generally between locations in different
LATAs.
Mbps ...
Megabits per second, which is a measurement of speed for digital signal
transmission expressed in millions of bits per second.
MCI ...
MCI Communications, Inc.
MOU ...
Minutes of use of long distance service.
Multiplexing ...
An electronic or optical process that combines a large number of lower speed
transmission lines into one high speed line by splitting the total available
bandwidth into narrower bands (frequency division), or by allotting a common
channel to several different transmitting devices, one at a time in sequence
(time division).
OC-3, OC-12, OC-48 and
OC-192 ...
OC is a measure of SONET transmission optical carrier level, which is equal to
the corresponding number of DS-3s (e.g., OC-3 is equal to 3 DS-3s and OC-48 is
equal to 48 DS-3s).
RBOCs (Regional Bell Operating
Companies) ...
The seven local telephone companies (formerly part of AT&T) established as a
result of the AT&T Divestiture Decree.
Regeneration/amplifier ...
Devices which automatically re-transmit or boost signals on an out-bound
circuit.
G-3
<PAGE>
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
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED 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
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS
PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY
ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED
OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO
SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION.
---------------
TABLE OF CONTENTS
PAGE
----
Additional Information................................................... 4
Prospectus Summary....................................................... 5
Summary Consolidated Financial and Operating Data........................ 14
Risk Factors............................................................. 19
The Exchange Offer....................................................... 28
Use of Proceeds.......................................................... 36
Capitalization........................................................... 37
Selected Consolidated Financial Data..................................... 38
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 42
Industry Overview........................................................ 57
Business................................................................. 60
Regulation............................................................... 75
Management............................................................... 83
Principal Stockholder.................................................... 98
Certain Transactions..................................................... 99
Description of the Notes................................................. 101
Description of Certain Indebtedness...................................... 135
Certain United States Federal Income Tax Considerations.................. 137
Plan of Distribution..................................................... 144
Legal Matters............................................................ 145
Experts.................................................................. 145
Index to Consolidated Financial Statements............................... F-1
Glossary................................................................. G-1
QWEST COMMUNICATIONS INTERNATIONAL INC.
OFFER TO EXCHANGE
9.47% SERIES B SENIOR DISCOUNT NOTES DUE 2007 FOR ANY AND ALL OF ITS OUTSTANDING
9.47% SENIOR DISCOUNT 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 ______DAY,
____________, 1997, UNLESS EXTENDED; PROVIDED IT MAY NOT BE EXTENDED BEYOND
_________________, 1997.
PROSPECTUS
DATED _______________, 1997
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law ("DGCL") empowers a
Delaware corporation to indemnify any persons who are, or are threatened to be
made, parties to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person is or was an officer or director of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise. The indemnity may include expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or proceeding, if such
officer or director acted in good faith and in a manner such person reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had no reasonable cause to
believe such officer's or director's conduct was unlawful. A Delaware
corporation may indemnify officers and directors in an action by or in the right
of the corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation in the performance of his duty. Where an officer or
director is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify such officer or director
against the expenses which such officer or director actually and reasonably
incurred.
In accordance with Section 102(b)(7) of the DGCL, the Company's Certificate of
Incorporation provides that directors shall not be personally liable for
monetary damages for breaches of their fiduciary duty as directors except for
(i) breaches of their duty of loyalty to the Company or its stockholders, (ii)
acts or omissions not in good faith or which involve intentional misconduct or
knowing violations of law, (iii) certain transactions under Section 174 of the
DGLC (unlawful payment of dividends or unlawful stock purchases or redemptions)
or (iv) transactions from which a director derives an improper personal benefit.
The effect of this provision is to eliminate the personal liability of directors
for monetary damages for actions involving a breach of their fiduciary duty of
care, including any actions involving gross negligence.
The Certificate of Incorporation and the By-laws of the Company provide for
indemnification of the Company's officers and directors to the fullest extent
permitted by applicable law, except that the By-laws provide that the Company is
required to indemnify an officer or director in connection with a proceeding
initiated by such person only if the proceeding was authorized by the Board of
Directors of the Company. In addition, the Company maintains insurance policies
which provide coverage for its officers and directors in certain situations
where the Company cannot directly indemnify such officers or directors.
Pursuant to Section 145 of the DGCL and the Certificate of Incorporation and
the By-laws of the Company, the Company maintains directors' and officers'
liability insurance coverage.
II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL DATA SCHEDULES.
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which are incorporated herein:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 --Purchase Agreement dated October 9, 1997, among the Company and
Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities
Corporation and Merrill Lynch & Co.
3.1* --Amended and Restated Certificate of Incorporation of the Company.
3.2** --By-laws of the Company.
4.1 --Indenture dated as of October 15, 1997 with Bankers Trust Company
(including form of the Company's 9.47% Senior Discount Notes Due
2007 and 9.47% Series B Senior Discount Notes Due 2007 as an
exhibit thereto).
4.2 --Registration Agreement dated October 15, 1997 with Salomon Brothers
Inc relating to the Company's 9.47% Senior Discount Notes Due 2007.
5.1 --Opinion of Holme Roberts & Owen LLP with respect to the legality of
the securities being registered.
8 --Opinion of Holme Roberts & Owen LLP with respect to certain tax
matters.
10.1* --Growth Share Plan, as amended, effective October 1, 1996.
10.2* --Employment Agreement dated December 21, 1996 with Joseph P.
Nacchio.
10.3* --Promissory Note dated November 20, 1996 and Severance Agreement
dated December 1, 1996 with Robert S. Woodruff.
10.4* --Settlement Agreement, General Release and Covenant Not to Sue dated
as of November 11, 1996 with Douglas H. Hanson.
10.5*+ --IRU Agreement dated as of October 18, 1996 with Frontier
Communications International Inc.
10.6*+ --IRU Agreement dated as of February 26, 1996 with WorldCom Network
Services, Inc.
10.7*+ --IRU Agreement dated as of May 2, 1997 with GTE.
10.8* --Equity Incentive Plan.
11.1*** --Statement re Computation of Per Share Earnings.
12.1 --Statement re Computation of Ratios.
21 --Subsidiaries of the Registrant.
23.1 --Consent of KPMG Peat Marwick LLP.
23.2 --Consent of Dollinger, Smith & Co.
23.3 --Consent of Holme Roberts & Owen LLP (contained in Exhibit 5.1).
24 --Power of Attorney.
25 --Statement of Eligibility of Bankers Trust Company; Form T-1.
</TABLE>
- - --------
* Incorporated by reference to the exhibit of the same number in Form S-1 as
declared effective on June 23, 1997 (File No. 333-25391).
** Incorporated by reference to exhibit 3 in Form 10-Q for the quarter ended
September 30, 1997(File No.000-22609).
*** Incorporated by reference to exhibit 11 in Form 10-Q for the quarter ended
September 30, 1997(File No.000-22609) and exhibit 11.1 in Form S-1 as
declared effective on June 23, 1997 (File No. 333-25391).
+ Portions have been omitted pursuant to a request for confidential
treatment.
II-2
<PAGE>
(b) Financial Statement Schedules. Incorporated by reference to Form S-1 as
declared effective on June 23, 1997 (File No. 333-25391).
ITEM 22. UNDERTAKINGS.
(a) The undersigned Company hereby undertakes:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c) under the Securities Act of 1933, as amended (the
"Securities Act"), the issuer undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition
to the information called for by the other Items of the applicable form.
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415 under the Securities Act, will be
filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceedings) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether indemnification by it is against public policy
as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Company hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(d) The undersigned Company hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company
II-3
<PAGE>
being acquired involved therein, that was not the subject of and included in the
registration statement when it became effective.
(e) The undersigned Company hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(f) The undersigned Company hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of Prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20 percent change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed part of the registration statement as
of the time it was declared effective.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
COMPANY HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF
BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF DENVER, STATE OF
COLORADO ON DECEMBER 18, 1997.
Qwest Communications International Inc.
By: /s/
ROBERT S. WOODRUFF
Executive Vice President--Finance
POWER OF ATTORNEY AND SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
SIGNATURE TITLE DATE
* Chairman of the Board December 18,
- ------------------------------------ 1997
PHILIP F. ANSCHUTZ
* Director, President December 18,
- ------------------------------------ and Chief Executive 1997
JOSEPH P. NACCHIO Officer (Principal
Executive Officer)
/s/ Director and December 18,
- ------------------------------------ Executive Vice 1997
ROBERT S. WOODRUFF President--Finance
and Chief Financial
Officer and
Treasurer (Principal
Financial Officer)
* Vice President and December 18,
- ------------------------------------- Controller (Principal 1997
RICHARD L. SMITH Accounting Officer)
* Director December 18,
- ------------------------------------- 1997
CANNON Y. HARVEY
* Director December 18,
- ------------------------------------- 1997
RICHARD T. LIEBHABER
* Director December 18,
- ------------------------------------- 1997
DOUGLAS L. POLSON
II-5
<PAGE>
* Director December 18,
- ------------------------------------- 1997
CRAIG D. SLATER
* Director December 18,
- ------------------------------------- 1997
JORDAN L. HAINES
* Director December 18,
- ------------------------------------- 1997
W. THOMAS STEPHENS
* By: /s/
Robert S. Woodruff, Attorney in Fact
II-6
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
$555,890,000 9.47% Senior Discount Notes Due 2007
PURCHASE AGREEMENT
Dated: October 9, 1997
1.1-1
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
$555,890,000 9.47% SENIOR DISCOUNT NOTES DUE 2007
PURCHASE AGREEMENT
New York, New York
October 9, 1997
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation Merrill Lynch, Pierce,
Fenner & Smith Incorporated As Representatives of the Initial Purchasers c/o
Salomon Brothers Inc Seven World Trade Center New York, New York 10048
Ladies and Gentlemen:
Qwest Communications International Inc., a Delaware
corporation (the "Company"), proposes to issue and sell to the parties named in
Schedule I hereto (the "Initial Purchasers"), for whom you are acting as
representatives (the "Representatives"), $555,890,000 aggregate principal amount
at maturity of its 9.47% Senior Discount Notes Due 2007 (the "Securities"). The
Securities are to be issued under an indenture (the "Indenture") dated as of
October 15, 1997 between the Company and Bankers Trust Company, as trustee. If
you are the only Initial Purchasers, all references herein to the
Representatives shall be deemed to be to the Initial Purchasers.
The sale of the Securities to the Initial Purchasers will be
made without registration of the Securities under the Securities Act of 1933, as
amended (the "Securities Act"), in reliance upon exemptions from the
registration requirements of the Securities Act. You have advised the Company
that the Initial Purchasers will offer and sell the Securities purchased by them
hereunder in accordance with Section 4 hereof as soon as you deem advisable.
The holders of the Securities will be entitled to the benefits
of a Registration Agreement dated as of October 15, 1997 between the Company and
Salomon Brothers Inc (the "Registration Agreement"), pursuant to which the
Company will file a registration statement with the Securities and Exchange
Commission (the "Commission") registering the Securities or New Securities
(referred to in the Registration Agreement) under the Securities Act.
In connection with the sale of the Securities, the Company has
prepared a final offering memorandum, dated October 9, 1997 (the "Final
Memorandum"). The Final Memorandum sets forth certain information concerning the
Company and the Securities. The Company hereby confirms that it has authorized
the use of the Final Memorandum, and any amendment or supplement thereto, in
connection with the offer and sale of the Securities by the Initial Purchasers.
Unless stated to the contrary, all references herein to the Final Memorandum are
to the Final Memorandum at the Execution Time (as defined in Section 6 hereof)
and are not meant to include any amendment or supplement subsequent to the
Execution Time.
1.1-1
<PAGE>
1. Representations and Warranties. The Company represents and warrants to
each Initial Purchaser as set forth below in this Section 1.
(a) The Final Memorandum, at the date hereof, does not, and at
the Closing Date (as defined below) will not (and any amendment or
supplement thereto, at the date thereof and at the Closing Date, will
not), contain any untrue statement of a material fact or omit to state
any material fact necessary to make the statements therein, in the
light of the circumstances under which they were made, not misleading;
provided, however, that the Company makes no representation or warranty
as to the information contained in or omitted from the Final
Memorandum, or any amendment or supplement thereto, in reliance upon
and in conformity with information furnished in writing to the Company
by or on behalf of the Initial Purchasers through the Representatives
specifically for inclusion therein.
(b) Each of the Company and its subsidiaries has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full power
(corporate and other) to own or lease its properties and conduct its
business as described in the Final Memorandum, and is duly qualified to
do business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification wherein it
owns or leases material properties or conducts material business,
except where the failure to be qualified would not have a material
adverse effect on the Company or any of its subsidiaries.
(c) The Company has full power (corporate and other) to enter
into and to perform its obligations under this Agreement, the
Indenture, the Registration Agreement and the Securities.
(d) The issued shares of capital stock of each of the
Company's subsidiaries have been duly authorized and validly issued,
are fully paid and nonassessable and, except as otherwise set forth in
the Final Memorandum, are owned beneficially by the Company free and
clear of any security interests, liens, encumbrances, equities or
claims.
(e) The Company has an authorized, issued and outstanding
capitalization as set forth in the Final Memorandum. All of the issued
shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable.
(f) The consolidated financial statements and schedules of the
Company and its consolidated subsidiaries included in the Final
Memorandum fairly present the financial position of the Company and its
consolidated subsidiaries and the results of operations and changes in
financial condition as of the dates and for the periods therein
specified. Such financial statements and schedules have been prepared
in accordance with generally accepted accounting principles
consistently applied throughout the periods involved (except as
otherwise noted therein). The selected financial data set forth under
the caption "Selected Consolidated Financial Data" in the Final
Memorandum fairly present, on the basis stated in the Final Memorandum,
the information included therein.
(g) KPMG Peat Marwick LLP, who have certified certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements and schedules included in the Final Memorandum,
are independent public accountants within the meaning of the Securities
Act and the applicable rules and regulations thereunder.
1.1-2
<PAGE>
(h) This Agreement has been duly authorized, executed, and
delivered by the Company.
(i) The Registration Agreement has been duly authorized by the
Company and, when duly executed and delivered by the Company, will
constitute a legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms (subject,
as to the enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally from time to time in effect, general
principles of equity and to the enforcement of the indemnification or
contribution provisions contained therein).
(j) The Indenture has been duly authorized by the Company and,
when duly executed and delivered by the Company and the Trustee, will
constitute a valid and binding instrument enforceable against the
Company in accordance with its terms (subject, as to the enforcement of
remedies, to applicable bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditors' rights generally from
time to time in effect, and general principles of equity); the
Securities have been duly and validly authorized and, when executed and
authenticated in accordance with the provisions of the Indenture and
delivered to and paid for by the Initial Purchasers pursuant to this
Agreement, will constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture; and the statements set forth
under the heading "Description of the Notes" in the Final Memorandum,
insofar as such statements purport to summarize certain provisions of
the Securities and the Indenture, provide a fair summary of such
provisions.
(k) No legal or governmental proceedings are pending to which
the Company or any of its subsidiaries is a party or to which the
property of the Company or any of its subsidiaries is subject that are
not described in the Final Memorandum, and no such proceedings have
been threatened against the Company or any of its subsidiaries or with
respect to any of their respective properties, except in each case for
such proceedings that, if the subject of an unfavorable decision,
ruling or finding, would not, singly or in the aggregate, result in a
material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company
and its subsidiaries.
(l) The issuance, offering and sale of the Securities to the
Initial Purchasers by the Company pursuant to this Agreement, the
performance by the Company of its obligations under this Agreement, the
Registration Agreement, the Indenture and the Securities, the
consummation of the transactions herein and therein and the application
of proceeds from the sale of the Securities as described in the Final
Memorandum do not (i) require the consent, approval, authorization,
registration or qualification of or with any governmental authority,
except such as have been obtained and such as may be required under
state securities or blue sky laws and except as may be required under
the Securities Act and the rules and regulations thereunder with
respect to the Registration Agreement and transactions contemplated
thereunder or (ii) conflict with or result in a breach or violation of
any of the terms and provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
respective properties are bound, or the charter documents or by-laws of
the Company or any of its subsidiaries, or any statute or any judgment,
decree, order, rule or
1.1-3
<PAGE>
regulation of any court or other governmental authority or any
arbitrator applicable to the Company or any of its subsidiaries.
(m) The Company has not (i) taken, directly or indirectly, any
action designed to cause or to result in, or that has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities or (ii) paid or agreed to pay to
any person any compensation for soliciting another to purchase any
securities of the Company (except for the sale of Securities by the
Initial Purchasers under this Agreement).
(n) Subsequent to the respective dates as of which information
is given in the Final Memorandum, (i) the Company and its subsidiaries
have not incurred any material liability or obligation, direct or
contingent, nor entered into any material transaction whether or not in
the ordinary course of business; (ii) the Company has not purchased any
of its outstanding capital stock, nor declared, paid or otherwise made
any dividend or distribution of any kind on its capital stock; (iii)
there has not been any material change in the capital stock, short-term
debt or long-term debt of the Company and its consolidated
subsidiaries, except in each case as described in or contemplated by
the Final Memorandum; and (iv) there has not been any material adverse
change in the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company and its consolidated
subsidiaries whether or not arising in the ordinary course of business.
(o) The Company and each of its subsidiaries own or hold all
items of property owned or held by each of them free and clear of any
security interests, liens, encumbrances, equities, claims and other
defects, except such as do not materially and adversely affect the
value of such property and do not interfere with the use made or
proposed to be made of such property by the Company or such subsidiary,
and any real property and buildings held under lease by the Company or
any such subsidiary are held under valid, subsisting and enforceable
leases, with such exceptions as are not material and do not interfere
with the use made or proposed to be made of such property and buildings
by the Company or such subsidiary, in each case except as described in
or contemplated by the Final Memorandum.
(p) No labor dispute with the employees of the Company or any
of its subsidiaries exists or is threatened or imminent that could
result in a material adverse change in the condition (financial or
otherwise), business prospects, net worth or results of operations of
the Company and its subsidiaries, except as described in or
contemplated by the Final Memorandum.
(q) The Company and its subsidiaries own or possess all
material patents, patent applications, trademarks, service marks, trade
names, licenses, copyrights and proprietary or other confidential
information currently employed by them in connection with their
respective businesses, and neither the Company nor any such subsidiary
has received any notice of infringement of or conflict with asserted
rights of any third party with respect to any of the foregoing which,
singly or in the aggregate, if the subject of an unfavorable decision,
ruling or finding, would result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Final Memorandum.
1.1-4
<PAGE>
(r) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any such
subsidiary has been refused any insurance coverage sought or applied
for; and neither the Company nor any such subsidiary has any reason to
believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially and adversely affect the
condition (financial or otherwise), business prospects, net worth or
results of operations of the Company and its subsidiaries, except as
described in or contemplated by the Final Memorandum.
(s) No subsidiary of the Company is currently prohibited,
directly or indirectly, from paying any dividends to the Company, from
making any other distribution on such subsidiary's capital stock, from
repaying to the Company any loans or advances to such subsidiary from
the Company or from transferring any of such subsidiary's property or
assets to the Company or any other subsidiary of the Company, except as
described in or contemplated by the Final Memorandum.
(t) The Company and its subsidiaries possess all certificates,
orders, permits, licenses, authorizations, consents and approvals of
and from, and have made all filings and registrations with, the
appropriate federal, state or foreign regulatory authorities necessary
to own, lease, license and use their properties and assets and to
conduct their respective businesses, and neither the Company nor any
such subsidiary is in violation of or has received any notice of
proceedings relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations, consents or
approvals, or the qualification or rejection of any such filing or
registration which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, would result in a material
adverse change in the condition (financial or otherwise), business
prospects, net worth or results of operations of the Company and its
subsidiaries, except as described in or contemplated by the Final
Memorandum.
(u) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof and has paid all taxes required to be paid by it and
any other assessment, fine or penalty levied against it, to the extent
that any of the foregoing is due and payable, except for any such tax,
assessment, fine or penalty that is currently being contested in good
faith or as described in or contemplated by the Final Memorandum.
(v) Neither the Company nor any of its subsidiaries is in
violation of any federal or state law or regulation relating to
occupational safety and health or to the storage, handling or
transportation of hazardous or toxic materials and the Company and its
subsidiaries have received all permits, licenses or other approvals
required of them under applicable federal and state occupational safety
and health and environmental laws and regulations to conduct their
respective businesses, and the Company and each such subsidiary is in
compliance with all terms and conditions of any such permit, license or
approval, except any such violation of law or regulation, failure to
receive required permits, licenses or other approvals or failure to
comply with the terms and conditions of such permits, licenses or
approvals which would not, singly or in the aggregate, result in a
material adverse change in the condition (financial or otherwise),
business prospects, net worth or results of operations of the Company
1.1-5
<PAGE>
and its subsidiaries, except as described in or contemplated by the
Final Memorandum.
(w) Each certificate signed by any officer of the Company and
delivered to the Representatives or Counsel for the Initial Purchasers
shall be deemed to be a representation and warranty by the Company (and
not individually by such officer) to the Initial Purchasers as to the
matters covered thereby.
(x) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable and appropriate intervals and appropriate
action is taken with respect to any differences.
(y) No default exists, and no event has occurred which, with
notice or lapse of time or both, would constitute a default in the due
performance and observance of any term, covenant or condition of any
indenture, mortgage, deed of trust, lease or other agreement or
instrument to which the Company or any of its subsidiaries is a party
or by which the Company or any of its subsidiaries or any of their
respective properties is bound or may be affected in any material
adverse respect with regard to property, business or operations of the
Company and its subsidiaries.
(z) Neither the Company, nor any of its Affiliates (as defined
in Rule 501(b) of Regulation D under the Securities Act ("Regulation
D")), nor any person acting on its or their behalf has, directly or
indirectly, made offers or sales of any security, or solicited offers
to buy any security, under circumstances that would require the
registration of the Securities under the Securities Act.
(aa) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf has engaged in any form of general
solicitation or general advertising (within the meaning of Regulation
D) in connection with any offer or sale of the Securities in the United
States.
(bb) The Securities satisfy the eligibility requirements of Rule 144A(d)(3)
under the Securities Act.
(cc) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf has engaged in any directed
selling efforts with respect to the Securities, and each of them has
complied with the offering restrictions requirement of Regulation S
("Regulation S") under the Securities Act. Terms used in this paragraph
have the meanings given to them by Regulation S.
(dd) The Company as of the Execution Time expects to be and as
of the Closing Date will have been advised by the National Association
of Securities Dealers, Inc. PORTAL Market that the Securities have been
designated "PORTAL-eligible securities" in accordance with the rules
and regulations of the National Association of Securities Dealers, Inc.
1.1-6
<PAGE>
(ee) The Company is not, and upon the issuance and sale of the
Securities as herein contemplated and the application of the net
proceeds therefrom as described in the Final Memorandum will not be, an
"investment company" within the meaning of the Investment Company Act
of 1940, as amended (the "Investment Company Act"), without taking
account of any exemption arising out of the number of holders of the
Company's securities.
(ff) The Company will conduct its operations in a manner that
will not subject it to registration as an investment company under the
Investment Company Act.
(gg) The information provided by the Company pursuant to
Section 5(h) hereof will not, at the date thereof, contain any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(hh) There is no franchise, contract or other document of a
character that would be required to be described or referred to in the
Final Memorandum, if it were a prospectus filed as part of a
registration statement on Form S-1 under the Securities Act, that is
not described or referred to as would be so required, and the
description thereof or references thereto are correct in all material
respects.
(ii) Subject to compliance by the Initial Purchaser with the
representations and warranties set forth in Section 4, it is not
necessary in connection with the offer, sale and delivery of the
Securities to the Initial Purchasers and the resale to each subsequent
purchaser in the manner contemplated by this Agreement and the Final
Memorandum to register the Securities under the Securities Act or to
qualify the Indenture under the Trust Indenture Act of 1939, as
amended.
2. Purchase and Sale. Subject to the terms and conditions and
in reliance upon the representations and warranties herein set forth, the
Company agrees to sell to each Initial Purchaser, and each Initial Purchaser
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of 61.6807% of the aggregate principal amount at maturity thereof, plus
amortization of original issue discount, if any, from October 15, 1997 to the
Closing Date, the aggregate principal amount at maturity of Securities set forth
opposite such Initial Purchaser's name in Schedule I hereto.
3. Delivery and Payment. Delivery of and payment for the
Securities shall be made at 10:00 AM, New York City time, on October 15, 1997,
or such later date (not later than October 22, 1997) as the Representatives
shall designate, which date and time may be postponed by agreement between the
Representatives and the Company or as provided in Section 9 hereof (such date
and time of delivery and payment for the Securities being herein called the
"Closing Date"). Delivery of the Securities shall be made to the Representatives
for the respective accounts of the Initial Purchasers against payment by the
Initial Purchasers through the Representatives of the purchase price thereof to
or upon the order of the Company by wire transfer of federal funds or other
immediately available funds or such other manner of payment as may be agreed by
the Company and the Representatives. Delivery of the Securities shall be made at
such location as the Representatives shall reasonably designate at least one
business day in advance of the Closing Date and payment for the Securities shall
be made at the office of Shearman & Sterling ("Counsel for the Initial
Purchasers"), 599 Lexington Avenue, New York, New York. Certificates for the
Securities shall be registered in such names and in such denominations as the
Representatives may request not less than three full business days in advance of
the Closing Date.
1.1-7
<PAGE>
The Company agrees to have the Securities available for
inspection, checking and packaging by the Representatives in New York, New York,
not later than 1:00 PM on the business day prior to the Closing Date.
4. Offering of Securities. Each Initial Purchaser, severally and not
jointly, represents and warrants to and agrees with the Company that:
(a) It has not offered or sold, and will not offer or sell,
any Securities except (i) to those it reasonably believes to be
qualified institutional buyers (as defined in Rule 144A under the
Securities Act) and that, in connection with each such sale, it has
taken or will take reasonable steps to ensure that the purchaser of
such Securities is aware that such sale is being made in reliance on
Rule 144A, or (ii) in accordance with the restrictions set forth in
Exhibit A hereto.
(b) Neither it nor any person acting on its behalf has made or will make
offers or sales of the Securities by means of any form of general solicitation
or general advertising (within the meaning of Regulation D) in the United
States.
5. Agreements. The Company agrees with each Initial Purchaser that:
(a) The Company will furnish to each Initial Purchaser and to
Counsel for the Initial Purchasers, without charge, during the period
referred to in paragraph (c) below, as many copies of the Final
Memorandum and any amendments and supplements thereto as it may
reasonably request. The Company will pay the expenses of printing or
other production of all documents relating to the offering.
(b) The Company will not amend or supplement the Final
Memorandum without the prior written consent of the Representatives as
contemplated by paragraph (c) below.
(c) If at any time prior to the completion of the sale of the
Securities by the Initial Purchasers (as determined by the
Representatives), any event occurs as a result of which the Final
Memorandum, as then amended or supplemented, would include any untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it
should be necessary to amend or supplement the Final Memorandum to
comply with applicable law, the Company will promptly notify the
Representatives of the same and, subject to the requirements of
paragraph (b) of this Section 5, will prepare and provide as promptly
as practicable to the Representatives pursuant to paragraph (a) of this
Section 5 an amendment or supplement which will correct such statement
or omission or effect such compliance.
(d) The Company will arrange for the qualification of the
Securities for sale by the Initial Purchasers under the laws of such
jurisdictions as the Initial Purchasers may reasonably designate and
will maintain such qualifications in effect so long as required for the
sale of the Securities. The Company will promptly advise the
Representatives of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose.
1.1-8
<PAGE>
(e) The Company will not, and will not permit any of its
Affiliates to, resell any Securities that have been acquired by any of
them.
(f) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf will, directly or indirectly, make
offers or sales of any security, or solicit offers to buy any security,
under circumstances that would require the registration of the
Securities under the Securities Act.
(g) Neither the Company, nor any of its Affiliates, nor any
person acting on its or their behalf will engage in any form of general
solicitation or general advertising (within the meaning of Regulation
D) in connection with any offer or sale of the Securities in the United
States.
(h) So long as any of the Securities are "restricted
securities" within the meaning of Rule 144(a)(3) under the Securities
Act, the Company will, unless it becomes subject to and complies with
Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), provide to each holder of such restricted
securities and to each prospective purchaser (as designated by such
holder) of such restricted securities, upon the request of such holder
or prospective purchaser, any information required to be provided by
Rule 144A(d)(4) under the Securities Act. This covenant is intended to
be for the benefit of the holders, and the prospective purchasers
designated by such holders, from time to time of such restricted
securities.
(i) Neither the Company nor any of its Affiliates nor any
person acting on its or their behalf will engage in any directed
selling efforts with respect to the Securities, and each of them will
comply with the offering restrictions requirement of Regulation S.
Terms used in this paragraph have the meanings given to them by
Regulation S.
(j) The Company will cooperate with the Representatives and
use its best efforts to permit the Securities to be eligible for
clearance and settlement through The Depository Trust Company.
(k) The Company will not, until 180 days following the Closing
Date, without the prior written consent of the Representatives, offer,
sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce the offering of, any debt securities issued or
guaranteed by the Company (other than the Securities or as otherwise
contemplated by the Registration Agreement).
(l) The Company will use the net proceeds received by it from
the sale of the Securities in the manner specified in the Final
Memorandum under "Use of Proceeds."
6. Conditions to the Obligations of the Initial Purchasers.
The obligations of the Initial Purchasers to purchase the Securities shall be
subject to the accuracy of the representations and warranties on the part of the
Company contained herein at the date and time that this Agreement is executed
and delivered by the parties hereto (the "Execution Time") and the Closing Date,
to the accuracy of the statements of the Company made in any certificates
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder and to the following additional conditions:
1.1-9
<PAGE>
(a) The Company shall have furnished to the Representatives
the opinion of Holme Roberts & Owen LLP, counsel for the Company, dated
the Closing Date, to the effect that:
(i) each of the Company, Qwest Corporation ("QC"),
Qwest Communications Corporation ("QCC") and Qwest
Transmission Inc. ("QTI") (collectively, the "Subsidiaries"
and individually, a "Subsidiary") has been duly incorporated
and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is organized,
with full corporate power and authority to own its properties
and conduct its business as described in the Final Memorandum,
and is duly qualified to do business as a foreign corporation
and is in good standing under the laws of each jurisdiction
that requires such qualification in which it owns or leases
material properties or conducts material business, except for
such jurisdictions where the failure to so qualify or to be in
good standing would not, singly or in the aggregate, have a
material adverse effect on the Company and the Subsidiaries,
and the Company has full corporate power and authority to
enter into and perform its obligations under this Agreement,
the Registration Agreement, the Indenture and the Securities;
(ii) all of the outstanding shares of capital stock
of the Company and each of the Subsidiaries have been duly and
validly authorized and issued and are fully paid and
nonassessable, and, except as otherwise set forth in the Final
Memorandum, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company either directly or
through a wholly owned Subsidiary, free and clear of (to the
best of such counsel's knowledge after due inquiry) any
security interests and any other claims, liens or
encumbrances;
(iii) the Company's authorized equity capitalization
is as set forth in the Final Memorandum;
(iv) the Indenture has been duly authorized, executed
and delivered and constitutes a legal, valid and binding
instrument enforceable against the Company in accordance with
its terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, fraudulent
conveyance, moratorium or other laws affecting creditors'
rights generally from time to time in effect, and to general
equitable principles); the Securities have been duly and
validly authorized and, when executed and authenticated in
accordance with the provisions of the Indenture and delivered
to and paid for by the Initial Purchasers pursuant to this
Agreement, will constitute legal, valid and binding
obligations of the Company (subject, as to the enforcement of
remedies, to applicable bankruptcy, reorganization,
insolvency, fraudulent conveyance, moratorium or other laws
affecting creditors' rights generally from time to time in
effect, and to general equitable principles) entitled to the
benefits of the Indenture; and the Securities and the
Indenture conform as to legal matters in all material respects
to the descriptions thereof set forth under the heading
"Description of the Notes" in the Final Memorandum;
(v) the information contained in the Final Memorandum
under the headings "Description of Certain Indebtedness,"
"Certain United States Federal Income Taxes" and "Certain
Transactions" fairly summarizes in all material respects the
matters therein
1.1-10
<PAGE>
described and to the extent that such statements purport to
describe certain provisions of U.S. federal laws, rules or
regulations, have been reviewed by such counsel and are
correct as to legal matters in all material respects;
(vi)this Agreement has been duly authorized, executed
and delivered by the Company;
(vii) the Registration Agreement has been duly
authorized, executed and delivered by the Company, and
constitutes legal, valid and binding obligations of the
Company enforceable against the Company in accordance with its
terms (subject, as to the enforcement of remedies, to
applicable bankruptcy, reorganization, insolvency, fraudulent
conveyance, moratorium or other laws affecting creditors'
rights generally from time to time in effect, and to general
principles of equity), and further such counsel expresses no
opinion as to the enforceability of the indemnification or
contribution provisions contained therein, and the
Registration Agreement conforms as to legal matters in all
material respects to the description thereof contained in the
Final Memorandum;
(viii) no consent, approval, authorization or order
of any court or governmental agency or body (other than such
as may be required under the applicable securities laws of the
various jurisdictions in which the Securities will be offered
or sold, as to which such counsel expresses no opinion, or as
required in connection with the transactions contemplated by
the Registration Agreement) is required in connection with the
due authorization, execution and delivery of this Agreement,
the Registration Agreement or the Indenture or for the
offering, issuance, sale or delivery of the Securities to the
Initial Purchasers or the resale of the Securities by the
Initial Purchasers in accordance with this Agreement;
(ix) the issue and sale of the Securities, the
execution and delivery of this Agreement, the Registration
Agreement, the Indenture and the Securities, the consummation
of the transactions contemplated by this Agreement and the
application of proceeds from the sale of the Securities as
described in the Final Memorandum and the compliance by the
Company with its obligations under this Agreement, the
Registration Agreement, the Indenture or the Securities, will
not conflict with, result in a breach or violation of, or
constitute a default under any applicable law or the charter
or by-laws of the Company or any of the Subsidiaries or the
terms of any indenture or other agreement or instrument known
to such counsel to which the Company or any of the
Subsidiaries is a party or bound or any judgment, order or
decree known to such counsel to be applicable to the Company
or any of the Subsidiaries of any court, regulatory body,
administrative agency, governmental body or arbitrator having
jurisdiction over the Company or any of the Subsidiaries;
(x) assuming the accuracy of the representations and
warranties and compliance with the agreements contained in
this Agreement, no registration of the Securities under the
Securities Act is required, and no qualification of the
Indenture under the Trust Indenture Act of 1939 is necessary,
for the purchase by the Initial Purchasers of the Securities,
or the offer and sale by the Initial Purchasers of the
Securities, in each case, in the manner
1.1-11
<PAGE>
contemplated by this Agreement (and not taking into account
the transactions contemplated by the Registration Agreement);
(xi) the Company is not an "investment company"
within the meaning of the Investment Company Act of 1940
without taking account of any exemption arising out of the
number of holders of the Company's securities;
(xii) no legal or governmental proceedings are
pending to which the Company or any of its Subsidiaries is a
party or to which the property of the Company or any of its
Subsidiaries is subject, as would be required to be described
in the Final Memorandum, that are not described in the Final
Memorandum and, to the best of such counsel's knowledge after
due inquiry, no such proceedings have been threatened against
the Company or any of its subsidiaries or with respect to any
of their respective properties; there is no franchise,
contract or other document of a character that would be
required to be described or referred to in the Final
Memorandum, if it were a prospectus filed as part of a
registration statement on Form S-1 under the Securities Act,
that is not described or referred to as would be so required,
and the descriptions thereof or references thereto are correct
in all material respects; and the statements in the Final
Memorandum under the caption "Business -- Legal Proceedings"
present the information that would be called for, if the Final
Memorandum were a prospectus filed as part of a registration
statement on Form S-1 under the Securities Act, with respect
to such legal matters, documents and proceedings and fairly
summarize the matters referred to therein;
(xiii) to the best of such counsel's knowledge, there
are no statutes or regulations that would be required to be
described in the Final Memorandum, if it were a prospectus
filed as part of a registration statement on Form S-1 under
the Securities Act, that are not described as would be so
required; and
(xiv) to the best of such counsel's knowledge, (a)
neither the Company nor any Subsidiary is in violation of its
charter or by-laws and (b) no default by the Company or any
Subsidiary exists in the due performance or observance of any
material obligation, agreement, covenant or condition
contained in any contract or other document that is described
or referred to in the Final Memorandum, except in the case of
(b) only, to the extent that any such default would not have a
material adverse effect on the condition (financial or
otherwise) or operations of the Company on a consolidated
basis;
Such counsel shall also state that they have no reason to
believe that at the Execution Time or at the Closing Date the Final
Memorandum contained an untrue statement of a material fact or omitted
to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made,
not misleading; provided, however, that such counsel expresses no
belief as to the financial statements, including the notes thereto, or
supporting schedules or other financial and accounting data included in
the Final Memorandum.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other
than the State of New York, the State of Colorado, the United States or
the
1.1-12
<PAGE>
General Corporation Law of the State of Delaware, to the extent such
counsel deems proper and as specified in such opinion, upon the opinion
of other counsel (including internal counsel) of good standing whom
such counsel believes to be reliable and who are satisfactory to
Counsel for the Initial Purchasers and (B) as to matters of fact, to
the extent deemed proper, on certificates of responsible officers of
the Company and public officials.
All references in this Section 6(a) to the Final Memorandum
shall be deemed to include any amendment or supplement thereto at the
Closing Date.
(b) The Company shall have furnished to the Representatives
the opinion of Morrison & Foerster LLP, special federal regulatory
counsel for the Company, dated the Closing Date, to the effect that:
(i) (A) the execution and delivery of this Agreement,
the Registration Agreement and the Indenture by the Company
and the issue and sale of the Securities contemplated hereby
and thereby do not violate (1) the Communications Act of 1934
(the "Communications Act"), (2) the Telecommunications Act of
1996 (the "Telecom Act of 1996") or (3) any rules or
regulations of the Federal Communications Commission (the
"FCC") applicable to the Company or its subsidiaries, and (B)
no authorization of or filing with the FCC is necessary for
the execution and delivery of this Agreement, the Registration
Agreement or the Indenture by the Company and the issue and
sale of the Securities contemplated hereby and thereby in
accordance with the terms hereof and thereof;
(ii) QCC is a nondominant carrier authorized by the
FCC to provide domestic interstate interexchange
telecommunications services as described in such opinion
without any further order, license, permit or other
authorization by the FCC. QCC also has been granted Section
214 authority by the FCC to provide international switched
resale telecommunications services as described in such
opinion. QCC has on file with the FCC tariffs applicable to
its domestic interstate and international services. No other
FCC authority is required, and no other tariffs are required
to be filed under the rules and regulations of the FCC, for
the conduct of QCC's telecommunications business as described
in the Final Memorandum;
(iii) QTI is a microwave carrier authorized by the
FCC and holds the licenses listed in such opinion. No further
FCC authority is required for the conduct of QTI's microwave
telecommunications business as described in the Final
Memorandum, except to the extent that the absence of any such
authority, singly or in the aggregate, would not have a
material adverse effect on the business or operations of the
Company or its subsidiaries taken as a whole;
(iv) FSI Acquisition Corp. is a private carrier not
subject to Title II common carrier regulation under the
Communications Act, as amended by the Telecom Act of 1996;
(v) (A) QCC and QTI in all material respects (1) have
made all reports and filings, and paid all fees, required by
the FCC; and (2) have all certificates, orders, permits,
licenses, authorizations, consents and approvals of and from,
and have made all filings and registrations with, the FCC
necessary to own,
1.1-13
<PAGE>
lease, license and use their properties and assets and to
conduct their business in the manner described in the Final
Memorandum; and (B) to the best of such counsel's knowledge,
neither QCC nor QTI has received any notice of proceedings
relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations,
consents or approvals, or the qualification or rejection of
any such filing or registration, the effect of which, singly
or in the aggregate, would have a material adverse effect on
the business or operations of the Company and its subsidiaries
taken as a whole as described in the Final Memorandum;
(vi) to the best of such counsel's knowledge, neither
QCC nor QTI is in violation of, or in default under, the
Communications Act, as amended by the Telecom Act of 1996, or
the rules or regulations of the FCC, the effect of which,
singly or in the aggregate, would have a material adverse
effect on the business or operations of the Company and its
subsidiaries taken as a whole as described in the Final
Memorandum;
(vii) (A) no decree or order of the FCC is
outstanding against QCC or QTI and (B) to the best of such
counsel's knowledge, no formal litigation, proceeding, inquiry
or investigation has been commenced or threatened, and no
formal notice of violation or order to show cause has been
issued, against QCC or QTI before or by the FCC (except for
any matters described in such opinion, which, if the subject
of an unfavorable decision, would not have a material adverse
effect on the business or operations of the Company and its
subsidiaries taken as a whole as described in the Final
Memorandum); and
(viii) the statements in the Final Memorandum under
the captions "Risk Factors--Regulation Risks" and
"Regulation," insofar as such statements constitute a summary
of the legal matters, documents or proceedings of the FCC with
respect to the telecommunications regulation referred to
therein, are accurate in all material respects and fairly
summarize all matters referred to therein.
(c) (A) The Company shall have furnished to the
Representatives the opinion of Goodin, MacBride, Squeri, Schlotz &
Ritchie, LLP, special state regulatory counsel for the Company for the
State of California, dated the Closing Date, to the effect that:
(i) (x) the execution and delivery of this Agreement,
the Registration Agreement and the Indenture by the Company
and the issue and sale of the Securities contemplated hereby
and thereby do not violate (1) any laws administered by,
rules, regulations or published policies of, the California
Public Utilities Commission (the "California PUC") ("PUC
Laws") or any other state laws governing the provision of
telecommunications services in the State of California
("Telecommunications Laws") applicable to the Company or its
subsidiaries, or (2) any decree from any California court
relating to telecommunications matters, and (y) no
authorization of or filing with the California PUC in the
State of California is necessary for the execution and
delivery of this Agreement, the Registration Agreement or the
Indenture by the Company and the issue and sale of the
Securities contemplated hereby and thereby in accordance with
the terms hereof and thereof;
1.1-14
<PAGE>
(ii) QCC is certified, registered or otherwise
authorized, or is not required to obtain authority, to provide
intrastate interexchange telecommunications services in the
State of California. QCC has a tariff on file in the State of
California and no further tariffs are required to be filed by
QCC or the Company in the State of California to conduct the
Company's telecommunications business as described in the
Final Memorandum;
(iii) (x) QCC and the Company (1) have made all
reports and filings, and paid all fees, required by the
California PUC in the State of California; and (2) have all
certificates, orders, permits, licenses, authorizations,
consents and approvals of and from, and have made all filings
and registrations with, the California PUC in the State of
California necessary to own, lease, license and use their
properties and assets and to conduct their business in the
manner described in the Final Memorandum; and (y) neither QCC
nor the Company has received any notice of proceedings
relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations,
consents or approvals, or the qualification or rejection of
any such filing or registration, the effect of which, singly
or in the aggregate, would have a material adverse effect on
the Company's, and its subsidiaries' taken as a whole,
telecommunications business or operations, as described in the
Final Memorandum;
(iv) neither the Company nor QCC is in violation of,
or in default under any PUC Laws or any Telecommunications
Laws, the effect of which, singly or in the aggregate, would
have a material adverse effect on the Company's, and its
subsidiaries' taken as a whole, telecommunications business or
operations, as described in the Final Memorandum; and
(v) (x) no decree or order of the California PUC in
the State of California is outstanding against the Company or
any of its subsidiaries and (y) no formal litigation,
proceeding, inquiry or investigation has been commenced or
threatened, and no notice of violation or order to show cause
has been issued, against the Company or any of its
subsidiaries before or by the California PUC or any other
regulatory agency in the State of California.
(B) The Company shall have furnished to the Representatives
the opinion of Bickerstaff, Heath Smiley, Pollan, Kever & McDaniel LLP,
special state regulatory counsel for the Company for the State of
Texas, dated the Closing Date, to the effect that:
(i) (x) the execution and delivery of this Agreement,
the Registration Agreement and the Indenture by the Company
and the issue and sale of the Securities do not violate any
telecommunications laws of the State of Texas applicable to
the Company or QCC or, to the best of such counsel's
knowledge, any decree from any court of the State of Texas
relating to the telecommunications operations of the Company
or QCC, and (y) no authorization of or filing with the Public
Utility Commission of Texas (the "Texas PUC") is necessary for
the execution and delivery of this Agreement, the Registration
Agreement or the Indenture by the Company or the issue and
sale of the Securities contemplated hereby and thereby in
accordance with the terms of this Agreement;
(ii) QCC is duly registered with the Texas PUC and
authorized to provide intrastate telecommunications services
1.1-15
<PAGE>
in Texas and no further authority is required to be obtained by
QCC or the Company from the Texas PUC to conduct the Company's
telecommunications business as described in the Final
Memorandum. QCC has a registration and price list on file in
Texas and no further tariffs are required to be filed by QCC
or the Company with the Texas PUC to conduct the Company's
telecommunications business as described in the Final
Memorandum;
(iii) (x) QCC and the Company (1) have made all
reports and filings required by the Texas PUC; and (2) have
all certificates, orders, permits, licenses, authorizations,
consents and approvals of and from, and have made all filings
and registrations with, the Texas PUC necessary to own, lease,
license and use their properties and assets and to conduct the
Company's telecommunications business in the manner described
in the Final Memorandum; and (y) neither QCC nor the Company
has received any notice of proceedings from the Texas PUC
relating to the revocation or modification of any such
certificates, orders, permits, licenses, authorizations,
consents or approvals, or the qualification or rejection of
any such filing or registration, the effect of which, singly
or in the aggregate, would have a material adverse effect on
the business or operations of the Company and its subsidiaries
taken as a whole as described in the Final Memorandum;
(iv) neither QCC nor the Company is in violation of,
or in default under the telecommunications laws of the State
of Texas, the effect of which, singly or in the aggregate,
would have a material adverse effect on the business or
operations of the Company and its subsidiaries taken as a
whole as described in the Final Memorandum; and
(v) (x) no decree or order of the Texas PUC is
outstanding against QCC or the Company and (y) no formal
litigation, proceeding, inquiry or investigation has been
commenced or threatened, and no formal notice of violation or
order to show cause has been issued, against QCC or the
Company before or by the Texas PUC.
(d) The Company shall have furnished to the Representatives
the opinion of Joseph Garrity, internal counsel for the Company, dated
the Closing Date, to the effect that:
(i) (A) the execution and delivery of this Agreement,
the Registration Agreement and the Indenture by the Company
and the issuance and sale of the Securities contemplated
hereby and thereby do not violate (1) any state
telecommunications laws or regulations ("State
Telecommunications Laws") applicable to the Company or QCC,
QTI or FSI Acquisition Corp. (together, the "Operating
Subsidiaries") or (2) any decree from any court relating to
the telecommunications operations of the Company or the
Operating Subsidiaries, and (B) no authorization of or filing
with any Public Utilities Commission or other state regulatory
authority ("State Regulatory Agency") is necessary for the
execution and delivery of this Agreement, the Registration
Agreement or the Indenture by the Company and the issuance and
sale of the Securities contemplated hereby and thereby in
accordance with the terms hereof and thereof;
(ii) QCC is certified, registered or otherwise authorized,
or is not required to obtain authority to provide, intrastate
1.1-16
<PAGE>
interexchange telecommunications services in the respective
states listed in such opinion. No further authority is
required to be obtained by the Company or any of the Operating
Subsidiaries from any such state to conduct the
telecommunications business as described in the Final
Memorandum. QCC has a tariff or price list on file in each of
the states requiring such a filing as identified in such
opinion. No further tariffs are currently required to be filed
by the Company or any of the Operating Subsidiaries in any
such state to conduct the telecommunications business as
described in the Final Memorandum;
(iii) except to the extent that the following would
not have, singly or in the aggregate, a material adverse
effect on the business or operations of the Company and its
subsidiaries as described in the Final Memorandum: (A) the
Company and QCC (1) have made all reports and filings, and
paid all fees, required by State Regulatory Agencies; and (2)
have all certificates, orders, permits, licenses,
authorizations, consents and approvals of and from, and have
made all filings and registrations with, State Regulatory
Authorities necessary to own, lease, license and use their
properties and assets and to conduct business in the manner
described in the Final Memorandum; and (B) neither the Company
nor QCC has received any notice of proceedings relating to the
revocation or modification of any such certificates, orders,
permits, licenses, authorizations, consents or approvals, or
the qualification or rejection of any such filing or
registration;
(iv) to the best of such counsel's knowledge, neither
the Company nor QCC is in violation of, or in default under,
any State Telecommunications Law, the effect of which, singly
or in the aggregate, would have a material adverse effect on
the business or operations of the Company and its subsidiaries
as described in the Final Memorandum;
(v) (A) no decree or order of any State Regulatory
Agency is outstanding against the Company or any of the
Operating Subsidiaries and (B) no formal litigation,
proceeding, inquiry or investigation has been commenced or, to
such counsel's knowledge, threatened, and no formal notice of
violation or order to show cause has been issued, against the
Company or any of the Operating Subsidiaries before or by any
State Regulatory Agency, the effect of which, singly or in the
aggregate, would have a material adverse effect on the
business or operations of the Company and its subsidiaries as
described in the Final Memorandum; and
(vi) the statements in the Final Memorandum under the
captions "Risk Factors--Regulation Risks" and "Regulation,"
insofar as such statements constitute a summary of the legal
matters, documents or proceedings of the FCC and State
Regulatory Agencies with respect to telecommunications
regulation referred to therein, are accurate in all material
respects and fairly summarize all matters referred to therein,
as of the date of publication of the Final Memorandum.
(e) The Representatives shall have received from Counsel for
the Initial Purchasers such opinion or opinions, dated the Closing
Date, with respect to the issuance and sale of the Securities, the
Final Memorandum (as amended or supplemented at the Closing Date) and
other related matters as the Representatives may reasonably require,
and the Company shall have furnished or made available to such counsel
such
1.1-17
<PAGE>
documents as they request for the purpose of enabling them to pass upon
such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by (1) the President and Chief
Executive Officer and (2) the Vice President -- Finance, Treasurer and
Chief Financial Officer of the Company, dated the Closing Date, to the
effect that the signers of such certificate have carefully reviewed the
Final Memorandum, any amendment or supplement to the Final Memorandum
and this Agreement and that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the Closing Date with the same effect as
if made on the Closing Date, and the Company has complied with
all the agreements and satisfied all the conditions on its
part to be performed or satisfied hereunder at or prior to the
Closing Date; and
(ii) since the date of the most recent financial
statements included in the Final Memorandum, there has been no
material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects
or properties of the Company and its subsidiaries, whether or
not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Final
Memorandum (exclusive of any amendment or supplement thereto).
(g) (A) At the Execution Time, KPMG Peat Marwick LLP shall
have furnished to the Representatives a letter dated such date, in form
and substance satisfactory to the Initial Purchasers, containing
statements and information of the type ordinarily included in
accountants' "comfort letters" to underwriters with respect to the
financial statements and certain financial information contained in the
Final Memorandum and (B) at the Closing Date, KPMG Peat Marwick LLP
shall have furnished to the Representatives a letter dated such date,
in form and substance satisfactory to the Initial Purchasers, to the
effect that they reaffirm the statements made in the letter furnished
pursuant to preceding sentence, except that the specified date referred
to shall be a date not more than three business days prior to the
Closing Date.
(h) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Final Memorandum, there shall
not have been (i) any change or decrease specified in the letters
referred to in paragraph (g) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the
business or properties of the Company and its subsidiaries the effect
of which, in any case referred to in clause (i) or (ii) above, is, in
the judgment of the Representatives, so material and adverse as to make
it impractical or inadvisable to market the Securities as contemplated
by the Final Memorandum.
(i) Prior to the Closing Date, the Company shall have
furnished to the Representatives such reasonable further information,
certificates and documents as the Representatives may reasonably
request.
(j) At the Closing Date, the Company's $250,000,000 Series B
107/8% Senior Notes Due 2007 (the "Series B Notes") shall be rated at
least B+ by Standard & Poor's Corporation and B2 by Moody's Investors
Service Inc. and since the date of this Agreement there shall not have
occurred a downgrading in the rating assigned to the Series B Notes by
any "nationally recognized statistical rating agency", as that term is
1.1-18
<PAGE>
defined by the Commission for purposes of Rule 436(g)(2) under the
Securities Act, and no such organization shall have publicly announced
that it has its rating of the Series B Notes under surveillance or
review.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and Counsel for the
Initial Purchasers, this Agreement and all obligations of the Initial Purchasers
hereunder may be cancelled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company in
writing, by facsimile or by telephone confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Counsel for the Initial Purchasers, at 599
Lexington Avenue, New York, New York, or such other place as the Representatives
and the Company shall mutually agree, on the Closing Date.
7. Reimbursement of Expenses. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Initial Purchasers set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein or comply with any provision hereof other than by reason of a
default by any of the Initial Purchasers in payment for the Securities on the
Closing Date, the Company will reimburse the Initial Purchasers severally upon
demand for all reasonable out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company agrees to
indemnify and hold harmless each Initial Purchaser, the directors, officers,
employees and agents of each Initial Purchaser and each person who controls any
Initial Purchaser within the meaning of either the Securities Act or the
Exchange Act against any and all losses, claims, damages or liabilities, joint
or several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or other federal or state statutory law or regulation, at
common law or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in the Final
Memorandum or any information provided by the Company to any holder or
prospective purchaser of Securities pursuant to Section 5(h), or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agrees to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon any such untrue
statement or alleged untrue statement or omission or alleged omission made in
the Final Memorandum, or in any amendment thereof or supplement thereto, in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any of the Initial Purchasers through the
Representatives specifically for inclusion therein. This indemnity agreement
will be in addition to any liability which the Company may otherwise have.
1.1-19
<PAGE>
(b) Each Initial Purchaser severally agrees to indemnify and
hold harmless the Company, its directors, its officers, and each person who
controls the Company within the meaning of either the Securities Act or the
Exchange Act, to the same extent as the foregoing indemnity from the Company to
each Initial Purchaser, but only with reference to written information relating
to such Initial Purchaser furnished to the Company by or on behalf of such
Initial Purchaser through the Representatives specifically for inclusion in the
Final Memorandum (or in any amendment or supplement thereto). This indemnity
agreement will be in addition to any liability which any Initial Purchaser may
otherwise have. The Company acknowledges that the statements set forth in the
last paragraph of the cover page and under the heading "Plan of Distribution" in
the Final Memorandum constitute the only information furnished in writing by or
on behalf of the Initial Purchasers for inclusion in the Final Memorandum (or in
any amendment or supplement thereto).
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve the indemnifying party from liability under paragraph (a) or
(b) above unless and to the extent the indemnifying party did not otherwise
learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying party's
election to appoint counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel (including
local counsel), and the indemnifying party shall bear the reasonable fees, costs
and expenses of such separate counsel if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a)
or (b) of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Initial Purchasers agree
1.1-20
<PAGE>
to contribute to the aggregate losses, claims, damages and liabilities
(including legal or other expenses reasonably incurred in connection with
investigating or defending same) (collectively "Losses") to which the Company
and one or more of the Initial Purchasers may be subject in such proportion as
is appropriate to reflect the relative benefits received by the Company and by
the Initial Purchasers from the offering of the Securities; provided, however,
that in no case shall any Initial Purchaser (except as may be provided in any
agreement among the Initial Purchasers relating to the offering of the
Securities) be responsible for any amount in excess of the purchase discount or
commission applicable to the Securities purchased by such Initial Purchaser
hereunder. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the Company and the Initial Purchasers shall
contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and of the Initial
Purchasers in connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Benefits received
by the Company shall be deemed to be equal to the total net proceeds from the
offering (before deducting expenses), and benefits received by the Initial
Purchasers shall be deemed to be equal to the total purchase discounts and
commissions received by the Initial Purchasers from the Company in connection
with the purchase of the Securities hereunder. Relative fault shall be
determined by reference to whether any alleged untrue statement or omission
relates to information provided by the Company or the Initial Purchasers. The
Company and the Initial Purchasers agree that it would not be just and equitable
if contribution were determined by pro rata allocation or any other method of
allocation which does not take account of the equitable considerations referred
to above. Notwithstanding the provisions of this paragraph (d), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls an Initial Purchaser within the meaning of either the
Securities Act or the Exchange Act and each director, officer, employee and
agent of an Initial Purchaser shall have the same rights to contribution as such
Initial Purchaser, and each person who controls the Company within the meaning
of either the Securities Act or the Exchange Act and each officer and director
of the Company shall have the same rights to contribution as the Company,
subject in each case to the applicable terms and conditions of this paragraph
(d).
9. Default by an Initial Purchaser. If any one or more Initial
Purchasers shall fail to purchase and pay for any of the Securities agreed to be
purchased by such Initial Purchaser hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Initial Purchasers shall be obligated severally to take
up and pay for (in the respective proportions which the principal amount of
Securities set forth opposite their names in Schedule I hereto bears to the
aggregate principal amount of Securities set forth opposite the names of all the
remaining Initial Purchasers) the Securities which the defaulting Initial
Purchaser or Initial Purchasers agreed but failed to purchase; provided,
however, that in the event that the aggregate principal amount of Securities
which the defaulting Initial Purchaser or Initial Purchasers agreed but failed
to purchase shall exceed 10% of the aggregate principal amount of Securities set
forth in Schedule I hereto, the remaining Initial Purchasers shall have the
right to purchase all, but shall not be under any obligation to purchase any, of
the Securities, and if such non-defaulting Initial Purchasers do not purchase
all the Securities, this Agreement will terminate without liability to any
non-defaulting Initial Purchaser or the Company. In the event of a default by
any Initial Purchaser as set forth in this Section 9, the Closing Date shall be
postponed for such period, not exceeding seven days, as the Representatives
shall determine in order that the required changes in the Final Memorandum or in
any other
1.1-21
<PAGE>
documents or arrangements may be effected. Nothing contained in this Agreement
shall relieve any defaulting Initial Purchaser of its liability, if any, to the
Company or any non-defaulting Initial Purchaser for damages occasioned by its
default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended by
the Commission or the Nasdaq Stock Market's National Market ("Nasdaq") or
trading in securities generally on the New York Stock Exchange or Nasdaq shall
have been suspended or limited or minimum prices shall have been established on
the New York Stock Exchange or Nasdaq, (ii) a banking moratorium shall have been
declared either by federal or New York state authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or crisis the
effect of which on financial markets is such as to make it, in the judgment of
the Representatives, impracticable or inadvisable to proceed with the offering
or delivery of the Securities as contemplated by the Final Memorandum.
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Initial Purchasers set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation made by or on behalf of the Initial Purchasers or the Company
or any of the officers, directors or controlling persons referred to in Section
8 hereof, and will survive delivery of and payment for the Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Representatives, will be
mailed, delivered or telecopied and confirmed to them, care of Salomon Brothers
Inc, at Seven World Trade Center, New York, New York 10048, attention: Legal
Department; or, if sent to the Company, will be mailed, delivered or telecopied
and confirmed to it at 555 Seventeenth Street, Suite 1000, Denver, Colorado
80202, attention: Joseph T. Garrity, Esq.
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and, except as expressly set forth in Section 5(h) hereof, no other person will
have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
15. Business Day. For purposes of this Agreement, "business
day" means each Monday, Tuesday, Wednesday, Thursday and Friday that is not a
day on which banking institutions in The City of New York, New York are
authorized or obligated by law, executive order or regulation to close.
16. Counterparts. This Agreement may be executed in one or more
counterparts, each of which will be deemed to be an original, but all such
counterparts will together constitute one and the same instrument.
1.1-22
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this Agreement and your acceptance shall represent a binding agreement
between the Company and the Initial Purchasers.
Very truly yours,
QWEST COMMUNICATIONS INTERNATIONAL
INC.
By /s/
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
By: SALOMON BROTHERS INC
By /s/
Name:
Title:
For themselves and the other
Initial Purchasers named in
Schedule I to the foregoing Agreement
1.1-23
<PAGE>
SCHEDULE I
Principal Amount
at Maturity of
Securities to
Initial Purchasers be Purchased
Salomon Brothers Inc........................................ $222,356,000
Donaldson, Lufkin & Jenrette Securities Corporation......... $166,767,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated................................... $166,767,000
Total............................. $555,890,000
============
1.1-24
<PAGE>
EXHIBIT A
Non-Distribution Letter for U.S. Purchasers
_________, 1997
Salomon Brothers Inc
Donaldson, Lufkin & Jenrette Securities Corporation
Merrill Lynch, Pierce, Fenner & Smith Incorporated
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Qwest Communications International Inc.
Suite 1000
555 Seventeenth Street
Denver, Colorado 80202
Re: Purchase of $555,890,000 principal amount at maturity of 9.47% Senior
Discount Notes Due 2007 (the "Securities"), of Qwest Communications
International Inc. (the "Company")
Ladies and Gentlemen:
In connection with our purchase of the Securities we confirm
that:
1. We understand that the Securities are not being and will
not be registered under the Securities Act of 1933, as amended (the "Securities
Act"), and are being sold to us in a transaction that is exempt from the
registration requirements of the Securities Act.
2. We acknowledge that (a) neither the Company, nor the
Initial Purchasers (as defined in the Offering Memorandum dated October 9, 1997
relating to the Securities (the "Final Memorandum")) nor any person acting on
behalf of the Company or the Initial Purchasers has made any representation to
us with respect to the Company or the offer or sale of any Securities and (b)
any information we desire concerning the Company and the Securities or any other
matter relevant to our decision to purchase the Securities (including a copy of
the Final Memorandum) is or has been made available to us.
3. We have such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of an
investment in the Securities, and we are (or any account for which we are
purchasing under paragraph 4 below is) an institutional "accredited investor"
(within the meaning of Rule 501(a)(1), (2), (3) or (7) of Regulation D under the
Securities Act) able to bear the economic risk of investment in the Securities.
4. We are acquiring the Securities for our own account (or for
accounts as to which we exercise sole investment discretion and have authority
to make, and do make, the statements contained in this letter) and not with a
view to any distribution of the Securities, subject, nevertheless, to the
understanding that the disposition of our property will at all times be and
remain within our control.
A-1
<PAGE>
5. We understand that (a) the Securities will be in registered
form only and that any certificates delivered to us in respect of the Securities
will bear a legend substantially to the following effect:
"These Securities have not been registered under the
Securities Act of 1933. Further offers or sales of these
Securities are subject to certain restrictions, as set forth
in the Offering Memorandum dated October __, 1997 relating to
these Securities."
and (b) the Company has agreed to reissue such certificates without the
foregoing legend only in the event of a disposition of the Securities in
accordance with the provisions of paragraph 6 below (provided, in the case of a
disposition of the Securities in accordance with paragraph 6(f) below, that the
legal opinion referred to in such paragraph so permits), or at our request at
such time as we would be permitted to dispose of them in accordance with
paragraph 6(a) below.
6. We agree that in the event that at some future time we wish
to dispose of any of the Securities, we will not do so unless such disposition
is made in accordance with any applicable securities laws of any state of the
United States and:
(a) the Securities are sold in compliance with Rule 144(k) under
the Securities Act; or
(b) the Securities are sold in compliance with Rule 144A under
the Securities Act; or
(c) the Securities are sold in compliance with Rule 904 of
Regulation S under the Securities Act; or
(d) the Securities are sold pursuant to an effective
registration statement under the Securities Act; or
(e) the Securities are sold to the Company or an affiliate (as
defined in Rule 501(b) of Regulation D) of the Company; or
(f) the Securities are disposed of in any other transaction
that does not require registration under the Securities Act, and we
theretofore have furnished to the Company or its designee an opinion of
counsel experienced in securities law matters to such effect or such
other documentation as the Company or its designee may reasonably
request.
Very truly yours,
By
(Authorized Officer)
A-2
<PAGE>
EXHIBIT A
Selling Restrictions for Offers and
Sales outside the United States
(1) (a) The Securities have not been and will not be
registered under the Securities Act and may not be offered or sold within the
United States or to, or for the account or benefit of, U.S. persons except in
accordance with Regulation S under the Securities Act or pursuant to an
exemption from the registration requirements of the Securities Act. Each Initial
Purchaser represents and agrees that, except as otherwise permitted by Section
4(a)(i) or (ii) of the Agreement to which this is an exhibit, it has offered and
sold the Securities, and will offer and sell the Securities, (i) as part of
their distribution at any time and (ii) otherwise until 40 days after the later
of the commencement of the offering and the Closing Date, only in accordance
with Rule 903 of Regulation S under the Securities Act. Accordingly, each
Initial Purchaser represents and agrees that neither it, nor any of its
affiliates nor any person acting on its or their behalf has engaged or will
engage in any directed selling efforts with respect to the Securities, and that
it and they have complied and will comply with the offering restrictions
requirement of Regulation S. Each Initial Purchaser agrees that, at or prior to
the confirmation of sale of Securities (other than a sale of Securities pursuant
to Section 4(a)(i) or (ii) of the Agreement to which this is an exhibit), it
shall have sent to each distributor, dealer or person receiving a selling
concession, fee or other remuneration that purchases Securities from it during
the restricted period a confirmation or notice to substantially the following
effect:
"The Securities covered hereby have not been
registered under the U.S. Securities Act of 1933 (the
"Securities Act") and may not be offered or sold within the
United States or to, or for the account or benefit of, U.S.
persons (i) as part of their distribution at any time or (ii)
otherwise until 40 days after the later of the commencement of
the offering and October 15, 1997, except in either case in
accordance with Regulation S or Rule 144A under the Securities
Act. Terms used above have the meanings given to them by
Regulation S."
(b) Each Initial Purchaser also represents and agrees that it
has not entered and will not enter into any contractual arrangement with any
distributor with respect to the distribution of the Securities, except with its
affiliates or with the prior written consent of the Company.
(c) Terms used in this section have the meanings given to them
by Regulation S.
(2) Each Initial Purchaser represents, warrants and agrees
that (i) it has not offered or sold, and will not offer or sell, any Securities
to persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments (as
principal or agent) for the purposes of their business or in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulation 1995
(the "Regulations"), (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 of the United Kingdom and the
Regulations with respect to anything done by it in relation to the Securities
in, from or otherwise involving the United Kingdom, and (iii) it has only issued
or passed on, and will only issue or pass on, to any person in the United
Kingdom any document received by it in connection with the issue of the
Securities if that person is of a kind described in Article 11(3) of the
Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order
A-1
<PAGE>
1995 or is a person to whom the document may otherwise lawfully be issued or
passed on.
A-2
<PAGE>
EXHIBIT 4.1
INDENTURE, dated as of October 15, 1997 between Qwest
Communications International Inc., a corporation duly organized and existing
under the laws of the State of Delaware (herein called the "Company"), having
its principal office at 555 Seventeenth Street, Denver, Colorado 80202, and
Bankers Trust Company, a New York banking corporation, as Trustee (herein called
the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the creation of an issue of
9.47% Senior Discount Notes Due 2007 (herein called the "Initial Securities")
and 9.47% Series B Senior Discount Notes Due 2007 (the "Exchange Securities"
and, together with the Initial Securities, the "Securities"), of substantially
the tenor and amount hereinafter set forth, and to provide therefor the Company
has duly authorized the execution and delivery of this Indenture.
All things necessary have been done to make the Securities,
when executed by the Company and authenticated and delivered hereunder and duly
issued by the Company, the valid obligations of the Company and to make this
Indenture a valid agreement of each of the Company and the Trustee, in
accordance with their and its terms.
NOW, THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of
the Securities by the Holders thereof, it is mutually covenanted and agreed, for
the equal and proportionate benefit of all Holders of the Securities, as
follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.
For all purposes of this Indenture, except as otherwise
expressly provided or unless the context otherwise requires:
(a) the terms defined in this Article have the meanings assigned
to them in this Article, and include the plural as well as the singular;
(b) all other terms used herein which are defined in the Trust
Indenture Act, either directly or by reference therein, have the
meanings assigned to them therein, and the terms "cash transaction" and
"self-liquidating paper", as used in TIA Section 311, shall have the
meanings assigned to them in the rules of the Commission adopted under
the Trust Indenture Act;
4.1-1
<PAGE>
(c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with generally accepted
accounting principles, and, except as otherwise herein expressly
provided, the term "generally accepted accounting principles" with
respect to any computation required or permitted hereunder shall mean
such accounting principles as are generally accepted at the date of
such computation;
(d) the words "herein", "hereof" and "hereunder" and other
words of similar import refer to this Indenture as a whole and not to
any particular Article, Section, paragraph or other subdivision; and
(e) unless otherwise indicated, references to Articles,
Sections, paragraphs or other subdivisions are references to such
Articles, Sections, paragraphs or other subdivisions of this Indenture.
"Accreted Value" means, with respect to any Note, (i) as of
any date prior to October 15, 2002, an amount per $1,000 principal amount at
maturity of Notes that is equal to the sum of (a) the offering price ($629.62
per $1,000 principal amount at maturity of Notes) of such Notes and (b) the
portion of the excess of the principal amount at maturity of such Notes over
such offering price which shall have been amortized through such date, such
amount to be so amortized on a daily basis and compounded semiannually on each
October 15 and April 15 at a rate of 9.47% per annum from the date of original
issue of the Notes through the date of determination computed on the basis of a
360-day year of twelve 30-day months, and (ii) as of any date on or after
October 15, 2002, the principal amount at maturity of each Note; provided,
however, that if the Company elects to commence the accrual of cash interest on
the Notes on or after October 15, 2000 and prior to October 15, 2002, the Notes
shall cease to accrete, and the Accreted Value and the principal amount at
maturity thereof shall be the Accreted Value on the date of commencement of such
accrual as calculated in accordance with the foregoing.
"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.
"Act", when used with respect to any Holder, has the meaning
specified in Section 104.
"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.
"Agent Member" has the meaning specified in Section 312.
"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
4.1-2
<PAGE>
Capital Stock or other ownership interests of a Restricted Subsidiary (other
than as permitted by clauses (iii), (iv) and (v) of Section 1019), (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 of Section 1015.
"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.
"Board of Directors" means the board of directors of the Company.
"Board Resolution" means a copy of a resolution certified by
the Secretary or an Assistant Secretary of the Company to have been duly adopted
by the Board of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Business Day" means each Monday, Tuesday, Wednesday, Thursday
and Friday which is not a day on which banking institutions in The City of New
York are authorized or obligated by law or executive order to close.
"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
4.1-3
<PAGE>
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.
"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 Ratings Services 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 Ratings Services 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.
"Change of Control" has the meaning specified in Section 1010.
"Commission" means the Securities and Exchange Commission, as
from time to time constituted, created under the Exchange Act, or, if at any
time after the execution of this Indenture such Commission is not existing and
performing the duties now assigned to it under the Trust Indenture Act, then the
body performing such duties at such time.
"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.
"Company" means the Person named as the "Company" in the first
paragraph of this Indenture, until a successor Person shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Company" shall mean such successor Person.
"Company Order" or "Company Request" means a written request
or order signed in the name of the Company by the Chief Executive Officer, 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.
"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.
4.1-4
<PAGE>
"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' 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
4.1-5
<PAGE>
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
Section 1013, 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 the date of execution of this Indenture 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 who (i) was a member of such Board of
Directors on March 31, 1997 or (ii) was nominated for election or elected to the
Board of Directors with the affirmative vote of a majority of the Continuing
Directors who were members of the Board of Directors at the time of such
nomination or election or the affirmative vote of Permitted Holders.
"Corporate Trust Office" means the principal corporate trust
office of the Trustee, at which at any particular time its corporate trust
business shall be administered, which office at the date of execution of this
Indenture is located at Four Albany Street, New York, New York 10006, except
that, with respect to presentation of Securities for payment or for registration
of transfer or exchange, such term shall mean the office or agency of the
Trustee at which, at any particular time, its corporate agency business shall be
conducted.
"Corporation" includes corporations, associations, companies and
business trusts.
"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,
4.1-6
<PAGE>
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 pursuant to paragraph (b) of Section
1011).
"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.
"Defaulted Interest" has the meaning specified in Section 307.
"Depository" means The Depository Trust Company, its nominees and
successors.
"Designation" and "Designation Amount" have the respective
meanings specified in Section 1021.
"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 Securities, 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 Securities 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 Securities contained in Section 1010
and such Preferred Stock specifically provides that the Company shall not
repurchase or redeem any such stock pursuant to such provisions prior to the
Company's repurchase of such Securities as are required to be repurchased
pursuant to Section 1010.
4.1-7
<PAGE>
"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 Ratings Services 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 pursuant to clause (vii) of
paragraph (b) of Section 1011.
"Event of Default" has the meaning specified in Section 501.
"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).
"Exchange Offer" means the exchange offer that may be effected
pursuant to the Registration Agreement.
"Exchange Offer Registration Statement" means the Exchange Offer
Registration Statement as defined in the Registration Agreement.
"Exchange Securities" has the meaning stated in the first
recital of this Indenture and refers to any Exchange Securities containing terms
substantially identical to the Initial Securities (except that such Exchange
Securities shall not contain terms with respect to transfer restrictions) that
are issued and exchanged for the Initial Securities pursuant to the Registration
Agreement and this Indenture.
"Expiration Date" has the meaning specified in "Offer to Purchase"
below.
"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. Fair Market
Value shall be determined by the Board of Directors acting in good faith and
shall be evidenced by a Board Resolution delivered to the Trustee.
"Federal Bankruptcy Code" means the Bankruptcy Act of Title 11
of the United States Code, as amended from time to time.
"Global Security" means a Rule 144A Global Security or a
Regulation S Global Security, as the case may be.
"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.
"Group" has the meaning specified in Section 1010.
"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
4.1-8
<PAGE>
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.
"Holder" means a Person in whose name a Security is registered in
the Security Register.
"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.
"Indenture" means this instrument as originally executed and
as it may from time to time be supplemented or amended by one or more indentures
supplemental hereto entered into pursuant to the applicable provisions hereof.
"Indenture Obligations" means the obligations of the Company
and any other obligor under this Indenture or under the Securities to pay
principal of, premium, if any, and interest on the Securities when due and
payable, whether at maturity, by acceleration, call for redemption or repurchase
or otherwise, and all other amounts due or to become due under or in connection
with this Indenture or the Securities and the performance of all other
obligations to the Trustee (including, but not limited to, payment of all
amounts due the Trustee under Section 607), Paying Agent, Security Registrar and
the Holders of the Securities under this Indenture and the Securities according
to the terms thereof.
"Initial Purchasers" means Salomon Brothers Inc, Donaldson, Lufkin
& Jenrette Securities Corporation and Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
"Initial Securities" has the meaning provided in the recitals to
this Indenture.
"Interest Payment Date" means the Stated Maturity of an
installment of interest on the Securities.
"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.
4.1-9
<PAGE>
"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.
"Liquidated Interest" has the meaning specified in Exhibit A.
"Maturity", when used with respect to any Security, means the
date on which the principal of such Security or an installment of principal
becomes due and payable as therein or herein provided, whether at the Stated
Maturity or by declaration of acceleration, notice of redemption or otherwise.
"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 Board Resolution; provided, however, that any
reduction in such reserve within twelve months following the consummation of
such Asset Disposition shall be for all purposes of this Indenture and the
Securities treated as a new Asset Disposition at the time of such reduction with
Net Available Proceeds equal to the amount of such reduction.
"Notice of Default" has the meaning specified in Section 501.
4.1-10
<PAGE>
"Offer" has the meaning specified in "Offer to Purchase" below.
"Offer to Purchase" means a written offer (the "Offer") sent
by the Company by first class mail, postage prepaid, to each Holder of
Securities at his address appearing in the Security Register on the date of the
Offer offering to purchase up to the total aggregate principal amount at
maturity of Securities specified in such Offer at the purchase price specified
in such Offer (as determined pursuant to Section 1010). 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 days or more than 60
days after the date of such Offer and a settlement date (the "Purchase Date")
for purchase of Securities 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 Section 1008 (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 Securities pursuant to
the Offer to Purchase.
The Offer shall also state:
(a) the Section of this Indenture pursuant to which the Offer to
Purchase is being made;
(b) the Expiration Date and the Purchase Date;
(c) the aggregate principal amount at maturity of the
Outstanding Securities 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 at maturity of Securities accepted
for payment (as specified pursuant to Section 1010) (the "Purchase
Price");
(e) that the Holder may tender all or any portion of the
Securities registered in the name of such Holder and that any portion
of a Security tendered must be tendered in an integral multiple of
$1,000 principal amount at maturity;
(f) the place or places where Securities are to be surrendered
for tender pursuant to the Offer to Purchase;
4.1-11
<PAGE>
(g) that any Securities not tendered or tendered but not
purchased by the Company will continue to accrete or accrue interest, as
the case may be;
(h) that on the Purchase Date the Purchase Price will become
due and payable upon each Security being accepted for payment pursuant
to the Offer to Purchase and that interest thereon, if any, shall cease
to accrue on and after the Purchase Date;
(i) that each Holder electing to tender a Security pursuant to
the Offer to Purchase will be required to surrender such Security at
the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Security 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 its attorney duly
authorized in writing);
(j) that Holders will be entitled to withdraw all or any
portion of Securities tendered if the Company (or their 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 at maturity of the Security
the Holder tendered, the certificate number of the Security the Holder
tendered and a statement that such Holder is withdrawing all or a
portion of its tender;
(k) that (i) if Securities in an aggregate principal amount at
maturity 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 Securities and (ii) if Securities in an aggregate
principal amount at maturity in excess of the Purchase Amount are
tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Securities having an aggregate principal amount
at maturity equal to the Purchase Amount on a pro rata basis (with such
adjustments as may be deemed appropriate so that only Securities in
denominations of $1,000 or integral multiples thereof shall be
purchased); and
(l) that in the case of any Holder whose Security is purchased
only in part, the Company shall execute, and the Trustee shall
authenticate and deliver to the Holder of such Security without service
charge, a new Security or Securities, of any authorized denomination as
requested by such Holder, in an aggregate principal amount at maturity
equal to and in exchange for the unpurchased portion of the Security so
tendered.
Any Offer to Purchase shall be governed by and effected in accordance with the
Offer for such Offer to Purchase.
"Offering Memorandum" means the Offering Memorandum dated
October 9, 1997 pursuant to which the Securities were offered, and any
supplement thereto.
"Officers' Certificate" means a certificate signed by the
Chief Executive Officer, 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.
4.1-12
<PAGE>
"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).
"Outstanding", when used with respect to Securities, means, as
of the date of determination, all Securities theretofore authenticated and
delivered under this Indenture, except:
(i) Securities theretofore cancelled by the Trustee or delivered
to the Trustee for cancellation;
(ii) Securities, or portions thereof, for whose payment or
redemption money in the necessary amount has been theretofore deposited
with the Trustee or any Paying Agent (other than the Company) in trust
or set aside and segregated in trust by the Company (if the Company
shall act as its own Paying Agent) for the Holders of such Securities;
provided that, if such Securities are to be redeemed, notice of such
redemption has been duly given pursuant to this Indenture;
(iii) Securities, except to the extent provided in Sections
1202 and 1203, with respect to which the Company has effected
defeasance and/or covenant defeasance as provided in Article Twelve;
and
(iv) Securities which have been paid pursuant to Section 306
or in exchange for or in lieu of which other Securities have been
authenticated and delivered pursuant to this Indenture, other than any
such Securities in respect of which there shall have been presented to
the Trustee proof satisfactory to it that such Securities are held by a
bona fide purchaser in whose hands the Securities are valid obligations
of the Company;
provided, however, that in determining whether the Holders of the requisite
principal amount at maturity of Outstanding Securities have given any request,
demand, authorization, direction, consent, notice or waiver hereunder, and for
the purpose of making the calculations required by TIA Section 313, Securities
owned by the Company or any other obligor upon the Securities or any Affiliate
of the Company or such other obligor shall be disregarded and deemed not to be
Outstanding, except that, in determining whether the Trustee shall be protected
in making such calculation or in relying upon any such request, demand,
authorization, direction, notice, consent or waiver, only Securities which any
Responsible Officer of the Trustee knows to be so owned shall be so disregarded.
Securities so owned which have been pledged in good faith may be regarded as
Outstanding if the pledgee establishes to the satisfaction of the Trustee the
pledgee's right so to act with respect to such Securities and that the pledgee
is not the Company or any other obligor upon the Securities or any Affiliate of
the Company or such other obligor.
"Paying Agent" means any Person (including the Company acting
as Paying Agent) authorized by the Company to pay the principal or Accreted
Value of (and premium, if any) or interest on any Securities on behalf 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.
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<PAGE>
"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 Section 1018; (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 pursuant to Section
1020; 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.
"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'
business 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
4.1-14
<PAGE>
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.
"Physical Security" means Securities issued in registered
definitive form without coupons substantially in the form of Exhibit A.
"Predecessor Security" of any particular Security means every
previous Security evidencing all or a portion of the same debt as that evidenced
by such particular Security; and, for the purposes of this definition, any
Security authenticated and delivered under Section 306 in exchange for a
mutilated security or in lieu of a lost, destroyed or stolen Security shall be
deemed to evidence the same debt as the mutilated, lost, destroyed or stolen
Security.
"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.
"Private Placement Legend" means the third paragraph of the
legend set forth in the Securities in the form set forth in Exhibit A.
"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.
"Purchase Amount" has the meaning specified in "Offer to Purchase"
above.
"Purchase Date" has the meaning specified in "Offer to Purchase"
above.
"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
4.1-15
<PAGE>
that the proceeds of such Debt are expended for such purposes within such 270-
day period.
"Purchase Price" has the meaning specified in "Offer to Purchase"
above.
"Qualified Institutional Buyer" or "QIB" has the meaning specified
in Rule 144A.
"Rating Decline" means the Securities cease to be rated B+ (or
the equivalent thereof) or better by Standard & Poor's Ratings Services 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.
"Redemption Date", when used with respect to any Security to
be redeemed, in whole or in part, means the date fixed for such redemption by or
pursuant to this Indenture.
"Redemption Price", when used with respect to any Security to
be redeemed, means the price at which it is to be redeemed pursuant to this
Indenture.
"Registration Agreement" means the Registration Agreement
between the Company and the Initial Purchasers named therein, dated as of
October 15, 1997, relating to the Securities.
"Registration Statement" means the Registration Statement as
defined in the Registration Agreement.
"Regular Record Date" for the interest payable on any Interest
Payment Date means the October 1 or April 1 (whether or not a Business Day), as
the case may be, next preceding such Interest Payment Date.
"Regulation S" means Regulation S under the Securities Act.
"Regulation S Global Security" has the meaning specified in
Section 303.
"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.
"Responsible Officer", when used with respect to the Trustee,
means any officer within the Trustee's Corporate Trust Office, including any
vice president, the Managing Director, the secretary, any assistant secretary,
any assistant treasurer, or any other officer of the Trustee customarily
performing functions similar to those performed by any of the above-designated
officers, and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
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<PAGE>
"Restricted Payment" has the meaning specified in Section 1013.
"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 (by a Board Resolution)
as an Unrestricted Subsidiary pursuant to and in compliance with Section 1021.
"Restricted Subsidiary Guarantee" means a supplemental
indenture to this Indenture, in form satisfactory to the Trustee, executed in
accordance with Article Nine, providing for an unconditional Guarantee of
payment in full of the principal of, premium, if any, and interest on the
Securities. 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.
"Revocation" has the meaning specified in Section 1021.
"Rule 144A" means Rule 144A under the Securities Act.
"Rule 144A Global Security" has the meaning specified in Section
303.
"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.
"Securities" means any of the Securities, as defined in the
recitals of this Indenture, that are authenticated and delivered under this
Indenture. For all purposes of this Indenture, the "Securities" shall include
the Initial Securities initially issued on October 15, 1997 and any Exchange
Securities to be issued and exchanged for any Initial Securities pursuant to the
Registration Agreement and this Indenture and any other Notes issued after
October 15, 1997 under this Indenture. For purposes of this Indenture, all
Securities shall vote together as one series of Securities under this Indenture.
"Securities Act" means the Securities Act of 1933, as amended.
"Security Register" and "Security Registrar" have the respective
meanings specified in Section 305.
"Senior Notes" means the Company's 107/8% Series B Senior
Notes Due 2007 which were issued on August 28, 1997 to exchange the Company's
107/8% Senior Notes Due 2007, issued on March 31, 1997.
"Shelf Registration Statement" means the Shelf Registration
Statement as defined in the Registration Agreement.
"Special Record Date" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 307.
"Stated Maturity", when used with respect to any Security or
any installment of interest thereon, means the date specified in such Security
as
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<PAGE>
the fixed date on which the principal amount at maturity of such Security 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.
"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 Securities 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 Accreted Value (or premium, if any) or interest on the Securities
exists; (ii) in the event that any other Default exists with respect to the
Securities, upon notice by 25% or more in principal amount at maturity of the
Securities, 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 Securities 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 Securities, 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 in Section 1010 (and which shall provide that such Debt shall not be
repurchased pursuant to such provisions prior to the Company's repurchase of the
Securities required to be repurchased by the Company pursuant to the provisions
of Section 1010).
"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, data
or video 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
4.1-18
<PAGE>
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.
"Trust Indenture Act" or "TIA" means the Trust Indenture Act
of 1939 as in force at the date as of which this Indenture was executed, except
as provided in Section 905.
"Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.
"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with Section 1021.
"Vice President", when used with respect to the Company or the
Trustee, means any vice president, whether or not designated by a number or a
word or words added before or after the title "vice president".
"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.
"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.
SECTION 102. Compliance Certificates and Opinions.
Upon any application or request by the Company to the Trustee
to take any action under any provision of this Indenture, the Company shall
furnish to the Trustee an Officers' Certificate stating that all conditions
precedent, if any, provided for in this Indenture (including any covenant
compliance with which constitutes a condition precedent) relating to the
proposed action have been complied with and an Opinion of Counsel stating that
in the opinion of such counsel all such conditions precedent, if any, have been
complied with, except that in the case of any such application or request as to
which the furnishing of such documents is specifically required by any provision
of this Indenture relating to such particular application or request, no
additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than pursuant to
Section 1009(a)) shall include:
(1) a statement that each individual signing such certificate
or opinion has read such covenant or condition and the definitions
herein relating thereto;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
4.1-19
<PAGE>
(3) a statement that, in the opinion of each such individual,
he has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether, in the opinion of each such
individual, such condition or covenant has been complied with.
SECTION 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company stating that the
information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
(with proper identification of each matter covered therein) and form one
instrument.
SECTION 104. Acts of Holders.
(a) Any request, demand, authorization, direction, notice,
consent, waiver or other action provided by this Indenture to be given or taken
by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the Trustee and
the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any
such instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by a signer acting in a capacity other than his individual
capacity, such certificate or affidavit shall also constitute
4.1-20
<PAGE>
sufficient proof of authority. The fact and date of the execution of any such
instrument or writing, or the authority of the Person executing the same, may
also be proved in any other manner that the Trustee deems sufficient.
(c) The principal amount at maturity and serial numbers of
Securities held by any Person, and the date of holding the same, shall be proved
by the Security Register.
(d) If the Company shall solicit from the Holders of
Securities any request, demand, authorization, direction, notice, consent,
waiver or other Act, the Company may, at its option, by or pursuant to a Board
Resolution, fix in advance a record date for the determination of Holders
entitled to give such request, demand, authorization, direction, notice,
consent, waiver or other Act, but the Company shall have no obligation to do so.
Notwithstanding TIA Section 316(c), such record date shall be the record date
specified in or pursuant to such Board Resolution, which shall be a date not
earlier than the date 30 days prior to the first solicitation of Holders
generally in connection therewith and not later than the date such solicitation
is completed. If such a record date is fixed, such request, demand,
authorization, direction, notice, consent, waiver or other Act may be given
before or after such record date, but only the Holders of record at the close of
business on such record date shall be deemed to be Holders for the purposes of
determining whether Holders of the requisite proportion of Outstanding
Securities have authorized or agreed or consented to such request, demand,
authorization, direction, notice, consent, waiver or other Act, and for that
purpose the Outstanding Securities shall be computed as of such record date;
provided that no such authorization, agreement or consent by the Holders on such
record date shall be deemed effective unless it shall become effective pursuant
to the provisions of this Indenture not later than eleven months after the
record date.
(e) Any request, demand, authorization, direction, notice,
consent, waiver or other Act of the Holder of any Security shall bind every
future Holder of the same Security and the Holder of every Security issued upon
the registration of transfer thereof or in exchange therefor or in lieu thereof
in respect of anything done, omitted or suffered to be done by the Trustee or
the Company in reliance thereon, whether or not notation of such action is made
upon such Security.
SECTION 105. Notices, Etc., to Trustee and Company.
Any request, demand, authorization, direction, notice,
consent, waiver or Act of Holders or other document provided or permitted by
this Indenture to be made upon, given or furnished to, or filed with,
(1) the Trustee by any Holder or by the Company shall be
sufficient for every purpose hereunder if made, given, furnished or
filed in writing to or with the Trustee at its Corporate Trust Office,
Attention: Corporate Market Services, or
(2) the Company by the Trustee or by any Holder shall be
sufficient for every purpose hereunder (unless otherwise herein
expressly provided) if in writing and mailed, first-class postage
prepaid, to the Company addressed to it at the address of its principal
office specified in the first paragraph of this Indenture, or at any
other address previously furnished in writing to the Trustee by the
Company.
SECTION 106. Notice to Holders; Waiver.
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<PAGE>
Where this Indenture provides for notice of any event to
Holders by the Company or the Trustee, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, to each Holder affected by such event, at the
address of such Holder as it appears in the Security Register, not later than
the latest date, and not earlier than the earliest date, prescribed for the
giving of such notice. In any case where notice to Holders is given by mail,
neither the failure to mail such notice, nor any defect in any notice so mailed,
to any particular Holder shall affect the sufficiency of such notice with
respect to other Holders. Any notice mailed to a Holder in the manner herein
prescribed shall be conclusively deemed to have been received by such Holder,
whether or not such Holder actually receives such notice. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
In case by reason of the suspension of or irregularities in
regular mail service or by reason of any other cause, it shall be impracticable
to mail notice of any event to Holders when such notice is required to be given
pursuant to any provision of this Indenture, then any manner of giving such
notice as shall be satisfactory to the Trustee shall be deemed to be a
sufficient giving of such notice for every purpose hereunder.
SECTION 107. Effect of Headings and Table of Contents.
The Article and Section headings herein and the Table of
Contents are for convenience only and shall not affect the construction hereof.
SECTION 108. Successors and Assigns.
All covenants and agreements in this Indenture by the Company
shall bind its successors and assigns, whether so expressed or not.
SECTION 109. Separability Clause.
In case any provision in this Indenture or in the Securities
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
SECTION 110. Benefits of Indenture.
Nothing in this Indenture or in the Securities, express or
implied, shall give to any Person, other than the parties hereto, any Paying
Agent, any Security Registrar and their successors hereunder and the Holders any
legal or equitable right, remedy or claim under this Indenture.
SECTION 111. Governing Law.
This Indenture and the Securities shall be governed by and
construed in accordance with the law of the State of New York.
SECTION 112. Conflict with Trust Indenture Act.
Prior to the issuance of the Exchange Securities or the
effectiveness of the Shelf Registration Statement, the Trust Indenture Act shall
apply as a matter of contract to this Indenture for purposes of interpretation,
construction and defining the rights and obligations hereunder. Upon the
issuance of the Exchange Securities or the effectiveness
4.1-22
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of the Shelf Registration Statement, this Indenture shall be subject to the
provisions of the Trust Indenture Act that are required to be part of this
Indenture and shall, to the extent applicable, be governed by such provisions.
If any provision hereof limits, qualifies or conflicts with any provision of the
Trust Indenture Act or another provision which is required or deemed to be
included in this Indenture by any of the provisions of the Trust Indenture Act,
such provision or requirement of the Trust Indenture Act shall control.
If any provision of this Indenture modifies or excludes any
provision of the Trust Indenture Act that may be so modified or excluded, the
latter provision shall be deemed to apply to this Indenture as so modified or
excluded, as the case may be.
SECTION 113. Legal Holidays.
In any case where any Interest Payment Date, Redemption Date,
or Stated Maturity or Maturity of any Security shall not be a Business Day, then
(notwithstanding any other provision of this Indenture or of the Securities)
payment of principal or Accreted Value (or premium, if any) or interest need not
be made on such date, but may be made on the next succeeding Business Day with
the same force and effect as if made on the Interest Payment Date or Redemption
Date or at the Stated Maturity or Maturity; provided that no interest shall
accrue for the period from and after such Interest Payment Date, Redemption
Date, Stated Maturity or Maturity, as the case may be.
SECTION 114. 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 Securities or this 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 Security, 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 Securities.
SECTION 115. Independence of Covenants.
All covenants and agreements in this Indenture shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or be otherwise within the limitations of, another covenant shall not avoid
the occurrence of a Default if such action is taken or condition exists.
SECTION 116. Exhibits.
All exhibits attached hereto are by this reference made a part
hereof with the same effect as if herein set forth in full.
SECTION 117. Counterparts.
This Indenture may be executed in any number of counterparts,
each of which shall be an original; but such counterparts shall together
constitute but one and the same instrument.
4.1-23
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SECTION 118. Duplicate Originals.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
ARTICLE TWO
SECURITY FORMS
SECTION 201. Forms Generally.
The Securities and the Trustee's certificate of authentication
with respect thereto shall be in substantially the form set forth in Exhibit A
hereto, with such appropriate insertions, omissions, substitutions and other
variations as are required or permitted by this Indenture, and may have such
letters, numbers or other marks of identification and such legends or
endorsements placed thereon as may be required to comply with the rules of any
securities exchange or system on which the Securities may be listed or eligible
for trading or as may, consistently herewith, be determined by the officers
executing such Securities, as evidenced by their execution of the Securities.
Any portion of the text of any Security may be set forth on the reverse thereof,
with an appropriate reference thereto on the face of the Security.
The definitive Securities shall be printed, lithographed or
engraved on steel-engraved borders or may be produced in any other manner
permitted by the rules of any securities exchange or system on which the
Securities may be listed or eligible for trading, all as determined by the
officers of the Company executing such Securities, as evidenced by their
execution of such Securities.
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms.
The aggregate principal amount at maturity of Securities which
may be authenticated and delivered under this Indenture is limited to
$555,890,000, except for Securities authenticated and delivered upon
registration of transfer of, or in exchange for, or in lieu of, other Securities
pursuant to Section 304, 305, 306, 906, 1010, 1018 or 1108.
The Initial Securities shall be known and designated as the
"9.47% Senior Discount Notes Due 2007" and the Exchange Securities shall be
known as the "9.47% Series B Senior Discount Notes". Their Stated Maturity shall
be October 15, 2007, and they shall bear interest at the rate of 9.47% per annum
from October 15, 2002, or from the most recent Interest Payment Date to which
interest has been paid or duly provided for, payable on April 15, 2003 and
semiannually thereafter on April 15 and October 15, in each year and at said
Stated Maturity, until the principal amount at maturity thereof is paid or duly
provided for; provided, however, that the Company may elect, upon not less than
60 days' prior notice to the Holders and the Trustee in accordance with Section
105 and Section 106 hereof, to commence the accrual of cash interest on all
Outstanding Securities on any April 15 or October 15 on or after October 15,
2000 and prior to October 15, 2002, in which case the Outstanding principal
amount at Stated Maturity of each Security will on such commencement date be
reduced to the Accreted Value of such Security as of such
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date and cash interest shall be payable with respect to such Security on each
April 15 and October 15 thereafter. Interest will be computed on the basis of a
360-day year comprised of twelve 30-day months.
Principal or Accreted Value of, premium, if any, and interest
on the Securities will be payable, and the Securities may be exchanged or
transferred, at the office or agency of the Company in the City of New York,
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
addresses of the Persons entitled thereto as such addresses shall appear on the
Security Register.
The interest rate on the Securities is subject to increase by
the addition of Liquidated Interest and otherwise, all as set forth or referred
to in the text of the Securities appearing in Exhibit A hereto.
The Securities shall be redeemable as provided in Article
Eleven.
At the election of the Company, the entire Debt on the
Securities or certain of the Company's obligations and covenants and certain
Events of Default thereunder may be defeased as provided in Article Twelve.
The Securities will be senior unsecured obligations of the
Company, ranking pari passu in right of payment with all existing and future
senior unsecured Debt of the Company, and will be senior in right of payment to
all existing and future Subordinated Debt of the Company.
SECTION 302. Denominations.
The Securities will be issued without coupons and in fully
registered form only, in minimum denominations of $1,000 principal amount at
maturity and integral multiples thereof.
SECTION 303. Execution, Authentication, Delivery and Dating.
The Securities shall be executed on behalf of the Company by
its Chief Executive Officer, its President or a Vice President under its
corporate seal reproduced thereon. The signature of any of these officers on the
Securities may be manual or facsimile signatures of the present or any future
such authorized officer and may be imprinted or otherwise reproduced on the
Securities. The seal of the Company may be in the form of a facsimile thereof
and may be impressed, affixed, imprinted or otherwise reproduced on the
Securities.
Securities bearing the manual or facsimile signatures of
individuals who were at any time the proper officers of the Company shall bind
the Company, notwithstanding that such individuals or any of them have ceased to
hold such offices prior to the authentication and delivery of such Securities or
did not hold such offices at the date of such Securities. In addition, any
Security may be signed on behalf of the Company by such Persons as, at the
actual date of the execution of such Security, shall be the proper officers of
the Company, although at the date of such Security or of the execution of this
Indenture any such Person was not such officer.
At any time and from time to time after the execution and
delivery of this Indenture, the Company may deliver Securities executed by the
Company to the Trustee for authentication, together with a Company Order for the
authentication and delivery of such Securities, and the Trustee in accordance
with such Company Order shall authenticate and deliver such Securities.
Each Security shall be dated the date of its authentication.
4.1-25
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No Security shall be entitled to any benefit under this
Indenture or be valid or obligatory for any purpose unless there appears on such
Security a certificate of authentication substantially in the form provided for
herein duly executed by the Trustee by manual signature of an authorized
signatory, and such certificate upon any Security shall be conclusive evidence,
and the only evidence, that such Security has been duly authenticated and
delivered hereunder and is entitled to the benefits of this Indenture.
The Trustee shall authenticate Securities for original issue
in an aggregate principal amount at maturity not to exceed $555,890,000 upon
receipt of a Company Order, which shall, specify the amount of Securities to be
authenticated, the names of the persons in which such Securities shall be
registered and the date on which such Securities are to be authenticated and
direct the Trustee to authenticate such Securities together with an Officers'
Certificate certifying that all conditions precedent to the issuance of such
Securities contained herein have been complied with. The aggregate principal
amount at maturity of Securities Outstanding at any time shall not exceed
$555,890,000, except as provided in Section 304.
Except as described below, the Securities will be deposited
with, or on behalf of, the Depository, and registered in the name of Cede & Co.
as the Depository's nominee in the form of a global note certificate
substantially in the form of Exhibit A (the "Rule 144A Global Security"), for
credit to the respective accounts of the beneficial owners of the Securities
represented thereby.
Securities purchased by persons outside the United States
pursuant to sales in accordance with Regulation S under the Securities Act shall
be deposited with, or on behalf of, the Depository, and registered in the name
of Cede & Co. as the Depository's nominee in the form of one or more global note
certificates substantially in the form of Exhibit A (each a "Regulation S Global
Security"), for credit to the respective accounts of the beneficial owners of
the Securities represented thereby (or such other accounts as they may direct),
provided that upon such deposit all such Securities shall be credited to or
through accounts maintained at the Depository by or on behalf of the Euroclear
System or Cedel Bank, societe anonyme. Securities represented by a Regulation S
Global Security will not be exchangeable for Physical Securities until the
expiration of the "40-day restricted period" within the meaning of Rule
903(c)(3) of Regulation S under the Securities Act.
In case the Company, pursuant to Article Eight, shall be
consolidated or merged with or into any other Person or shall convey, transfer,
lease or otherwise dispose of its properties and assets substantially as an
entirety to any Person, and the successor Person resulting from such
consolidation, or surviving such merger, or into which the Company shall have
been merged, or the Person which shall have received a conveyance, transfer,
lease or other disposition as aforesaid, shall have executed an indenture
supplemental hereto with the Trustee pursuant to Article Eight, any of the
Securities authenticated or delivered prior to such consolidation, merger,
conveyance, transfer, lease or other disposition may, from time to time, at the
request of the successor Person, be exchanged for other Securities executed in
the name of the successor Person with such changes in phraseology and form as
may be appropriate, but otherwise in substance of like tenor as the Securities
surrendered for such exchange and of like principal amount; and the Trustee,
upon Company Request of the successor Person, shall authenticate and deliver
Securities as specified in such request for the purpose of such exchange. If
Securities shall at any time be authenticated and delivered in any new name of a
successor Person pursuant to this Section in exchange or substitution for or
upon registration of transfer of any Securities, such successor Person, at the
option of the Holders but without
4.1-26
<PAGE>
expense to them, shall provide for the exchange of all Securities at the time
Outstanding for Securities authenticated and delivered in such new name.
SECTION 304. Temporary Securities.
Pending the preparation of definitive Securities, the Company
may execute, and upon Company Order the Trustee shall authenticate and deliver,
temporary Securities which are printed, lithographed, typewritten, mimeographed
or otherwise produced, in any authorized denomination, substantially of the
tenor of the definitive Securities in lieu of which they are issued and with
such appropriate insertions, omissions, substitutions and other variations as
the officers executing such Securities may determine, as conclusively evidenced
by their execution of such Securities.
If temporary Securities are issued, the Company will cause
definitive Securities to be prepared without unreasonable delay. After the
preparation of definitive Securities, the temporary Securities shall be
exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for such purpose
pursuant to Section 1002, without charge to the Holder. Upon surrender for
cancellation of any one or more temporary Securities, the Company shall execute
and the Trustee shall authenticate and deliver in exchange therefor a like
principal amount at maturity of definitive Securities of authorized
denominations. Until so exchanged, the temporary Securities shall in all
respects be entitled to the same benefits under this Indenture as definitive
Securities.
SECTION 305. Registration, Registration of Transfer and Exchange.
The Company shall cause to be kept at the Corporate Trust
Office of the Trustee a register (the register maintained in such office and in
any other office or agency designated pursuant to Section 1002 being herein
sometimes referred to as the "Security Register") in which, subject to such
reasonable regulations as it may prescribe, the Company shall provide for the
registration of Securities and of transfers and exchange of Securities. The
Security Register shall be in written form or any other form capable of being
converted into written form within a reasonable time. At all reasonable times,
the Security Register shall be open to inspection by the Trustee. The Trustee is
hereby initially appointed as security registrar (the "Security Registrar") for
the purpose of registering Securities and transfers and exchanges of Securities
as herein provided.
Upon surrender for registration of transfer of any Security at
the office or agency of the Company designated pursuant to Section 1002, the
Company shall execute, the Trustee shall authenticate and deliver, and the
Security Registrar shall register, if the requirements, of such transfer are
met, in the name of the designated transferee or transferees, one or more new
Securities of any authorized denomination or denominations of a like aggregate
principal amount at maturity.
At the option of the Holder, Securities may be exchanged for
other Securities of any authorized denomination and of a like aggregate
principal amount at maturity (including an exchange of Initial Securities for
Exchange Securities), upon surrender of the Securities to be exchanged at such
office or agency. Whenever any Securities are so surrendered for exchange, the
Company shall execute, the Trustee shall authenticate and deliver, and the
Security Registrar shall register, the Securities which the Holder making the
exchange is entitled to receive, provided that no exchange of Initial Securities
for Exchange Securities shall occur until an Exchange Offer Registration
Statement shall have been declared effective by the Commission
4.1-27
<PAGE>
(confirmed in an Officer's Certificate) and that the Initial Securities to be
exchanged for the Exchange Securities shall be cancelled by the Trustee.
All Securities issued upon any registration of transfer or
exchange of Securities shall be the valid obligations of the Company, evidencing
the same debt, and entitled to the same benefits under this Indenture, as the
Securities surrendered upon such registration of transfer or exchange.
Every Security presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company or the Security
Registrar) be duly endorsed, or be accompanied by a written instrument of
transfer, in form satisfactory to the Company and the Security Registrar, duly
executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of
transfer or exchange or redemption of Securities, but the Company may require
payment of a sum sufficient to cover any tax or other governmental charge that
may be imposed in connection with any registration of transfer or exchange of
Securities, other than exchanges pursuant to Section 304, 906, 1010, 1018 or
1108 not involving any transfer.
The Company shall not be required (i) to issue, register the
transfer of or exchange any Security during a period beginning at the opening of
business 15 days before the selection of Securities to be redeemed under Section
1104 and ending at the close of business on the day of such mailing of the
relevant notice of redemption or (ii) to register the transfer of or exchange
any Security so selected for redemption in whole or in part, except the
unredeemed portion of any Security being redeemed in part.
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities.
If (i) any mutilated Security is surrendered to the Trustee or
(ii) the Company and the Trustee receive evidence to their satisfaction of the
destruction, loss or theft of any Security, and there is delivered to the
Company and the Trustee such security or indemnity as may be required by them to
save each of them harmless, then, in the absence of notice to the Company or the
Trustee that such Security has been acquired by a bona fide purchaser, the
Company shall execute and upon Company Order the Trustee shall authenticate and
deliver, in exchange for any such mutilated Security or in lieu of any such
destroyed, lost or stolen Security, a new Security of like tenor and principal
amount at maturity, bearing a number not contemporaneously outstanding.
In case any such mutilated, destroyed, lost or stolen Security
has become or is about to become due and payable, the Company in its discretion
may, instead of issuing a new Security, pay such Security.
Upon the issuance of any new Security under this Section, the
Company may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.
Every new Security issued pursuant to this Section in lieu of
any mutilated, destroyed, lost or stolen Security shall constitute an original
additional contractual obligation of the Company, whether or not the mutilated,
destroyed, lost or stolen Security shall be at any time enforceable by anyone,
and shall be entitled to all benefits of this Indenture equally and
proportionately with any and all other Securities duly issued hereunder.
4.1-28
<PAGE>
The provisions of this Section are exclusive and shall
preclude (to the extent lawful) all other rights and remedies with respect to
the replacement or payment of mutilated, destroyed, lost or stolen Securities.
SECTION 307. Payment of Interest; Interest Rights Preserved.
Interest on any Security which is payable, and is punctually
paid or duly provided for, on any Interest Payment Date shall be paid to the
Person in whose name such Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such interest
at the office or agency of the Company maintained for such purpose pursuant to
Section 1002; provided, however, that each installment of interest may at the
Company's option be paid by mailing a check for such interest, payable to or
upon the written order of the Person entitled thereto pursuant to Section 308,
to the address of such Person as it appears in the Security Register.
Any interest on any Security which is payable, but is not
punctually paid or duly provided for, on any Interest Payment Date shall
forthwith cease to be payable to the Holder on the Regular Record Date by virtue
of having been such Holder, and such defaulted interest and (to the extent
lawful) interest on such defaulted interest at the rate borne by the Securities
(such defaulted interest and interest thereon herein collectively called
"Defaulted Interest") may be paid by the Company, at its election in each case,
as provided in paragraph (1) or (2) below:
(1) The Company may elect to make payment of any Defaulted
Interest to the Persons in whose names the Securities (or their
respective Predecessor Securities) are registered at the close of
business on a Special Record Date for the payment of such Defaulted
Interest, which shall be fixed in the following manner. The Company
shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Security and the date of the proposed
payment, and at the same time the Company shall deposit with the
Trustee an amount of money equal to the aggregate amount proposed to be
paid in respect of such Defaulted Interest or shall make arrangements
satisfactory to the Trustee for such deposit prior to the date of the
proposed payment, such money when deposited to be held in trust for the
benefit of the Persons entitled to such Defaulted Interest as in this
clause provided. Thereupon the Trustee shall fix a Special Record Date
for the payment of such Defaulted Interest which shall be not more than
15 days and not less than 10 days prior to the date of the proposed
payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify
the Company of such Special Record Date, and in the name and at the
expense of the Company, shall cause notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor to be
given in the manner provided for in Section 106, not less than 10 days
prior to such Special Record Date. Notice of the proposed payment of
such Defaulted Interest and the Special Record Date therefor having
been so given, such Defaulted Interest shall be paid to the Persons in
whose names the Securities (or their respective Predecessor Securities)
are registered at the close of business on such Special Record Date and
shall no longer be payable pursuant to the following paragraph (2).
(2) The Company may make payment of any Defaulted Interest in
any other lawful manner not inconsistent with the requirements of any
securities exchange or system on which the Securities may be listed or
eligible for trading, and upon such notice as may be required by such
exchange or system, if, after notice given by the Company to the
Trustee
4.1-29
<PAGE>
of the proposed payment pursuant to this clause, such manner of payment
shall be deemed practicable by the Trustee.
Subject to the foregoing provisions of this Section, each
Security delivered under this Indenture upon registration of transfer of or in
exchange for or in lieu of any other Security shall carry the rights to interest
accrued and unpaid, and to accrue, which were carried by such other Security.
SECTION 308. Persons Deemed Owners.
Prior to the due presentment of a Security for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name such Security is registered as the owner of
such Security for the purpose of receiving payment of principal or Accreted
Value of (and premium, if any) and (subject to Sections 305 and 307) interest on
such Security and for all other purposes whatsoever, whether or not such
Security be overdue, and none of the Company, the Trustee or any agent of the
Company or the Trustee shall be affected by notice to the contrary.
SECTION 309. Cancellation.
All Securities surrendered for payment, redemption,
registration of transfer or exchange shall, if surrendered to any Person other
than the Trustee, be delivered to the Trustee and shall be promptly cancelled by
it. The Company may at any time deliver to the Trustee for cancellation any
Securities previously authenticated and delivered hereunder which the Company
may have acquired in any manner whatsoever, and may deliver to the Trustee (or
to any other Person for delivery to the Trustee) for cancellation any Securities
previously authenticated hereunder which the Company has not issued and sold,
and all Securities so delivered shall be promptly cancelled by the Trustee. If
the Company shall so acquire any of the Securities, however, such acquisition
shall not operate as a redemption or satisfaction of the indebtedness
represented by such Securities unless and until the same are surrendered to the
Trustee for cancellation. No Securities shall be authenticated in lieu of or in
exchange for any Securities cancelled as provided in this Section, except as
expressly permitted by this Indenture. All cancelled Securities held by the
Trustee shall be disposed of by the Trustee in accordance with its customary
procedures and certification of their disposal delivered to the Company unless
by Company Order the Company shall direct that cancelled Securities be returned
to it.
SECTION 310. Computation of Interest.
Interest on the Securities shall be computed on the basis of a
360-day year comprised of twelve 30-day months.
SECTION 311. CUSIP Number.
The Company in issuing the Securities may use a "CUSIP" number
(if then generally in use), and if so, the Trustee may use the CUSIP numbers in
notices of redemption or exchange as a convenience to Holders; provided,
however, that any such notice may state that no representation is made as to the
correctness or accuracy of the CUSIP number printed in the notice or on the
Securities, and that reliance may be placed only on the other identification
numbers printed on the Securities. The Company shall promptly notify the Trustee
in writing of any change in the CUSIP number of the Securities.
SECTION 312. Book-Entry Provisions for Global Securities.
4.1-30
<PAGE>
(a) The Global Securities initially shall (i) be registered in
the name of the Depository or the nominee of such Depository, (ii) be delivered
to the Trustee as custodian for such Depository and (iii) bear legends as set
forth in Exhibit A.
Members of, or participants in, the Depository ("Agent
Members") shall have no rights under this Indenture with respect to any Global
Security held on their behalf by the Depository, or the Trustee as its
custodian, or under the Global Security, and the Depository may be treated by
the Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner of the Global Security for all purposes whatsoever.
Notwithstanding the foregoing, nothing herein shall prevent the Company, the
Trustee or any agent of the Company or the Trustee from giving effect to any
written certification, proxy or other authorization furnished by the Depository
or impair, as between the Depository and its Agent Members, the operation of
customary practices governing the exercise of the rights of a beneficial owner
of any Security.
(b) Transfers of Global Securities shall be limited to
transfers in whole, but not in part, to the Depository, its successors or their
respective nominees. Interests of beneficial owners in a Rule 144A Global
Security may be transferred or exchanged for interests in a Regulation S Global
Security, and interests of beneficial owners in a Regulation S Global Security
may be transferred or exchanged for interests in a Rule 144A Global Security, in
each case in accordance with the rules and procedures of the Depository and the
provisions of Section 313. In addition, Physical Securities shall be transferred
to all beneficial owners in exchange for their beneficial interests in a Global
Security if (i) the Depository notifies the Company that it is unwilling or
unable to continue as a depository for such Global Security or if at any time
the Depository ceases to be a clearing agency registered under the Exchange Act,
and a successor depository is not appointed by the Company within 90 days, (ii)
the Company executes and delivers to the Trustee a notice that such Global
Security shall be so transferable, registrable and exchangeable, and such
transfer shall be registrable, or (iii) there shall have occurred and be
continuing a Default or Event of Default with respect to the Securities
represented by such Global Security.
(c) In connection with the transfer of Global Securities as an
entirety to beneficial owners pursuant to paragraph (b), the Global Securities
shall be deemed to be surrendered to the Trustee for cancellation, and the
Company shall execute, and the Trustee shall authenticate and deliver, to each
beneficial owner identified by the Depository in exchange for its beneficial
interest in the Global Securities, an equal aggregate principal amount at
maturity of Physical Securities of like tenor of authorized denominations.
(d) Any Physical Security delivered in exchange for an
interest in a Global Security pursuant to paragraph (c) of this Section 312
shall, except as otherwise provided by (b)(1)(x) and paragraph (d) of Section
313, bear the legend regarding transfer restrictions applicable to the Physical
Securities set forth in Exhibit A.
(e) The Holder of any Global Security may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Securities.
SECTION 313. Special Transfer Provisions.
(a) Transfers to Non-QIB Institutional Accredited Investors.
The Initial Securities shall not be transferred to any Person that is not a
QIB or a non-U.S. Person.
4.1-31
<PAGE>
(b) Transfers to Non-U.S. Persons. The following provisions
shall apply with respect to the registration of any proposed transfer of an
Initial Security to any non-U.S. person:
(1) the Security Registrar shall register the transfer of any
Initial Security if (x) the requested transfer is not prior to the date
which is two years (or such shorter period as may be prescribed by Rule
144(k) under the Securities Act or any successor provision thereunder)
after the later of the original issue date of such Initial Security (or
of any Predecessor Security) or the last day on which the Company or
any Affiliate of the Company was the owner of such Initial Security or
any Predecessor Security or (y) the proposed transferee has delivered
to the Security Registrar a certificate substantially in the form of
Exhibit B hereto; and
(2) the Security Registrar shall register the transfer of any
Initial Security if the proposed transferor is an Agent Member holding
a beneficial interest in a Rule 144A Global Security, upon receipt by
the Security Registrar of (x) the certificate, if any, required by
paragraph (1) above and (y) instructions given in accordance with the
Depository's and the Security Registrar's procedures;
whereupon the Security Registrar shall reflect on its books and records the date
of such transfer and (A) (if the transfer involves a transfer of a beneficial
interest in a Rule 144A Global Security) a decrease in the principal amount of
such Rule 144A Global Security in an amount equal to the principal amount to be
transferred and (B) an increase in the principal amount of a Regulation S Global
Security in an amount equal to the principal amount to be transferred.
(c) Private Placement Legend. Upon the registration of
transfer, exchange or replacement of Initial Securities, the Security Registrar
shall deliver only Initial Securities that bear the Private Placement Legend
unless (i) (x) the circumstances contemplated by clause (b)(1)(x) of this
Section 313 exist or (y) such Security has been sold pursuant to an effective
registration statement under the Securities Act and (ii) there is delivered to
the Security Registrar and the Trustee an Opinion of Counsel reasonably
satisfactory to the Company and the Trustee to the effect that neither such
legend nor the related restrictions on transfer are required in order to
maintain compliance with the provisions of the Securities Act.
(d) Other Transfers. If a Holder proposes to transfer an
Initial Security pursuant to any exemption from the registration requirements
of the Securities Act other than as provided for by Section 313(a) and 313(b),
the Security Registrar shall only register such transfer or exchange if such
transferor delivers to the Security Registrar and the Trustee an Opinion of
Counsel satisfactory to the Company and the Security Registrar that such
transfer is in compliance with the Securities Act and the terms of this
Indenture; provided that the Company may, based upon the opinion of its
counsel, instruct the Security Registrar by a Company Order not to register
such transfer in any case where the proposed transferee is not a QIB or a non-
U.S. person.
(e) General. By its acceptance of any Security bearing the
Private Placement Legend, each Holder of such a Security acknowledges the
restrictions on transfer of such Security set forth in this Indenture and in the
Private Placement Legend and agrees that it will transfer such Security only as
provided in this Indenture.
4.1-32
<PAGE>
The Security Registrar shall retain copies of all letters,
notices and other written communications received pursuant to Section 312 or
this Section 313 for a period of two years, after which time such letters,
notices and other written communications shall at the written request of the
Company be delivered to the Company. The Company shall have the right to inspect
and make copies of all such letters, notices or other written communications at
any reasonable time upon the giving of reasonable prior written notice to the
Security Registrar.
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.
This Indenture shall upon Company Request cease to be of
further effect (except as to surviving rights of registration of transfer or
exchange of Securities expressly provided for herein or pursuant hereto) and the
Trustee, at the expense of the Company, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture when
(1) either
(a) all Securities theretofore authenticated and
delivered (other than (i) Securities which have been
destroyed, lost or stolen and which have been replaced or paid
as provided in Section 306 and (ii) Securities for whose
payment money has theretofore been deposited in trust with the
Trustee or any Paying Agent or segregated and held in trust by
the Company and thereafter repaid to the Company or discharged
from such trust as provided in Section 1003) have been
delivered to the Trustee for cancellation; or
(b) all such Securities not theretofore delivered to the
Trustee for cancellation
(i) have become due and payable, or
(ii) will become due and payable at their Stated
Maturity within one year, or
(iii) are to be called for redemption within
one year under 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, in the case of (i), (ii) or (iii) above, has
irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for such purpose an amount
sufficient to pay and discharge the entire indebtedness on
such Securities not theretofore delivered to the Trustee for
cancellation, for principal (and premium, if any) and interest
to the date of such deposit (in the case of Securities which
have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be;
(2) the Company has paid or caused to be paid all other sums
payable hereunder by the Company; and
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(3) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent herein provided for relating to the satisfaction and
discharge of this Indenture have been complied with.
Notwithstanding the satisfaction and discharge of this
Indenture, the obligations of the Company to the Trustee under Section 607 and,
if money shall have been deposited with the Trustee pursuant to clause (1)(b) of
this Section 401, the obligations of the Trustee under Section 402 and the last
paragraph of Section 1003 shall survive.
SECTION 402. Application of Trust Money.
Subject to the provisions of the last paragraph of Section
1003, all money deposited with the Trustee pursuant to Section 401 shall be held
in trust and applied by it, in accordance with the provisions of the Securities
and this Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Persons entitled thereto, of the principal (and premium, if
any) and interest for whose payment such money has been deposited with the
Trustee; but such money need not be segregated from other funds except to the
extent required by law.
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default.
"Event of Default", wherever used herein, means any one of the
following events (whatever the reason for such Event of Default and whether it
shall be voluntary or involuntary or be effected by operation of law or pursuant
to any judgment, decree or order of any court or any order, rule or regulation
of any administrative or governmental body):
(1) default in the payment of the principal or Accreted Value
of (or premium, if any, on) any Security at its Maturity; or
(2) default in the payment of any interest on any Security when
it becomes due and payable, and continuance of such default for a period
of 30 days; or
(3) default in the payment of principal or Accreted Value and
interest on any Security required to be purchased pursuant to an Offer
to Purchase pursuant to Section 1010 or 1018; or
(4) default in the performance, or breach, of Section 801 or
1018; or
(5) default in the performance, or breach, of any covenant or
warranty of the Company in this Indenture or in any Security (other
than a covenant or warranty a default in whose performance or whose
breach is elsewhere in this Section specifically dealt with), and
continuance of such default or breach for a period of 60 days after
there has been given, by registered or certified mail, to the Company
by the Trustee or to the Company and the Trustee by the Holders of at
least 25% in aggregate principal amount at maturity of the Outstanding
Securities a written notice specifying such default or breach and
requiring it to be remedied and stating that such notice is a "Notice
of Default" hereunder; or
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(6) a default or defaults under any bond(s), debenture(s),
note(s) or other evidence(s) of indebtedness by the Company or any
Restricted Subsidiary or under any mortgage(s), indenture(s) or
instrument(s) under which there may be issued or by which there may be
secured or evidenced any indebtedness of such type by the Company or
any such Restricted Subsidiary with a principal amount then
outstanding, individually or in the aggregate, in excess of $10
million, whether such indebtedness now exists or shall hereafter be
created, which default or defaults shall result in the acceleration of
the payment of such indebtedness or shall constitute a failure to pay
the principal of such indebtedness when due at the final maturity
thereof, or shall have resulted in excess of $10 million of
indebtedness becoming or being declared due and payable prior to the
date on which it would otherwise have become due and payable (after
expiration of any applicable grace period); or
(7) a final judgment or final judgments for the payment of
money are entered against the Company or any Restricted Subsidiary in
an aggregate amount in excess of $10 million by a court or courts of
competent jurisdiction, which judgment or judgments remain undischarged
or unbonded for a period (during which execution shall not be
effectively stayed) of 45 days after the right to appeal all such
judgments has expired; or
(8) the entry of a decree or order by a court having
jurisdiction in the premises adjudging the Company or any Restricted
Subsidiary a bankrupt or insolvent, or approving as properly filed a
petition seeking reorganization, arrangement, adjustment or composition
of or in respect of the Company or any Restricted Subsidiary under the
Federal Bankruptcy Code or any other applicable federal or state law,
or appointing a receiver, liquidator, assignee, trustee or sequestrator
(or other similar official) of the Company or any Restricted Subsidiary
or of any substantial part of its property, or ordering the winding up
or liquidation of its affairs, and the continuance of any such decree
or order unstayed and in effect for a period of 60 consecutive days; or
(9) the institution by the Company or any Restricted
Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or
the consent by it to the institution of bankruptcy or insolvency
proceedings against it, or the filing by it of a petition or answer or
consent seeking reorganization or relief under the Federal Bankruptcy
Code or any other applicable federal or state law, or the consent by it
to the filing of any such petition or to the appointment of a receiver,
liquidator, assignee, trustee or sequestrator (or other similar
official) of the Company or any Restricted Subsidiary or of any
substantial part of its property, or the making by it of an assignment
for the benefit of creditors, or the admission by it in writing of its
inability to pay its debts generally as they become due.
SECTION 502. Acceleration of Maturity; Rescission and Annulment.
If an Event of Default (other than an Event of Default
specified in Section 501(8) or (9)) occurs and is continuing, then and in every
such case the Trustee or the Holders of not less than 25% in principal amount at
maturity of the Outstanding Securities may declare the principal of all the
Securities to be due and payable immediately in an amount equal to the Accreted
Value of the Securities as of the date on which the Securities first become due
and payable (plus any accrued and unpaid interest and premium, if any, not
otherwise included in the Accreted Value to such date), by a notice in writing
to the Company (and to the Trustee if given by Holders), and upon any such
declaration such principal shall become immediately due and payable.
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If an Event of Default specified in Section 501(8) or (9) occurs and is
continuing, then the principal of all the Securities shall ipso facto become and
be immediately due and payable without any declaration or other act on the part
of the Trustee or any Holder in an amount equal to the Accreted Value of the
Securities as of the date on which the Securities first become due and payable
(plus any accrued and unpaid interest and premium, if any, not otherwise
included in the Accreted Value to such date).
At any time after a declaration of acceleration has been made
and before a judgment or decree for payment of the money due has been obtained
by the Trustee as hereinafter provided in this Article Five, the Holders of a
majority in principal amount at maturity of the Outstanding Securities, by
written notice to the Company and the Trustee, may rescind and annul such
declaration and its consequences if
(1) the Company has paid or deposited with the Trustee a sum
sufficient to pay
(A) all overdue interest on all Outstanding Securities,
(B) all unpaid principal at maturity of (and premium,
if any, on) any Outstanding Securities which has become due
otherwise than by such declaration of acceleration, and
interest on such unpaid principal at maturity at the rate
borne by the Securities,
(C) to the extent that payment of such interest is lawful,
interest on overdue interest at the rate borne by the Securities,
and
(D) all sums paid or advanced by the Trustee hereunder and
the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel; and
(2) all Events of Default, other than the nonpayment of
amounts of principal or Accreted Value of (or premium, if any, on)
Securities which have become due solely by such declaration of
acceleration, have been cured or waived as provided in Section 513.
No such rescission shall affect any subsequent default or impair any right
consequent thereon.
Notwithstanding the preceding paragraph, in the event that a
declaration of acceleration in respect of the Securities due to an Event of
Default specified in Section 501(6) shall have occurred and be continuing, such
declaration of acceleration shall be automatically annulled if the Debt that is
the subject of such Event of Default has been discharged or the holders thereof
have rescinded their declaration of acceleration in respect of such Debt, and
written notice of such discharge or rescission, as the case may be, shall have
been given to the Trustee by the Company and countersigned by the holders of
such Debt or a trustee, fiduciary or agent for such holders, within 30 days
after such declaration of acceleration in respect of the Securities, and no
other Event of Default has occurred during such 30-day period which has not been
cured or waived during such period.
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by Trustee.
The Company covenants that if
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(a) default is made in the payment of any installment of
interest on any Security when such interest becomes due and payable and
such default continues for a period of 30 days, or
(b) default is made in the payment of the principal or Accreted
Value of (or premium, if any, on) any Security at the Maturity thereof,
the Company will, upon demand of the Trustee, pay to the Trustee for the benefit
of the Holders of such Securities the whole amount then due and payable on such
Securities for principal or Accreted Value (and premium, if any) and interest,
and interest on any overdue principal or Accreted Value (and premium, if any)
and, to the extent that payment of such interest shall be legally enforceable,
upon any overdue installment of interest, at the rate borne by the Securities,
and, in addition thereto, such further amount as shall be sufficient to cover
the costs and expenses of collection, including the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel.
If the Company fails to pay such amounts forthwith upon such
demand, the Trustee, in its own name as trustee of an express trust, may
institute a judicial proceeding for the collection of the sums so due and
unpaid, may prosecute such proceeding to judgment or final decree and may
enforce the same against the Company or any other obligor upon the Securities
and collect the moneys adjudged or decreed to be payable in the manner provided
by law out of the property of the Company or any other obligor upon the
Securities, wherever situated.
If an Event of Default occurs and is continuing, the Trustee
may in its discretion proceed to protect and enforce its rights and the rights
of the Holders by such appropriate judicial proceedings as the Trustee shall
deem most effectual to protect and enforce any such rights, whether for the
specific enforcement of any covenant or agreement in this Indenture or in aid of
the exercise of any power granted herein, or to enforce any other proper remedy.
SECTION 504. Trustee May File Proofs of Claim.
In case of the pendency of any receivership, insolvency,
liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or
other judicial proceeding relative to the Company or any other obligor upon the
Securities or the property of the Company or of such other obligor or their
creditors, the Trustee (irrespective of whether the principal of the Securities
shall then be due and payable as herein expressed or by declaration or otherwise
and irrespective of whether the Trustee shall have made any demand on the
Company for the payment of overdue principal, Accreted Value, premium, if any,
or interest) shall be entitled and empowered, by intervention in such proceeding
or otherwise,
(i) to file and prove a claim for the whole amount of
principal at maturity (and premium, if any) and interest owing and
unpaid in respect of the Securities and to file such other papers or
documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee and its agents and
counsel) and of the Holders allowed in such judicial proceeding, and
(ii) to collect and receive any moneys or other property payable
or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator or sequestrator (or
other similar official) in any such judicial proceeding is hereby authorized
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<PAGE>
by each Holder to make such payments to the Trustee and, in the event that the
Trustee shall consent to the making of such payments directly to the Holders, to
pay the Trustee any amount due it for the reasonable compensation, expenses,
disbursements and advances of the Trustee and its agents and counsel, and any
other amounts due the Trustee under Section 607.
Nothing herein contained shall be deemed to authorize the
Trustee to authorize or consent to or accept or adopt on behalf of any Holder
any plan of reorganization, arrangement, adjustment or composition affecting the
Securities or the rights of any Holder thereof, or to authorize the Trustee to
vote in respect of the claim of any Holder in any such proceeding.
SECTION 505. Trustee May Enforce Claims Without Possession of
Securities.
All rights of action and claims under this Indenture or the
Securities may be prosecuted and enforced by the Trustee without the possession
of any of the Securities or the production thereof in any proceeding relating
thereto, and any such proceeding instituted by the Trustee shall be brought in
its own name and as trustee of an express trust, and any recovery of judgment
shall, after provision for the payment of the reasonable compensation, expenses,
disbursements and advances of the Trustee and its agents and counsel, be for the
ratable benefit of the Holders of the Securities in respect of which such
judgment has been recovered.
SECTION 506. Application of Money Collected.
Any money collected by the Trustee pursuant to this Article
Five shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
or Accreted Value (or premium, if any) or interest, upon presentation of the
Securities and the notation thereon of the payment if only partially paid and
upon surrender thereof if fully paid:
FIRST: To the payment of all amounts due the Trustee under
Section 607;
SECOND: To the payment of the amounts then due and unpaid for
principal or Accreted Value of (and premium, if any) and interest on
the Securities in respect of which or for the benefit of which such
money has been collected, ratably, without preference or priority of
any kind, according to the amounts due and payable on such Securities
for principal or Accreted Value (and premium, if any) and interest,
respectively; and
THIRD: The balance, if any, to the Person or Persons entitled
thereto.
SECTION 507. Limitation on Suits.
No Holder of any Securities shall have any right to institute
any proceeding, judicial or otherwise, with respect to this Indenture, or for
the appointment of a receiver or trustee, or for any other remedy hereunder,
unless
(1) such Holder has previously given written notice to the
Trustee of a continuing Event of Default;
(2) the Holders of not less than 25% in aggregate principal
amount at maturity of the Outstanding Securities shall have made written
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<PAGE>
request to the Trustee to institute proceedings in respect of such Event
of Default in its own name as Trustee hereunder;
(3) such Holder or Holders have offered to the Trustee
indemnity reasonably satisfactory to it against the costs, expenses and
liabilities to be incurred in compliance with such request;
(4) the Trustee for 60 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such
proceeding; and
(5) no direction inconsistent with such written request has
been given to the Trustee during such 60-day period by the Holders of a
majority or more in aggregate principal amount at maturity of the
Outstanding Securities;
it being understood and intended that no one or more Holders shall have any
right in any manner whatsoever by virtue of, or by availing of, any provision of
this Indenture to affect, disturb or prejudice the rights of any other Holders,
or to obtain or to seek to obtain priority or preference over any other Holders
or to enforce any right under this Indenture, except in the manner herein
provided and for the equal and ratable benefit of all the Holders.
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest.
Notwithstanding any other provision in this Indenture, the
Holder of any Security shall have the right, which is absolute and
unconditional, to receive payment as provided herein (including, if applicable,
Article Twelve) and in such Security of the principal and Accreted Value of (and
premium, if any) and (subject to Section 307) interest on such Security on the
respective Stated Maturities expressed in such Security (or, in the case of
redemption, on the Redemption Date) and to institute suit for the enforcement of
any such payment, and such rights shall not be impaired without the consent of
such Holder.
SECTION 509. Restoration of Rights and Remedies.
If the Trustee or any Holder has instituted any proceeding to
enforce any right or remedy under this Indenture and such proceeding has been
discontinued or abandoned for any reason, or has been determined adversely to
the Trustee or to such Holder, then and in every such case, subject to any
determination in such proceeding, the Company, the Trustee and the Holders shall
be restored severally and respectively to their former positions hereunder and
thereafter all rights and remedies of the Trustee and the Holders shall continue
as though no such proceeding had been instituted.
SECTION 510. Rights and Remedies Cumulative.
Except as otherwise provided with respect to the replacement
or payment of mutilated, destroyed, lost or stolen Securities in the last
paragraph of Section 306, no right or remedy herein conferred upon or reserved
to the Trustee or to the Holders is intended to be exclusive of any other right
or remedy, and every right and remedy shall, to the extent permitted by law, be
cumulative and in addition to every other right and remedy given hereunder or
now or hereafter existing at law or in equity or otherwise. The assertion or
employment of any right or remedy hereunder, or otherwise, shall not prevent the
concurrent assertion or employment of any other appropriate right or remedy.
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<PAGE>
SECTION 511. Delay or Omission Not Waiver.
No delay or omission of the Trustee or of any Holder of any
Security to exercise any right or remedy accruing upon any Event of Default
shall impair any such right or remedy or constitute a waiver of any such Event
of Default or an acquiescence therein. Every right and remedy given by this
Article Five or by law to the Trustee or to the Holders may be exercised from
time to time, and as often as may be deemed expedient, by the Trustee or by the
Holders, as the case may be.
SECTION 512. Control by Holders.
The Holders of not less than a majority in aggregate principal
amount at maturity of the Outstanding Securities shall 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,
provided that
(1) such direction shall not be in conflict with any rule of law
or with this Indenture,
(2) the Trustee may take any other action deemed proper by the
Trustee which is not inconsistent with such direction, and
(3) the Trustee need not take any action which might involve
it in personal liability or be unjustly prejudicial to the Holders not
consenting.
SECTION 513. Waiver of Past Defaults.
The Holders of not less than a majority in aggregate principal
amount at maturity of the Outstanding Securities may on behalf of the Holders of
all the Securities waive any past default hereunder and its consequences, except
a default
(1) in respect of the payment of the principal or Accreted Value
of (or premium, if any) or interest on any Security, or
(2) in respect of a covenant or provision hereof which under
Article Nine cannot be modified or amended without the consent of the
Holder of each Outstanding Security affected.
Upon any such waiver, such default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured, for
every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other default or Event of Default or impair any right consequent
thereon.
SECTION 514. Waiver of Stay or Extension Laws.
The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, or plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay or extension law
wherever enacted, now or at any time hereafter in force, which may affect the
covenants or the performance of this Indenture; and the Company (to the extent
that it may lawfully do so) hereby expressly waives all benefit or advantage of
any such law and covenants that it shall not hinder, delay or impede the
execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
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<PAGE>
ARTICLE SIX
THE TRUSTEE
SECTION 601. Certain Duties and Responsibilities.
(a) Except during the continuance of an Event of Default,
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture, and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture; but, in the case of any such certificates or opinions
which by any provision hereof are specifically required to be furnished
to the Trustee, the Trustee shall be under a duty to examine the same
to determine whether or not they conform to the requirements of this
Indenture.
(b) In case an Event of Default has occurred and is
continuing, the Trustee shall exercise such of the rights and powers vested in
it by this Indenture, and use the same degree of care and skill in their
exercise, as a prudent man would exercise or use under the circumstances in the
conduct of his own affairs.
(c) No provision of this Indenture shall be construed to
relieve the Trustee from liability for its own negligent action, its own
negligent failure to act or its own willful misconduct, except that
(1) this paragraph (c) shall not be construed to limit the
effect of paragraph (a) of this Section 601;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it shall be proved
that the Trustee was negligent in ascertaining the pertinent facts;
(3) the Trustee shall not be liable with respect to any action
taken or omitted to be taken by it in good faith in accordance with the
direction of the Holders of a majority in principal amount at maturity
of the Outstanding Securities relating to the time, method and place of
conducting any proceeding for any remedy available to the Trustee, or
exercising any trust or power conferred upon the Trustee, under this
Indenture; and
(4) no provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder, or in the
exercise of any of its rights or powers, if it shall have reasonable
grounds for believing that repayment of such funds or indemnity
reasonably satisfactory to it against such risk or liability is not
reasonably assured to it.
(d) Whether or not therein expressly so provided, every
provision of this Indenture relating to the conduct or affecting the liability
of or affording protection to the Trustee shall be subject to the provisions of
this Section 601.
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<PAGE>
SECTION 602. Notice of Default.
Within 60 days after the occurrence of any Default hereunder,
the Trustee shall transmit, in the manner and to the extent provided in TIA
Section 313(c), notice of such Default hereunder known to any Responsible
Officer of the Trustee, unless such Default shall have been cured or waived;
provided, however, that, except in the case of a Default in the payment of the
principal or Accreted Value of (or premium, if any) or interest on any Security,
the Trustee shall be protected in withholding such notice if and so long as the
board of directors, the executive committee or a trust committee of directors
and/or Responsible Officers of the Trustee in good faith determines that the
withholding of such notice is in the interest of the Holders; and provided
further that in the case of any Default of the character specified in Section
501(5) no such notice to Holders shall be given until at least 30 days after the
occurrence thereof.
SECTION 603. Certain Rights of Trustee.
Subject to Section 601 and to the provisions of TIA Sections
315(a) through 315(d):
(1) the Trustee may conclusively rely and shall be fully
protected in acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice, request,
direction, consent, order, bond, debenture, note, other evidence of
indebtedness or other paper or document believed by it to be genuine
and to have been signed or presented by the proper party or parties;
(2) any request or direction of the Company mentioned herein
shall be sufficiently evidenced by a Company Request or Company Order
and any resolution of the Board of Directors may be sufficiently
evidenced by a Board Resolution;
(3) whenever in the administration of this Indenture the
Trustee shall deem it desirable that a matter be proved or established
prior to taking, suffering or omitting any action hereunder, the
Trustee (unless other evidence be herein specifically prescribed) may,
in the absence of bad faith on its part, receive and rely upon an
Officers' Certificate;
(4) the Trustee may consult with counsel and the written
advice of such counsel or any Opinion of Counsel shall be full and
complete authorization and protection in respect of any action taken,
suffered or omitted by it hereunder in good faith and in reliance
thereon;
(5) the Trustee shall be under no obligation to exercise any
of the rights or powers vested in it by this Indenture at the request
or direction of any of the Holders pursuant to this Indenture, unless
such Holders shall have offered to the Trustee security or indemnity
reasonably satisfactory to it against the costs, expenses and
liabilities which might be incurred by it in compliance with such
request or direction;
(6) the Trustee shall not be bound to make any investigation
into the facts or matters stated in any resolution, certificate,
statement, instrument, opinion, report, notice, request, direction,
consent, order, bond, debenture, note, other evidence of indebtedness
or other paper or document, but the Trustee, in its discretion, may
make such further inquiry or investigation into such facts or matters
as it may see fit, and, if the Trustee shall determine to make such
further inquiry or investigation, it shall be entitled to examine the
books, records and premises of the Company, personally or by agent or
attorney;
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(7) the Trustee may execute any of the trusts or powers
hereunder or perform any duties hereunder either directly or by or
through agents or attorneys and the Trustee shall not be responsible
for any misconduct or negligence on the part of any agent or attorney
appointed with due care by it hereunder;
(8) the Trustee shall not be liable for any action taken,
suffered or omitted by it in good faith and believed by it to be
authorized or within the discretion or rights or powers conferred upon
it by this Indenture; and
(9) the Trustee shall have no duties, obligations or liability
in connection with any Event of Default hereunder unless a Responsible
Officer of the Trustee has knowledge thereof.
The Trustee shall not be required to expend or risk its own
funds or otherwise incur any financial liability in the performance of any of
its duties hereunder, or in the exercise of any of its rights or powers, if it
shall have reasonable grounds for believing that repayment of such funds or
adequate indemnity against such risk or liability is not reasonably assured to
it.
SECTION 604. Trustee Not Responsible for Recitals or Issuance of
Securities.
The recitals contained herein and in the Securities, except
for the Trustee's certificates of authentication, shall be taken as the
statements of the Company, and the Trustee assumes no responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Securities, except that the Trustee
represents that it is duly authorized to execute and deliver this Indenture,
authenticate the Securities and perform its obligations hereunder. The Trustee
shall not be accountable for the use or application by the Company of Securities
or the proceeds thereof.
SECTION 605. May Hold Securities.
The Trustee, any Paying Agent, any Security Registrar or any
other agent of the Company or of the Trustee, in its individual or any other
capacity, may become the owner or pledgee of Securities and, subject to TIA
Sections 310(b) and 311, may otherwise deal with the Company with the same
rights it would have if it were not Trustee, Paying Agent, Security Registrar or
such other agent.
SECTION 606. Money Held in Trust.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed with the Company.
SECTION 607. Compensation and Reimbursement.
The Company agrees:
(1) to pay to the Trustee from time to time reasonable
compensation for all services rendered by it hereunder (which
compensation shall not be limited by any provision of law in regard to
the compensation of a trustee of an express trust);
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(2) except as otherwise expressly provided herein, to
reimburse the Trustee upon its request for all reasonable expenses,
disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the
reasonable compensation and the expenses and disbursements of its
agents and counsel), except any such expense, disbursement or advance
as may be attributable to the Trustee's negligence or bad faith; and
(3) to indemnify the Trustee and its directors, officers,
employees and agents for, and to hold them harmless against, any loss,
liability or expense incurred without negligence or bad faith on the
part of any of them, arising out of or in connection with the
acceptance or administration of this trust, including the costs and
expenses of defending itself or themselves against any claim or
liability in connection with the exercise or performance of any of its
or their powers or duties hereunder.
The obligations of the Company under this Section 607 to
compensate the Trustee, to pay or reimburse the Trustee for expenses,
disbursements and advances and to indemnify and hold harmless the Trustee shall
constitute additional indebtedness hereunder and shall survive the satisfaction
and discharge of this Indenture or the earlier resignation or removal of the
Trustee. As security for the performance of such obligations of the Company, the
Trustee shall have a claim prior to the Securities upon all property and funds
held or collected by the Trustee as such, except funds held in trust for the
payment of principal or Accreted Value of (and premium, if any) or interest on
particular Securities.
When the Trustee incurs expenses or renders services in
connection with an Event of Default specified in Section 501(8) or (9), the
expenses (including the reasonable charges and expenses of its counsel) of and
the compensation for such services are intended to constitute expenses of
administration under any applicable federal or state bankruptcy, insolvency or
other similar law.
The provisions of this Section 607 shall survive the
termination of this Indenture or the earlier resignation or removal of the
Trustee.
SECTION 608. Corporate Trustee Required; Eligibility; Conflicting
Interests.
(a) There shall be at all times a Trustee hereunder which
shall be subject to and comply with the provisions of Section 310(a)(1) of the
Trust Indenture Act and shall have a combined capital and surplus of at least
$50,000,000. If such Corporation publishes reports of condition at least
annually, pursuant to law or to the requirements of federal, state, territorial
or District of Columbia supervising or examining authority, then, for the
purposes of this Section 608, the combined capital and surplus of such
Corporation shall be deemed to be its combined capital and surplus as set forth
in its most recent report of condition so published. If at any time the Trustee
shall cease to be eligible in accordance with the provisions of this Section
608, it shall resign immediately in the manner and with the effect hereinafter
specified in this Article Six.
(b) The Trustee shall be subject to and comply with Section
310(b) of the Trust Indenture Act.
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SECTION 609. Resignation and Removal; Appointment of Successor.
(a) No resignation or removal of the Trustee and no
appointment of a successor Trustee pursuant to this Article shall become
effective until the acceptance of appointment by the successor Trustee in
accordance with the applicable requirements of Section 610.
(b) The Trustee may resign at any time by giving written
notice thereof to the Company. If the instrument of acceptance by a successor
Trustee required by Section 610 shall not have been delivered to the Trustee
within 30 days after the giving of such notice of resignation, the resigning
Trustee may petition any court of competent jurisdiction for the appointment of
a successor Trustee.
(c) The Trustee may be removed at any time by Act of the
Holders of not less than a majority in aggregate principal amount at maturity of
the Outstanding Securities, delivered to the Trustee and to the Company.
(d) If at any time:
(1) the Trustee shall fail to comply with the provisions of
TIA Section 310(b) after written request therefor by the Company or by
any Holder who has been a bona fide Holder of a Security for at least
six months, or
(2) the Trustee shall cease to be eligible under Section
608(a) and shall fail to resign after written request therefor by the
Company or by any Holder who has been a bona fide Holder of a Security
for at least six months, or
(3) the Trustee shall become incapable of acting or shall be
adjudged a bankrupt or insolvent or a receiver of the Trustee or of its
property shall be appointed or any public officer shall take charge or
control of the Trustee or of its property or affairs for the purpose of
rehabilitation, conservation or liquidation,
then, in any such case, (i) the Company, by a Board Resolution, may remove the
Trustee or (ii) subject to TIA Section 315(e), any Holder who has been a bona
fide Holder of a Security for at least six months may, on behalf of himself and
all others similarly situated, petition any court of competent jurisdiction for
the removal of the Trustee and the appointment of a successor Trustee.
(e) If the Trustee shall resign, be removed or become
incapable of acting, or if a vacancy shall occur in the office of Trustee for
any cause, the Company, by a Board Resolution, shall promptly appoint a
successor Trustee. If, within one year after such resignation, removal or
incapability, or the occurrence of such vacancy, a successor Trustee shall be
appointed by Act of the Holders of a majority in aggregate principal amount at
maturity of the Outstanding Securities delivered to the Company and the retiring
Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance
of such appointment, become the successor Trustee and supersede the successor
Trustee appointed by the Company. If no successor Trustee shall have been so
appointed by the Company or the Holders and accepted appointment in the manner
hereinafter provided, any Holder who has been a bona fide Holder of a Security
for at least six months may, on behalf of himself and all others similarly
situated, petition any court of competent jurisdiction for the appointment of a
successor Trustee.
(f) The Company shall give notice of each resignation and each
removal of the Trustee and each appointment of a successor Trustee to the
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Holders of Securities in the manner provided for in Section 106. Each notice
shall include the name of the successor Trustee and the address of its Corporate
Trust Office.
(g) The retiring Trustee shall not be liable for any of the acts
or omissions of any successor Trustee appointed hereunder.
SECTION 610. Acceptance of Appointment by Successor.
Every successor Trustee appointed hereunder shall execute,
acknowledge and deliver to the Company and to the retiring Trustee an instrument
accepting such appointment, and thereupon the resignation or removal of the
retiring Trustee shall become effective and such successor Trustee, without any
further act, deed or conveyance, shall become vested with all the rights,
powers, trusts and duties of the retiring Trustee; but, on request of the
Company or the successor Trustee, such retiring Trustee shall, upon payment of
its charges, execute and deliver an instrument transferring to such successor
Trustee all the rights, powers and trusts of the retiring Trustee and shall duly
assign, transfer and deliver to such successor Trustee all property and money
held by such retiring Trustee hereunder. Upon request of any such successor
Trustee, the Company shall execute any and all instruments for more fully and
certainly vesting in and confirming to such successor Trustee all such rights,
powers and trusts.
No successor Trustee shall accept its appointment unless at
the time of such acceptance such successor Trustee shall be qualified and
eligible under this Article.
SECTION 611. Merger, Conversion, Consolidation or Succession to
Business.
Any Corporation into which the Trustee may be merged or
converted or with which it may be consolidated, or any Corporation resulting
from any merger, conversion or consolidation to which the Trustee shall be a
party, or any Corporation succeeding to all or substantially all of the
corporate trust business of the Trustee, shall be the successor of the Trustee
hereunder, provided that such Corporation shall be otherwise qualified and
eligible under this Article Six, without the execution or filing of any paper or
any further act on the part of any of the parties hereto. In case any Securities
shall have been authenticated, but not delivered, by the Trustee then in office,
any successor by merger, conversion or consolidation to such authenticating
Trustee may adopt such authentication and deliver the Securities so
authenticated with the same effect as if such successor Trustee had itself
authenticated such Securities. In case at that time any of the Securities shall
not have been authenticated, any successor Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor Trustee. In all such cases such certificates shall have the full force
and effect which this Indenture provides that the certificate of authentication
of the Trustee shall have; provided, however, that the right to adopt the
certificate of authentication of any predecessor Trustee or to authenticate
Securities in the name of any predecessor Trustee shall apply only to its
successor or successors by merger, conversion or consolidation.
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ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Disclosure of Names and Addresses of Holders.
Every Holder of Securities, by receiving and holding the same,
agrees with the Company and the Trustee that none of the Company or the Trustee
or any agent of either of them shall be held accountable by reason of the
disclosure of any such information as to the names and addresses of the Holders
in accordance with TIA Section 312, regardless of the source from which such
information was derived, and that the Trustee shall not be held accountable by
reason of mailing any material pursuant to a request made under TIA Section
312(b).
SECTION 702. Reports by Trustee.
Within 60 days after May 15 of each year commencing with the
first May 15 after the first issuance of Securities, the Trustee shall transmit
to the Holders, in the manner and to the extent provided in TIA Section 313(c),
a brief report dated as of such May 15 if required by TIA Section 313(a).
SECTION 703. Reports by Company.
The Company shall file with the Trustee and deliver to the
Holders of Securities the reports and other information required to be provided
by it pursuant to Section 1008.
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain
Terms.
The Company shall 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, in any such transaction specified in clause (i)
or (ii):
(1) 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 a
supplemental indenture executed and delivered to the Trustee in form
satisfactory to the Trustee, all of the Company's obligations under
this Indenture;
(2) 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;
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(3) 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;
(4) 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 paragraph (a) of Section 1011;
(5) 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 Section 1015, the Company or the successor entity to the
Company shall have secured the Securities as required by such Section
1015; and
(6) the Company has delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each in form and substance
reasonably satisfactory to the Trustee, stating that such
consolidation, merger, conveyance, transfer, lease or acquisition and,
if a supplemental indenture is required in connection with such
transaction, such supplemental indenture, complies with this Article
and that all conditions precedent herein provided for relating to such
transaction have been complied with, and, with respect to such
Officers' Certificate, setting forth the manner of determination of the
Consolidated Net Worth, in accordance with clause (3) of this Section
801, of the Company or, if applicable, of the successor entity as
required pursuant to the foregoing.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company with or merger of the
Company with or into any other Corporation or any conveyance, transfer or lease
of the properties and assets of the Company substantially as an entirety to any
Person or Persons in accordance with Section 801, the successor Person formed by
such consolidation or into which the Company is merged or to which such
conveyance, transfer or lease is made shall succeed to, and be substituted for,
and may exercise every right and power of, the Company under this Indenture with
the same effect as if such successor Person had been named as the Company
herein, and, in the event of any such conveyance or transfer, the Company (which
term shall for this purpose mean the Person named as the "Company" in the first
paragraph of this Indenture or any successor Person which shall have become such
in the manner described in Section 801), except in the case of a lease, shall be
discharged of all obligations and covenants under this Indenture and the
Securities and may be dissolved and liquidated.
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders.
Without the consent of any Holders, the Company, when
authorized by a Board Resolution, and the Trustee, at any time and from time to
time, may enter into one or more indentures supplemental hereto, in form and
substance satisfactory to the Trustee, for any of the following purposes:
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(1) to evidence the succession of another Person to the Company
and the assumption by any such successor of the covenants of the Company
contained herein and in the Securities; or
(2) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon the
Company; or
(3) to add any additional Events of Default; or
(4) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of
Section 610; or
(5) to cure any ambiguity, to correct or supplement any
provision herein which may be inconsistent with any other provision
herein, or to make any other provisions with respect to matters or
questions arising under this Indenture; provided that such action shall
not adversely affect the interests of the Holders in any material
respect; or
(6) to secure the Securities pursuant to the requirements of
Section 1016.
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount at maturity of the Outstanding Securities, by Act of
said Holders delivered to the Company and the Trustee, the Company, when
authorized by a Board Resolution, and the Trustee may enter into an indenture or
indentures supplemental hereto for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Indenture or
of modifying in any manner the rights of the Holders under this Indenture;
provided, however, that no such supplemental indenture shall, without the
consent of the Holder of each Outstanding Security affected thereby:
(1) change the Stated Maturity of the principal or Accreted
Value of or any installment of interest on any Security, or reduce the
principal amount or Accreted Value thereof (or premium, if any) or the
rate of interest thereon or reduce the amount of the principal at
maturity of the Securities that would be due and payable upon a
declaration of acceleration of the Maturity thereof pursuant to Section
502 or the amount thereof provable in bankruptcy pursuant to Section
504, or change the coin or currency in which any Security or any
premium or the interest thereon is payable, or impair the right to
institute suit for the enforcement of any such payment after the Stated
Maturity thereof (or, in the case of redemption, on or after the
Redemption Date); or
(2) reduce the percentage in aggregate principal amount at
maturity of the Outstanding Securities the consent of whose Holders is
required for any such supplemental indenture, or the consent of whose
Holders is required for any waiver of compliance with certain
provisions of this Indenture or certain defaults hereunder and their
consequences provided for in this Indenture; or
(3) modify any of the provisions of this Section 902 or
Sections 513 and 1023, except to increase any such percentage or to
provide that certain other provisions of this Indenture cannot be
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modified or waived without the consent of the Holder of each
Outstanding Security affected thereby.
It shall not be necessary for any Act of Holders under this
Section 902 to approve the particular form of any proposed supplemental
indenture, but it shall be sufficient if such Act shall approve the substance
thereof.
SECTION 903. Execution of Supplemental Indentures.
In executing, or accepting the additional trusts created by,
any supplemental indenture permitted by this Article Nine or the modifications
thereby of the trusts created by this Indenture, the Trustee shall be entitled
to receive, and shall be fully protected in relying upon, an Opinion of Counsel
stating that the execution of such supplemental indenture is authorized or
permitted by this Indenture and an Officers' Certificate stating that all
conditions precedent to the execution of such supplemental indenture have been
fulfilled. The Trustee may, but shall not be obligated to, enter into any such
supplemental indenture which affects the Trustee's own rights, duties or
immunities under this Indenture or otherwise.
SECTION 904. Effect of Supplemental Indentures.
Upon the execution of any supplemental indenture under this
Article Nine, this Indenture shall be modified in accordance therewith, and such
supplemental indenture shall form a part of this Indenture for all purposes; and
every Holder of Securities theretofore or thereafter authenticated and delivered
hereunder shall be bound thereby.
SECTION 905. Conformity with Trust Indenture Act.
Every supplemental indenture executed pursuant to this Article
Nine shall conform as a matter of contract or law to the requirements of the
Trust Indenture Act as then in effect.
SECTION 906. Reference in Securities to Supplemental Indentures.
Securities authenticated and delivered after the execution of
any supplemental indenture pursuant to this Article Nine may bear a notation in
form approved by the Trustee and the Company as to any matter provided for in
such supplemental indenture. If the Company shall so determine, new Securities
so modified as to conform, in the opinion of the Trustee and the Company, to any
such supplemental indenture may be prepared and executed by the Company and
authenticated and delivered by the Trustee in exchange for Outstanding
Securities.
SECTION 907. Notice of Supplemental Indentures.
Promptly after the execution by the Company and the Trustee of
any supplemental indenture pursuant to the provisions of Section 902, the
Company shall give notice thereof to the Holders of each Outstanding Security
affected, in the manner provided for in Section 106, setting forth in general
terms the substance of such supplemental indenture.
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ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, and
Interest.
The Company covenants and agrees for the benefit of the
Holders that it shall duly and punctually pay the principal or Accreted Value of
(and premium, if any) and interest on the Securities in accordance with the
terms of the Securities and this Indenture.
SECTION 1002. Maintenance of Office or Agency.
The Company shall maintain in The City of New York an office
or agency where Securities may be presented or surrendered for payment, where
Securities may be surrendered for registration of transfer or exchange and where
notices and demands to or upon the Company in respect of the Securities and this
Indenture may be served. The Corporate Trust Office of the Trustee shall be such
office or agency of the Company, unless the Company shall designate and maintain
some other office or agency for one or more of such purposes. The Company shall
give prompt written notice to the Trustee of any change in the location of any
such office or agency. If at any time the Company shall fail to maintain any
such required office or agency or shall fail to furnish the Trustee with the
address thereof, such presentations, surrenders, notices and demands may be made
or served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations, surrenders,
notices and demands.
The Company may also from time to time designate one or more
other offices or agencies (in or outside of The City of New York) where the
Securities may be presented or surrendered for any or all such purposes and may
from time to time rescind any such designation; provided, however, that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York for such
purposes. The Company shall give prompt written notice to the Trustee of any
such designation or rescission and any change in the location of any such other
office or agency.
SECTION 1003. Money for Security Payments to Be Held in Trust.
If the Company shall at any time act as its own Paying Agent,
it shall, on or before each due date of the principal or Accreted Value of (or
premium, if any) or interest on any of the Securities, segregate and hold in
trust for the benefit of the Persons entitled thereto a sum sufficient to pay
the principal or Accreted Value of (or premium, if any) or interest so becoming
due until such sums shall be paid to such Persons or otherwise disposed of as
herein provided and shall promptly notify the Trustee of its action or failure
so to act.
Whenever the Company shall have one or more Paying Agents for
the Securities, it shall, on or before each due date of the principal or
Accreted Value of (or premium, if any) or interest on any Securities, deposit
with a Paying Agent a sum sufficient to pay the principal or Accreted Value (and
premium, if any) or interest so becoming due, such sum to be held in trust for
the benefit of the Persons entitled to such principal or Accreted Value, premium
or interest, and (unless such Paying Agent is the Trustee) the Company will
promptly notify the Trustee of such action or any failure so to act.
The Company shall cause each Paying Agent (other than the
Trustee) to execute and deliver to the Trustee an instrument in which such
Paying Agent
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shall agree with the Trustee, subject to the provisions of this Section 1003,
that such Paying Agent shall:
(1) hold all sums held by it for the payment of the principal
or Accreted Value of, premium, if any, or interest on Securities in
trust for the benefit of the Persons entitled thereto until such sums
shall be paid to such Persons or otherwise disposed of as herein
provided;
(2) give the Trustee notice of any default by the Company (or
any other obligor upon the Securities) in the making of any payment of
principal or Accreted Value, premium, if any, or interest;
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent; and
(4) indemnify the Trustee and its officers, directors,
employees and agents against any loss, cost or liability caused by, or
incurred as a result of, such Paying Agent's acts or omissions.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Company Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by the Company or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by the Company or
such Paying Agent; and, upon such payment by any Paying Agent to the Trustee,
such Paying Agent shall be released from all further liability with respect to
such sums.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal or Accreted
Value of, premium, if any, or interest on any Security and remaining unclaimed
for two years after such principal, Accreted Value, premium or interest has
become due and payable shall be paid to the Company on Company Request, or (if
then held by the Company) shall be discharged from such trust; and the Holder of
such Security shall thereafter, as an unsecured general creditor, look only to
the Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in a newspaper published in
the English language, customarily published on each Business Day and of general
circulation in the Borough of Manhattan, The City of New York, notice that such
money remains unclaimed and that, after a date specified therein, which shall
not be less than 30 days from the date of such publication, any unclaimed
balance of such money then remaining will be repaid to the Company.
SECTION 1004. Corporate Existence.
Subject to Article Eight, the Company shall do or cause to be
done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the
Company and each Subsidiary; provided, however, that the Company shall not be
required to preserve, with respect to the Company, any such right or franchise
or, with respect to any Subsidiary (subject to all the other covenants in this
Indenture), any such corporate existence, right or franchise, if the Board of
Directors shall determine that the preservation thereof is no longer desirable
in the conduct of the business of the Company and its Subsidiaries as a whole
and that the loss thereof is not disadvantageous in any material respect to the
Holders.
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SECTION 1005. Payment of Taxes and Other Claims.
The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (a) all taxes, assessments
and governmental charges levied or imposed upon the Company or any Restricted
Subsidiary or upon the income, profits or property of the Company or any
Restricted Subsidiary and (b) all lawful claims for labor, materials and
supplies which, if unpaid, might by law become a lien upon the property of the
Company or any Restricted Subsidiary; provided, however, that the Company shall
not be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim whose amount, applicability or validity is
being contested in good faith by appropriate proceedings.
SECTION 1006. Maintenance of Properties.
The Company shall cause all properties owned by the Company or
any Restricted Subsidiary or used or held for use in the conduct of its business
or the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order and supplied with all necessary equipment
and shall cause to be made all necessary repairs, renewals, replacements,
betterments and improvements thereof, all as in the judgment of the Company may
be necessary so that the business carried on in connection therewith may be
properly and advantageously conducted at all times; provided, however, that
nothing in this Section 1006 shall prevent the Company from discontinuing the
maintenance of any of such properties if such discontinuance is, in the judgment
of the Company, desirable in the conduct of its business or the business of any
Subsidiary and not disadvantageous in any material respect to the Holders.
SECTION 1007. Insurance.
The Company shall at all times keep all of its and its
Restricted Subsidiaries' properties which are of an insurable nature insured
with insurers, believed by the Company to be responsible, against loss or damage
to the extent that property of similar character is usually so insured by
Corporations similarly situated and owning like properties.
SECTION 1008. Provision of Financial Statements.
The Company will file with the Trustee on the date on which it
files them with the Commission copies of the annual and quarterly reports and
the information, documents, and other reports that the Company is required to
file with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act
("SEC Reports"). 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.
SECTION 1009. Statement by Officers as to Default.
(a) The Company shall deliver to the Trustee, on the date of
delivery of each quarterly report to be delivered pursuant to Section 1008, a
brief certificate from the principal executive officer, principal financial
officer or principal accounting officer as to his or her knowledge of the
Company's compliance with all conditions and covenants under this Indenture. For
purposes of this Section 1009(a), such compliance shall be determined without
regard to any period of grace or requirement of notice under this Indenture.
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(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of Debt of
the Company or any Restricted Subsidiary gives any notice or takes any other
action with respect to a claimed default (other than with respect to Debt in the
principal amount of less than $5,000,000), the Company shall deliver to the
Trustee by registered or certified mail or by telegram, telex or facsimile
transmission an Officers' Certificate specifying such event, notice or other
action within five Business Days of its occurrence.
SECTION 1010. Purchase of Securities upon Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder
shall have the right to require that the Company repurchase such Holder's
Securities in whole or in part in integral multiples of $1,000 principal amount
at maturity, in accordance with the procedures set forth in this Section 1010
and this Indenture.
(b) Within 30 days of the occurrence of a Change of Control,
the Company shall mail an Offer with respect to an Offer to Purchase all
Outstanding Securities at a price in cash equal to 101% of the Accreted Value of
the Securities on the purchase date plus any accrued and unpaid interest thereon
and premium, if any, not otherwise included in the Accreted Value to such
purchase date. Installments of interest (including Liquidated Interest) whose
Stated Maturity is on or prior to the Purchase Date shall be payable to the
Holders of such Securities, or one or more Predecessor Securities, registered as
such at the close of business on the relevant Record Dates according to their
terms and the provisions of Section 307. Each Holder shall be entitled to tender
all or any portion of the Securities owned by such Holder pursuant to the Offer
to Purchase, subject to the requirement that any portion of a Security tendered
must be tendered in an integral multiple of $1,000 principal amount at maturity.
(c) The Company and the Trustee shall perform their respective
obligations for the Offer to Purchase as specified in the Offer. Prior to the
Purchase Date, the Company shall (i) accept for payment Securities or portions
thereof tendered pursuant to the Offer, (ii) deposit with the Paying Agent (or,
if the Company is acting as its own Paying Agent, segregate and hold in trust as
provided in Section 1003) money sufficient to pay the purchase price of all
Securities or portions thereof so accepted and (iii) deliver or cause to be
delivered to the Trustee all Securities so accepted together with an Officers'
Certificate stating the Securities or portions thereof accepted for payment by
the Company. The Paying Agent shall promptly mail or deliver to Holders of
Securities so accepted payment in an amount equal to the Purchase Price, and the
Trustee shall promptly authenticate and mail or deliver to such Holders a new
Security or Securities equal in principal amount at maturity to any unpurchased
portion of the Security surrendered as requested by the Holder. Any Security not
accepted for payment shall be promptly mailed or delivered by the Company to the
Holder thereof.
(d) A "Change of Control" shall be deemed to have occurred at
such time as (i) a Rating Decline shall have occurred and (ii) 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 shall be
deemed to have beneficial ownership of all shares that such Person has the right
to acquire, whether such right is
4.1-54
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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 Board of Directors then in office.
(e) In the event that the Company makes an Offer to Purchase
the Securities, the Company shall 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.
SECTION 1011. Limitation on Consolidated Debt.
(a) The Company shall not, and shall 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 Securities, this 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
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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;
(v) Debt Incurred to renew, extend, refinance, defease or
refund (each, a "refinancing") the Securities, the Senior 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
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 Securities or Debt
which is pari passu to the Securities or Debt which is subordinate in
right of payment to the Securities shall only be permitted under this
clause (v) if (A) in the case of any refinancing of the Securities or
Debt which is pari passu to the Securities, the refinancing Debt is
made pari passu to the Securities 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 Section 1010;
(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
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aggregate principal amount not in excess of $25 million at any time
outstanding.
SECTION 1012. Limitation on Debt and Preferred Stock of
Restricted Subsidiaries.
The Company shall 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
Section 1011;
(iii)Purchase Money Debt of Restricted Subsidiaries permitted to
be Incurred pursuant to clause (iii) of paragraph (b) of Section 1011;
(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 Section 1011;
(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 Section 1011;
(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 Section 1011;
(vii) Debt of Restricted Subsidiaries permitted to be Incurred
pursuant to clause (viii) of paragraph (b) of Section 1011;
(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 Section 1012 or any Debt or Preferred
Stock of a Restricted Subsidiary permitted to be Incurred pursuant to
clause (ix) of this Section 1012 (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
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<PAGE>
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 Section 1010, 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.
SECTION 1013. Limitation on Restricted Payments.
The Company (i) shall not, and shall 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 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)
shall not, and shall 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 event 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) shall 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) shall not, and shall 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 Securities (other than a permitted refinancing) (each of
clauses (i) through
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<PAGE>
(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 paragraph (a) of Section 1011, 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 event 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) of Section 1011 or clause (x) of Section 1012;
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.
SECTION 1014. Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries.
(a) The Company shall not, and shall 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 to 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.
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<PAGE>
(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 this Indenture and the Securities 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, permitted refinancing 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) of this Section 1014,
restrictions contained in any security agreement (including a Capital Lease
Obligation) securing Debt of the Company or a Restricted Subsidiary otherwise
permitted under this 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) of this Section 1014, 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 this
Indenture and the Securities.
SECTION 1015. Limitation on Liens.
The Company shall not, and shall 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 Subsidiary to make, effective
provision for securing the Securities (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
Securities, 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 Securities; (iv) Liens to secure Restricted Subsidiary Guarantees;
(v) Liens to secure Debt under Credit Facilities permitted to be Incurred
pursuant
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to clause (ii) of paragraph (b) of Section 1011; (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 Securities to secure Purchase Money Debt permitted to be Incurred
pursuant to clause (iii) of paragraph (b) of Section 1011, 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) of this Section 1015 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) of
Section 1011 or clause (x) of Section 1012; (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) of Section 1011; (x) Liens to
secure Debt secured by Receivables permitted to be Incurred pursuant to clause
(vii) of paragraph (b) of Section 1011; (xi) Liens to secure Debt of Restricted
Subsidiaries permitted to be Incurred pursuant to clause (viii) of paragraph (b)
of Section 1011; (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.
SECTION 1016. Limitation on Issuances of Certain Guarantees by,
and Debt Securities of, Restricted Subsidiaries.
The Company shall 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 a
Restricted Subsidiary Guarantee providing for a Guarantee of payment of the
Securities.
SECTION 1017. Limitation on Sale and Leaseback Transactions.
The Company shall not, and shall 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 of Section
1015, equal in amount to the Attributable Value of the Sale and Leaseback
Transaction, without equally and ratably securing the Securities and (ii) the
Sale and Leaseback Transaction is treated as an Asset Disposition and all of the
conditions of Section 1018 (including the provisions concerning the application
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 Section
1018.
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SECTION 1018. Limitation on Asset Dispositions.
The Company shall not, and shall 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 in good faith and evidenced
by a Board Resolution; 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 Securities) or of the
Restricted Subsidiary and release from all liability on the Debt assumed. If the
aggregate of Net Available Proceeds within any twelve-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 Securities at a price in cash
equal to 100% of the Accreted Value of the Securities on the purchase date plus
accrued and unpaid interest thereon and premium, if any, not otherwise included
in the Accreted Value to such purchase date and, to the extent required by the
terms thereof, any other Debt of the Company that is pari passu with the
Securities 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 this Indenture.
SECTION 1019. Limitation on Issuances and Sales of Capital Stock
of Restricted Subsidiaries.
The Company shall not, and shall 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 of Section 1018 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 of Section 1018 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 Section 1013;
(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.
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SECTION 1020. Transactions with Affiliates and Related Persons.
The Company shall not, and shall 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 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
tax sharing agreement entered into with Anschutz Company existing at the date of
execution of this Indenture described under the caption "Certain Transactions"
in the Offering Memorandum, 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, 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 Section 1018. 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 shall determine that the transaction satisfies the above criteria and
shall evidence such a determination by a Board Resolution 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, is independent with respect to the Company
and its Affiliates and qualified to perform such task.
SECTION 1021. Limitation on Designations of Unrestricted
Subsidiaries.
The Company shall 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 (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
Section 1011; and
(c) the Company would not be prohibited under any provision of
this 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
Section 1013 for all purposes of this Indenture in the Designation Amount. In
addition, neither the Company nor any Restricted Subsidiary shall at any time
(x) provide credit support for, or a guarantee of, any Debt of any
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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 Section
1013 or 1020.
A Designation may be revoked (a "Revocation") by a Board
Resolution, provided that the Company shall 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 this Indenture.
All Designations and Revocations must be evidenced by Board
Resolutions certifying compliance with the foregoing provisions.
SECTION 1022. No Repayment of Existing Parent Company Advances
with the Proceeds of the Securities.
The Company shall not apply any portion of the proceeds of the
offering of the Securities toward the repayment of advances made to the Company
or any of its subsidiaries by any parent company of the Company outstanding at
the date of execution of this Indenture.
SECTION 1023. Waiver of Certain Covenants.
The Company may omit in any particular instance to comply with
any term, provision or condition set forth in Sections 1007 through 1022,
inclusive, if before or after the time for such compliance the Holders of at
least a majority in principal amount of the Outstanding Securities, by Act of
such Holders, waive such compliance in such instance with such term, provision
or condition, but no such waiver shall extend to or affect such term, provision
or condition except to the extent so expressly waived, and, until such waiver
shall become effective, the obligations of the Company and the duties of the
Trustee in respect of any such term, provision or condition shall remain in full
force and effect.
SECTION 1024. Trustee Not to Monitor Performance.
The Trustee shall have no duty to confirm or monitor the
performance by the Company of its duties pursuant to the covenants set forth in
this Article Ten.
4.1-64
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ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption.
The Securities 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
October 15, 2002, upon not less than 30 nor more than 60 days' prior notice,
subject to the conditions and at the redemption prices (expressed as percentages
of Accreted Value) set forth in the form of Security, plus accrued and unpaid
interest thereon (if any) to the Redemption Date.
SECTION 1102. Applicability of Article.
Redemption of Securities at the election of the Company or
otherwise, as permitted or required by any provision of this Indenture, shall be
made in accordance with such provision and this Article.
SECTION 1103. Election to Redeem; Notice to Trustee.
The election of the Company to redeem any Securities pursuant
to Section 1101 shall be evidenced by a Board Resolution. In case of any
redemption at the election of the Company, the Company shall, at least 60 days
prior to the Redemption Date fixed by the Company (unless a shorter notice shall
be satisfactory to the Trustee), notify the Trustee of such Redemption Date and
of the principal amount at maturity of Securities to be redeemed and shall
deliver to the Trustee such documentation and records as shall enable the
Trustee to select the Securities to be redeemed pursuant to Section 1104.
SECTION 1104. Selection by Trustee of Securities to Be Redeemed.
If less than all the Securities are to be redeemed, the
particular Securities to be redeemed shall be selected not more than 60 days
prior to the Redemption Date by the Trustee, from the Outstanding Securities not
previously called for redemption, by such method as the Trustee shall deem fair
and appropriate and which may provide for the selection for redemption of
portions of the principal amount at maturity of Securities; provided, however,
that no such partial redemption shall reduce the portion of the principal amount
at maturity of a Security not redeemed to less than $1,000.
The Trustee shall promptly notify the Company in writing of
the Securities selected for redemption and, in the case of any Securities
selected for partial redemption, the principal amount at maturity thereof to be
redeemed.
For all purposes of this Indenture, unless the context
otherwise requires, all provisions relating to redemption of Securities shall
relate, in the case of any Security redeemed or to be redeemed only in part, to
the portion of the Accreted Value of such Security which has been or is to be
redeemed.
SECTION 1105. Notice of Redemption.
Notice of redemption shall be given in the manner provided for
in Section 106 not less than 30 nor more than 60 days prior to the Redemption
Date, to each Holder of Securities to be redeemed.
Each notice of redemption shall state:
(1) the Redemption Date,
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(2) the Redemption Price and the amount of accrued interest to
the Redemption Date payable as provided in Section 1107, if any,
(3) if less than all Outstanding Securities are to be
redeemed, the identification (and, in the case of a partial redemption,
the principal amount at maturity) of the particular Securities to be
redeemed,
(4) in case any Security is to be redeemed in part only, that
on and after the Redemption Date, upon surrender of such Security, the
Holder will receive, without charge, a new Security or Securities of
authorized denominations for the principal amount at maturity thereof
remaining unredeemed,
(5) that on the Redemption Date the Redemption Price (and
accrued interest, if any, to the Redemption Date payable as provided in
Section 1107) will become due and payable upon each such Security, or
the portion thereof, to be redeemed, and that interest thereon will
cease to accrue on and after said date, and
(6) the place or places where such Securities are to be
presented and surrendered for payment of the Redemption Price and
accrued interest, if any.
Notice of redemption of Securities to be redeemed at the
election of the Company shall be given by the Company or, at the Company's
request, by the Trustee in the name and at the expense of the Company.
SECTION 1106. Deposit of Redemption Price.
Prior to any Redemption Date, the Company shall deposit with
the Trustee or with a Paying Agent (or, if the Company is acting as its own
Paying Agent, segregate and hold in trust as provided in Section 1003) an amount
of money sufficient to pay the Redemption Price of, and accrued interest on, all
the Securities which are to be redeemed on that date.
SECTION 1107. Securities Payable on Redemption Date.
Notice of redemption having been given as aforesaid, the
Securities so to be redeemed shall, on the Redemption Date, become due and
payable at the Redemption Price therein specified (together with accrued
interest, if any, to the Redemption Date), and from and after such date (unless
the Company shall default in the payment of the Redemption Price and accrued
interest) such Securities shall cease to bear interest. Upon surrender of any
such Security for redemption in accordance with said notice, such Security shall
be paid by the Company at the Redemption Price, together with accrued interest,
if any, to the Redemption Date; provided, however, that installments of interest
whose Stated Maturity is on or prior to the Redemption Date shall be payable to
the Holders of such Securities, or one or more Predecessor Securities,
registered as such at the close of business on the relevant Record Dates
according to their terms and the provisions of Section 307.
If any Security called for redemption shall not be so paid
upon surrender thereof for redemption, the principal or Accreted Value (and
premium, if any) shall, until paid, accrete or bear interest from the Redemption
Date at the rate of accretion of and interest rate borne by the Securities.
4.1-66
<PAGE>
SECTION 1108. Securities Redeemed in Part.
Any Security which is to be redeemed only in part shall be
surrendered at the office or agency of the Company maintained for such purpose
pursuant to Section 1002 (with, if the Company or the Trustee so requires, due
endorsement by, or a written instrument of transfer in form satisfactory to the
Company and the Trustee duly executed by, the Holder thereof or such Holder's
attorney duly authorized in writing), and the Company shall execute, and the
Trustee shall authenticate and deliver to the Holder of such Security without
service charge, a new Security or Securities, of any authorized denomination as
requested by such Holder, in aggregate principal amount at maturity equal to and
in exchange for the unredeemed portion of the principal amount at maturity of
the Security so surrendered.
ARTICLE TWELVE
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1201. Company's Option to Effect Defeasance or Covenant
Defeasance.
The Company may, at its option by Board Resolution, at any
time, with respect to the Securities, elect to have either Section 1202 or
Section 1203 be applied to all Outstanding Securities upon compliance with the
conditions set forth below in this Article Twelve.
SECTION 1202. Defeasance and Discharge.
Upon the Company's exercise under Section 1201 of the option
applicable to this Section 1202, the Company shall be deemed to have been
discharged from its obligations with respect to all Outstanding Securities on
the date the conditions set forth in Section 1204 are satisfied (hereinafter,
"defeasance"). For this purpose, such defeasance means that the Company shall be
deemed to have paid and discharged the entire indebtedness represented by the
Outstanding Securities, which shall thereafter be deemed to be "Outstanding"
only for the purposes of Section 1205 and the other Sections of this Indenture
referred to in clauses (A) and (B) below, and to have satisfied all its other
obligations under such Securities and this Indenture insofar as such Securities
are concerned (and the Trustee, at the expense of the Company, shall execute
proper instruments acknowledging the same), except for the following which shall
survive until otherwise terminated or discharged hereunder: (A) the rights of
Holders of Outstanding Securities to receive, solely from the trust fund
described in Section 1204 and as more fully set forth in such Section, payments
in respect of the principal or Accreted Value of, premium, if any, and interest
on such Securities when such payments are due, (B) the Company's obligations
with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C)
the rights, powers, trusts, duties and immunities of the Trustee hereunder and
(D) this Article Twelve. Subject to compliance with this Article Twelve, the
Company may exercise its option under this Section 1202 notwithstanding the
prior exercise of its option under Section 1203 with respect to the Securities.
SECTION 1203. Covenant Defeasance.
Upon the Company's exercise under Section 1201 of the option
applicable to this Section 1203, the Company shall be released from its
obligations under any covenant contained in Section 801(4) and in Sections 1007
through 1021 with respect to the Outstanding Securities on and after the date
the conditions set forth below are satisfied (hereinafter, "covenant
defeasance"), and the Securities shall thereafter be deemed not to
4.1-67
<PAGE>
be "Outstanding" for the purposes of any direction, waiver, consent or
declaration or Act of Holders (and the consequences of any thereof) in
connection with such covenants, but shall continue to be deemed "Outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
means that, with respect to the Outstanding Securities, the Company may omit to
comply with and shall have no liability in respect of any term, condition or
limitation set forth in any such covenant, whether directly or indirectly, by
reason of any reference elsewhere herein to any such covenant or by reason of
any reference in any such covenant to any other provision herein or in any other
document and such omission to comply shall not constitute a Default or an Event
of Default under Section 501(3), 501(4) or 501(5), but, except as specified
above, the remainder of this Indenture and such Securities shall be unaffected
thereby.
SECTION 1204. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either
Section 1202 or Section 1203 to the Outstanding Securities:
(1) The Company shall irrevocably have deposited or caused to
be deposited with the Trustee (or another trustee satisfying the
requirements of Section 608 who shall agree to comply with the
provisions of this Article Twelve applicable to it) as trust funds in
trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the
Holders of such Securities: (A) money in an amount, or (B) Government
Securities which through the scheduled payment of principal and
interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment in
respect of the Securities, money in an amount, or (C) a combination
thereof, sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification
thereof delivered to the Trustee, to pay and discharge, and which shall
be applied by the Trustee (or other qualifying trustee) to pay and
discharge, the principal or Accreted Value of (and premium, if any) and
interest on the Outstanding Securities on the Stated Maturity (or
Redemption Date, if applicable) of such principal or Accreted Value
(and premium, if any) or installment of interest; provided that the
Trustee shall have been irrevocably instructed in writing to apply such
money or the proceeds of such Government Securities to said payments
with respect to the Securities. Before such a deposit, the Company may
give to the Trustee, in accordance with Section 1103, a notice of its
election to redeem all of the Outstanding Securities at a future date
in accordance with Article Eleven, which notice shall be irrevocable.
Such irrevocable redemption notice, if given, shall be given effect in
applying the foregoing.
(2) No Default or Event of Default with respect to the
Securities shall have occurred and be continuing on the date of such
deposit or, insofar as paragraphs (8) and (9) of Section 501 are
concerned, at any time during the period ending on the 91st day after
the date of such deposit (it being understood that this condition shall
not be deemed satisfied until the expiration of such period).
(3) Such defeasance or covenant defeasance shall not result in
a breach or violation of, or constitute a default under, this Indenture
or any other material agreement or instrument to which the Company is a
party or by which it is bound.
(4) In the case of an election under Section 1202, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
4.1-68
<PAGE>
(x) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (y) since October 9, 1997 there
has been a change in the applicable federal income tax law, in either
case to the effect that, and based thereon such opinion shall confirm
that, the Holders of the Outstanding Securities will not recognize
income, gain or loss for federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred.
(5) In the case of an election under Section 1203, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Holders of the Outstanding Securities will not recognize
income, gain or loss for federal income tax purposes as a result of
such covenant defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such covenant defeasance had not occurred.
(6) The Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent provided for relating to either the defeasance
under Section 1202 or the covenant defeasance under Section 1203 (as
the case may be) have been complied with.
SECTION 1205. Deposited Money and Government Securities to Be
Held in Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section
1003, all money and Government Securities (including the proceeds thereof)
deposited with the Trustee (or other qualifying trustee, collectively for
purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in
respect of the Outstanding Securities shall be held in trust and applied by the
Trustee, in accordance with the provisions of such Securities and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as its own Paying Agent) as the Trustee may
determine, to the Holders of such Securities of all sums due and to become due
thereon in respect of principal or Accreted Value, premium, if any, and
interest, but such money need not be segregated from other funds except to the
extent required by law.
The Company shall pay and indemnify the Trustee and (if
applicable) its officers, directors, employees and agents against any tax, fee
or other charge imposed on or assessed against the Government Securities
deposited pursuant to Section 1204 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Securities.
Anything in this Article Twelve to the contrary
notwithstanding, the Trustee shall deliver or pay to the Company from time to
time upon Company Request any money or Government Securities held by it as
provided in Section 1204 which, in the opinion of a nationally recognized firm
of independent public accountants expressed in a written certification thereof
delivered to the Trustee, are in excess of the amount thereof which would then
be required to be deposited to effect an equivalent defeasance or covenant
defeasance, as applicable, in accordance with this Article Twelve.
SECTION 1206. Reinstatement.
If the Trustee or any Paying Agent is unable to apply any
money in accordance with Section 1205 by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the Company's obligations under this Indenture and the
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<PAGE>
Securities shall be revived and reinstated as though no deposit had occurred
pursuant to Section 1202 or 1203, as the case may be, until such time as the
Trustee or Paying Agent is permitted to apply all such money in accordance with
Section 1205; provided, however, that if the Company makes any payment of
principal or Accreted Value of, premium, if any, or interest on any Security
following the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money held by the Trustee or Paying Agent.
4.1-70
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Indenture to be duly executed, and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
QWEST COMMUNICATIONS INTERNATIONAL INC.
By:/s/_________________________
Title:
Attest:/s/_________________________
Title:
BANKERS TRUST COMPANY, as Trustee
By:/s/_________________________
Title:
4.1-71
<PAGE>
EXHIBIT A
Form of Face of Security
[If a Global Security, then insert:] THIS SECURITY IS A GLOBAL
SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS
REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A
SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES
REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE
EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER
OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE
DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO
THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN
THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
[If a Global Security, then insert:] UNLESS THIS CERTIFICATE
IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A
NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF
TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE
NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER
ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST
HEREIN.
[If a Rule 144A Security, then insert:] THIS SECURITY HAS NOT
BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE
"SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE
TRANSFERRED EXCEPT (A)(1) 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, (2) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR
RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN
EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A
THEREUNDER (IF AVAILABLE) AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES
LAWS OF THE STATES OF THE UNITED STATES.
[If a Regulation S Security, then insert:] THIS SECURITY HAS
NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND, PRIOR TO THE EXPIRATION OF A RESTRICTED PERIOD
(DEFINED AS 40 DAYS AFTER THE ISSUE DATE WITH RESPECT TO THE SECURITIES), MAY
NOT BE: OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S OR
(2) 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, AND (B) IN ACCORDANCE WITH
ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES.
QWEST COMMUNICATIONS
INTERNATIONAL INC.
A-1
<PAGE>
9.47% [Series B]1 Senior Discount Note Due 2007
CUSIP: ________
No. __________ $________
FOR PURPOSES OF SECTIONS 1272, 1273 AND 1275 OF THE INTERNAL
REVENUE CODE OF 1986, AS AMENDED, AND THE RULES AND REGULATIONS THEREUNDER, THIS
SECURITY IS BEING ISSUED WITH ORIGINAL ISSUE DISCOUNT; FOR EACH $1,000 OF
PRINCIPAL AMOUNT (1) THE "ISSUE PRICE" IS $629.62; (2) THE "STATED REDEMPTION
PRICE AT MATURITY" IS $1,473.50; (3) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT (THE
EXCESS OF THE "STATED REDEMPTION PRICE AT MATURITY" OVER THE "ISSUE PRICE") IS
$843.88; (4) THE ISSUE DATE IS OCTOBER 15, 1997; (5) THE YIELD TO MATURITY
(COMPOUNDED SEMI-ANNUALLY) IS 9.47%; AND (6) THE METHOD USED TO DETERMINE YIELD
TO MATURITY IS THE EXACT METHOD.
Qwest Communications International Inc., a Delaware
corporation (herein called the "Company", which term includes any successor
Person under the Indenture hereinafter referred to), for value received, hereby
promises to pay to _________________ or registered assigns, the principal sum of
____________________ Dollars [if a Global Security, then insert: (which
principal amount may from time to time be increased or decreased to such other
principal amounts which, taken together with the principal amounts of all other
Outstanding Securities, shall not exceed $______________ in the aggregate at any
time, by adjustments made on the records of the Trustee hereinafter referred to
in accordance with the Indenture)] on October 15, 2007, at the office or agency
of the Company referred to below, and to pay interest thereon, semi-annually on
April 15 and October 15 in each year, commencing on April 15, 2003, accruing
from October 15, 2002 or from the most recent Interest Payment Date to which
interest has been paid or duly provided for; provided, however, that the Company
may elect, upon not less than 60 days' prior notice, to commence the accrual of
cash interest on all outstanding Securities on any April 15 or October 15 on or
after October 15, 2000 and prior to October 15, 2002, in which case the
outstanding principal amount at maturity of each Security will on such
commencement date be reduced to the Accreted Value of this Security as of such
date and cash interest shall be payable with respect to this Security on each
April 15 and October 15 thereafter. Except as otherwise described in this
paragraph, interest on the Securities will accrue at the rate of 9.47% per
annum, until the principal amount at maturity hereof is paid or duly provided
for, and (to the extent lawful) to pay on demand interest on any overdue
interest at the rate borne by the Securities from the date on which such overdue
interest becomes payable to the date payment of such interest has been made or
duly provided for [provided, however, that if (i) (a) Company has not filed a
registration statement (the "Registration Statement") under the Securities Act
of 1933, as amended (the "Securities Act") within 90 days after October 15,
1997, with respect to a registered offer (the "Exchange Offer") to exchange this
Security for a security (an "Exchange Security") with terms identical in all
material respects to this Security (except that such security will not contain
terms with respect to registration rights or transfer restrictions, and
provisions regarding interest and Liquidated Interest (described below) will be
modified or eliminated, as appropriate), or (b) the Registration Statement has
not been declared effective within 150 days after October 15, 1997, or (c) the
Exchange Offer has not been consummated within 180 days after October 15, 1997;
or (ii)
- --------
1 Include only for Exchange Securities.
A-2
<PAGE>
in lieu thereof, the Company has not filed a shelf registration statement (the
"Shelf Registration Statement") under the Securities Act within 210 days after
October 15, 1997, covering resales of this Security and such Shelf Registration
Statement has not been declared effective; or (iii) either the Registration
Statement or, if applicable, the Shelf Registration Statement is filed and
declared effective but shall thereafter cease to be effective or usable (subject
to certain exceptions) in connection with resales of this Security or Exchange
Securities in accordance with and during the periods specified in the
Registration Agreement without being succeeded promptly by an additional
registration statement filed and declared effective, in each case (i) through
(iii) upon the terms and conditions set forth in the Registration Agreement
(each such event referred to in clauses (i) through (iii), a "Registration
Default"), then additional interest ("Liquidated Interest") will accrue (in
addition to the accretion of principal and any stated interest on the
Securities) 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 at a rate per annum equal to
0.5% on the principal amount at maturity of the Securities 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 at maturity of the
Securities 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. Accrued Liquidated Interest, if any, shall be paid in
cash semiannually on April 15 and October 15 in each year; and the amount of
accrued Liquidated Interest shall be determined on the basis of the number of
days actually elapsed. Any accrued and unpaid interest (including Liquidated
Interest) on this Security upon the issuance of an Exchange Security in exchange
for this Security shall cease to be payable to the Holder hereof but such
accrued and unpaid interest (including Liquidated Interest) shall be payable on
the next Interest Payment Date for such Exchange Security to the Holder thereof
on the related Regular Record Date.]2
The interest so payable, and punctually paid or duly provided
for, on any Interest Payment Date will, as provided in such Indenture, be paid
to the Person in whose name this Security (or one or more Predecessor
Securities) is registered at the close of business on the Regular Record Date
for such interest, which shall be the April 1 or October 1 (whether or not a
Business Day), as the case may be, next preceding such Interest Payment Date.
Any such interest not so punctually paid or duly provided for shall forthwith
cease to be payable to the Holder on such Regular Record Date, and such
defaulted interest, and (to the extent lawful) interest on such defaulted
interest at the rate borne by the Securities, may be paid to the Person in whose
name this Security (or one or more Predecessor Securities) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Securities not less than 10 days prior to such Special Record Date, or may be
paid at any time in any other lawful manner, all as more fully provided in said
Indenture. Payment of the principal of (and premium, if any, on) and interest on
this Security will be made at the office or agency of the Company maintained for
that purpose in The City of New York, or at such other office or agency of the
Company as may be maintained for such purpose, in such coin or currency of the
United States of America as at the time of payment is legal
- --------
2 Include for Initial Securities and, if there has occurred a Registration
Default, include for Exchange Securities.
A-3
<PAGE>
tender for payment of public and private debts; provided, however, that payment
of interest may be made at the option of the Company by check mailed to the
address of the Person entitled thereto as such address shall appear on the
Security Register.
Reference is hereby made to the further provisions of this
Security set forth on the reverse hereof, which further provisions shall for all
purposes have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly
executed by the Trustee referred to on the reverse hereof by manual signature,
this Security shall not be entitled to any benefit under the Indenture, or be
valid or obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to
be duly executed under its corporate seal.
Dated: QWEST COMMUNICATIONS
INTERNATIONAL INC.
By:
Authorized Signatory
A-4
<PAGE>
Form of Reverse of Security
This Security is one of a duly authorized issue of securities
of the Company designated as its 9.47% [Series B]1 Senior Discount Notes Due
2007 (herein called the "Securities"), limited (except as otherwise provided in
the Indenture referred to below) in aggregate principal amount to $555,890,000,
which may be issued under an indenture (herein called the "Indenture") dated as
of October 15, 1997 between the Company and Bankers Trust Company, trustee
(herein called the "Trustee", which term includes any successor trustee under
the Indenture), to which Indenture and all indentures supplemental thereto
reference is hereby made for a statement of the respective rights, limitations
of rights, duties, obligations and immunities thereunder of the Company, the
Trustee and the Holders of the Securities, and of the terms upon which the
Securities are, and are to be, authenticated and delivered.
The Securities are 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
October 15, 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 October 15 of the years indicated
below:
Year Redemption Price
- ---- ----------------
2002...................................................... 104.735%
2003...................................................... 103.157%
2004...................................................... 101.578%
2005 and thereafter....................................... 100.000%
In addition, prior to October 15, 2000, the Company may redeem
up to 35% of the Accreted Value of the Securities at a redemption price equal to
109.47% of the Accreted Value of the Securities 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 Accreted Value
of the Securities would remain outstanding immediately after giving effect to
such redemption.
Upon the occurrence of a Change of Control, the Holder of this
Security may require the Company, subject to certain limitations provided in the
Indenture, to repurchase this Security at a purchase price in cash in an amount
equal to 101% of the Accreted Value of this Security on the purchase date plus
any accrued and unpaid interest and premium, if any, not otherwise included in
the Accreted Value to such purchase date.
In the case of any redemption of Securities, interest
installments whose Stated Maturity is on or prior to the Redemption Date will be
payable to the Holders of such Securities, or one or more Predecessor
Securities, of record at the close of business on the relevant Record Date
referred to on the face hereof. Securities (or portions thereof) for whose
redemption and payment provision is made in accordance with the Indenture shall
cease to bear interest from and after the Redemption Date.
- --------
1 Include for Exchange Securities only.
A-5
<PAGE>
In the event of redemption of this Security in part only, a
new Security or Securities for the unredeemed portion hereof shall be issued in
the name of the Holder hereof upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the
principal amount at maturity of all the Securities may be declared due and
payable in the manner and with the effect provided in the Indenture and in an
amount equal to the Accreted Value of the Securities as of the date on which the
Securities first become due and payable, plus any accrued and unpaid interest
and premium, if any, not otherwise included in the Accreted Value to such date.
The Indenture contains provisions for defeasance at any time
of (a) the entire indebtedness of the Company on this Security and (b) certain
restrictive covenants and the related Defaults and Events of Default, upon
compliance by the Company with certain conditions set forth therein, which
provisions apply to this Security.
The Indenture permits, with certain exceptions as therein
provided, the amendment thereof and the modification of the rights and
obligations of the Company and the rights of the Holders under the Indenture at
any time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount at maturity of the Securities at the time
Outstanding. The Indenture also contains provisions permitting the Holders of
specified percentages in aggregate principal amount at maturity of the
Securities at the time Outstanding, on behalf of the Holders of all the
Securities, to waive compliance by the Company with certain provisions of the
Indenture and certain past defaults under the Indenture and their consequences.
Any such consent or waiver by or on behalf of the Holder of this Security shall
be conclusive and binding upon such Holder and upon all future Holders of this
Security and of any Security issued upon the registration of transfer hereof or
in exchange herefor or in lieu hereof whether or not notation of such consent or
waiver is made upon this Security.
No reference herein to the Indenture and no provision of this
Security or of the Indenture shall alter or impair the obligation of the
Company, which is absolute and unconditional, to pay the principal or Accreted
Value of (and premium, if any) and interest on this Security at the times,
place, and rate, and in the coin or currency, herein prescribed.
As provided in the Indenture and subject to certain
limitations therein set forth, the transfer of this Security is registerable on
the Security Register of the Company, upon surrender of this Security for
registration of transfer at the office or agency of the Company maintained for
such purpose in The City of New York, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Securities, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee or transferees.
The Securities are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
the Securities are exchangeable for a like aggregate principal amount of
Securities of a different authorized denomination, as requested by the Holder
surrendering the same.
A-6
<PAGE>
No service charge shall be made for any registration of
transfer or exchange of Securities, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge payable in connection
therewith.
Prior to the time of due presentment of this Security for
registration of transfer, the Company, the Trustee and any agent of the Company
or the Trustee may treat the Person in whose name this Security is registered as
the owner hereof for all purposes, whether or not this Security be overdue, and
neither the Company, the Trustee nor any agent shall be affected by notice to
the contrary.
All terms used in this Security which are defined in the
Indenture shall have the meanings assigned to them in the Indenture.
A-7
<PAGE>
Form of Trustee's Certificate of Authentication
The Trustee's certificate of authentication shall be in
substantially the following form:
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
Dated: ____________________
This is one of the Securities referred to in the
within-mentioned Indenture.
[NAME OF TRUSTEE]
as Trustee
By:_________________________
Authorized Signatory
A-8
<PAGE>
Assignment Form
If you, the holder, want to assign this Security, fill in the
form below and have your signature guaranteed:
I or we assign and transfer this Security to
- -----------------------------------
(Insert assignee's social security or tax ID number)
(Print or type assignee's name, address and zip code)
and irrevocably appoint ________________________________
of ________________________________
--------------------------------
agent to transfer this Security on the books of the Company. The agent may
substitute another to act for such agent.
In connection with any transfer of this Security occurring
prior to the date which is the earlier of (i) the date of the declaration by the
Commission of the effectiveness of a registration statement under the Securities
Act of 1933, as amended (the "Securities Act"), covering resales of this
Security (which effectiveness shall not have been suspended or terminated at the
date of the transfer) and (ii) the date two years (or such shorter period of
time as may be permitted by Rule 144(k) under the Securities Act or any
successor provision thereunder) after the later of the original issuance date
appearing on the face of this Security (or any Predecessor Security) or the last
date on which the Company or any Affiliate of the Company was the owner of this
Security (or any Predecessor Security), the undersigned confirms that it has not
utilized any general solicitation or general advertising in connection with the
transfer and that this Security is being transferred in compliance with the
exemption from registration under the Securities Act provided by Rule 144A
thereunder.
A-9
<PAGE>
If the above is not correct, the Trustee or Security Registrar shall not be
obligated to register this Security in the name of any person other than the
Holder hereof unless and until the conditions to any such transfer or
registration set forth herein and in Section 313 of the Indenture shall have
been satisfied.
Dated:_________________ Your signature:
(Sign exactly as your name appears on the other
side of this Security)
By:
NOTICE: To be executed by an executive officer
Signature Guarantee:__________________________
TO BE COMPLETED BY PURCHASER:
The undersigned represents and warrants that it is purchasing
this Security for its own account or an account with respect to which it
exercises sole investment discretion and that it and any such account is a
"qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act and is aware that the sale to it is being made in reliance on
Rule 144A and acknowledges that it has received such information regarding the
Company as the undersigned has requested pursuant to Rule 144A (including the
information specified in Rule 144A(d)(4)) or has determined not to request such
information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.
Dated:__________________________
NOTICE: To be executed by an executive
officer
[The Transferee Certificates (Exhibit B to the Indenture) will be attached to
the Security]
A-10
<PAGE>
Option of Holder to Elect Purchase
If you wish to have this Security purchased by the Company
pursuant to Section 1010 or 1018 of the Indenture, check the box: |_|
If you wish to have a portion of this Security purchased by
the Company pursuant to Section 1010 or 1018 of the Indenture, state the amount:
$-------------
Dated:______________________ Your Signature:
(Sign exactly as your name appears
n the other side of this Security)
A-11
<PAGE>
EXHIBIT B
Form of Certificate to Be Delivered
in Connection with Transfers
Pursuant to Regulation S
[Date]
Bankers Trust Company
Four Albany Street
New York, NY 10006
Attention: Corporate Market Services
Re: Qwest Communications International Inc. (the "Company") 9.47%
Senior Discount Notes Due 2007 (the "Securities")
Dear Sirs:
In connection with our proposed sale of $ aggregate principal
amount of the Securities, we confirm that such sale has been effected pursuant
to and in accordance with Regulation S under the U.S. Securities Act of 1933, as
amended (the "Securities Act"), and, accordingly, we represent that:
(1)the offer of the Securities was not made to a person in the
United States;
(2) either (a) at the time the buy offer was originated, the
transferee was outside the United States or we and any person acting on
our behalf reasonably believed that the transferee was outside the
United States, or (b) the transaction was executed in, on or through
the facilities of a designated off-shore securities market and neither
we nor any person acting on our behalf knows that the transaction has
been pre-arranged with a buyer in the United States;
(3) no directed selling efforts have been made in the United
States in contravention of the requirements of Rule 903(b) or Rule
904(b) of Regulation S, as applicable;
(4)the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act;
(5)we have advised the transferee of the transfer restrictions
applicable to the Securities; and
(6) if the circumstances set forth in Rule 904(c) under the
Securities Act are applicable, we have complied with the additional
conditions therein, including (if applicable) sending a confirmation or
other notice stating that the Securities may be offered and sold:
during the restricted period specified in Rule 903(c)(2) or (3), as
applicable; in accordance with the provisions of Regulation S; pursuant
to registration of the Securities under the Securities Act; or pursuant
to an available exemption from the registration requirements under the
Securities Act.
You and the Company are entitled to rely upon this letter and
are irrevocably authorized to produce this letter or a copy hereof to any
B-1
<PAGE>
interested party in any administrative or legal proceedings or official inquiry
with respect to the matters covered hereby. Terms used in this certificate have
the meanings set forth in Regulation S.
Very truly yours,
[Name of Transferor]
By:
Authorized Signatory
B-2
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.,
Issuer
to
BANKERS TRUST COMPANY,
Trustee
--------------------
Indenture
Dated as of October 15, 1997
---------------------
$555,890,000 Principal Amount at Maturity
9.47% Senior Discount Notes Due 2007
B-3
<PAGE>
i
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
Page
PARTIES......................................................................................................... 1
RECITALS OF THE COMPANY......................................................................................... 1
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS
OF GENERAL APPLICATION
SECTION 101. Definitions.............................................................................. 1
Accreted Value................................................................................ 2
Acquired Debt................................................................................. 2
Act ..................................................................................... 2
Affiliate..................................................................................... 3
Agent Member.................................................................................. 3
Asset Disposition............................................................................. 3
Attributable Value............................................................................ 3
Board of Directors............................................................................ 4
Board Resolution.............................................................................. 4
Business Day.................................................................................. 4
Capital Lease Obligation...................................................................... 4
Capital Stock................................................................................. 4
Cash Equivalents.............................................................................. 4
Change of Control............................................................................. 5
Commission.................................................................................... 5
Common Stock.................................................................................. 5
Company ..................................................................................... 5
Company Order................................................................................. 5
Company Request............................................................................... 5
Consolidated Capital Ratio.................................................................... 5
Consolidated Cash Flow Available for Fixed Charges............................................ 5
Consolidated Income Tax Expense............................................................... 6
Consolidated Interest Expense................................................................. 6
Consolidated Net Income....................................................................... 6
Consolidated Net Worth........................................................................ 7
Consolidated Tangible Assets.................................................................. 7
Continuing Director........................................................................... 7
Corporate Trust Office........................................................................ 7
Corporation................................................................................... 7
Credit Facilities............................................................................. 7
Debt ..................................................................................... 8
Debt Securities............................................................................... 8
Default ..................................................................................... 8
Defaulted Interest............................................................................ 8
Depository.................................................................................... 8
Designation................................................................................... 9
Designation Amount............................................................................ 9
Disqualified Stock............................................................................ 9
Eligible Institution.......................................................................... 9
Eligible Receivables.......................................................................... 9
Event of Default.............................................................................. 9
Exchange Act.................................................................................. 9
- --------
Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture.
<PAGE>
ii
Page
Exchange Offer................................................................................ 9
Exchange Offer Registration Statement......................................................... 9
Exchange Securities........................................................................... 10
Expiration Date............................................................................... 10
Fair Market Value............................................................................. 10
Federal Bankruptcy Code....................................................................... 10
Global Security............................................................................... 10
Government Securities......................................................................... 10
Group ..................................................................................... 10
Guarantee..................................................................................... 10
Guarantor..................................................................................... 10
Holder ..................................................................................... 11
Incur ..................................................................................... 11
Indenture..................................................................................... 11
Indenture Obligations......................................................................... 11
Initial Purchasers............................................................................ 11
Initial Securities............................................................................ 11
Interest Payment Date......................................................................... 11
Interest Rate or Currency Protection Agreement................................................ 11
Investment.................................................................................... 11
Lien ..................................................................................... 12
Liquidated Interest........................................................................... 12
Maturity ..................................................................................... 12
Net Available Proceeds........................................................................ 12
Notice of Default............................................................................. 13
Offer ..................................................................................... 13
Offer to Purchase............................................................................. 13
Offering Memorandum........................................................................... 15
Officers' Certificate......................................................................... 15
Opinion of Counsel............................................................................ 15
Outstanding................................................................................... 15
Paying Agent.................................................................................. 16
Permitted Holders............................................................................. 16
Permitted Interest Rate or Currency Protection Agreement...................................... 16
Permitted Investments......................................................................... 17
Permitted Joint Venture....................................................................... 17
Permitted Liens............................................................................... 17
Permitted Telecommunications Capital Asset Disposition........................................ 18
Person ..................................................................................... 18
Physical Security............................................................................. 18
Predecessor Security.......................................................................... 18
Preferred Dividends........................................................................... 18
Preferred Stock............................................................................... 18
Private Placement Legend...................................................................... 18
Public Equity Offering........................................................................ 19
Purchase Amount............................................................................... 19
Purchase Date................................................................................. 19
Purchase Money Debt........................................................................... 19
Purchase Price................................................................................ 19
Qualified Institutional Buyer................................................................. 19
QIB ..................................................................................... 19
Rating Decline................................................................................ 19
Receivables................................................................................... 19
Receivables Sale.............................................................................. 19
Redemption Date............................................................................... 19
<PAGE>
iii
Page
Redemption Price.............................................................................. 19
Registration Agreement........................................................................ 19
Registration Statement........................................................................ 20
Regular Record Date........................................................................... 20
Regulation S.................................................................................. 20
Regulation S Global Security.................................................................. 20
Related Person................................................................................ 20
Responsible Officer........................................................................... 20
Restricted Payment............................................................................ 20
Restricted Subsidiary......................................................................... 20
Restricted Subsidiary Guarantee............................................................... 20
Revocation.................................................................................... 20
Rule 144A..................................................................................... 20
Rule 144A Global Security..................................................................... 21
Sale and Leaseback Transaction................................................................ 21
Securities.................................................................................... 21
Securities Act................................................................................ 21
Security Register............................................................................. 21
Security Registrar............................................................................ 21
Senior Notes.................................................................................. 21
Shelf Registration Statement.................................................................. 21
Special Record Date........................................................................... 21
Stated Maturity............................................................................... 21
Strategic Investor............................................................................ 22
Subordinated Debt............................................................................. 22
Subsidiary.................................................................................... 22
Telecommunications Assets..................................................................... 23
Telecommunications Business................................................................... 23
Trust Indenture Act........................................................................... 23
TIA ..................................................................................... 23
Trustee ..................................................................................... 23
Unrestricted Subsidiary....................................................................... 23
Vice President................................................................................ 23
Voting Stock.................................................................................. 23
Wholly Owned Subsidiary....................................................................... 23
SECTION 102. Compliance Certificates and Opinions..................................................... 23
SECTION 103. Form of Documents Delivered to Trustee................................................... 24
SECTION 104. Acts of Holders.......................................................................... 25
SECTION 105. Notices, Etc., to Trustee and Company.................................................... 26
SECTION 106. Notice to Holders; Waiver................................................................ 26
SECTION 107. Effect of Headings and Table of Contents................................................. 27
SECTION 108. Successors and Assigns................................................................... 27
SECTION 109. Separability Clause...................................................................... 27
SECTION 110. Benefits of Indenture.................................................................... 27
SECTION 111. Governing Law............................................................................ 28
SECTION 112. Conflict with Trust Indenture Act........................................................ 28
SECTION 113. Legal Holidays........................................................................... 28
SECTION 114. No Personal Liability of Directors, Officers,
Employees and
Stockholders.................................................................... 28
SECTION 115. Independence of Covenants................................................................ 29
SECTION 116. Exhibits................................................................................. 29
SECTION 117. Counterparts............................................................................. 29
SECTION 118. Duplicate Originals...................................................................... 29
ARTICLE TWO
<PAGE>
iv
Page
SECURITY FORMS
SECTION 201. Forms Generally.......................................................................... 29
ARTICLE THREE
THE SECURITIES
SECTION 301. Title and Terms.......................................................................... 30
SECTION 302. Denominations............................................................................ 31
SECTION 303. Execution, Authentication, Delivery and Dating........................................... 31
SECTION 304. Temporary Securities..................................................................... 33
SECTION 305. Registration, Registration of Transfer and Exchange...................................... 33
SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities......................................... 35
SECTION 307. Payment of Interest; Interest Rights Preserved........................................... 35
SECTION 308. Persons Deemed Owners.................................................................... 37
SECTION 309. Cancellation............................................................................. 37
SECTION 310. Computation of Interest.................................................................. 37
SECTION 311. CUSIP Number............................................................................. 38
SECTION 312. Book-Entry Provisions for Global Securities.............................................. 38
SECTION 313. Special Transfer Provisions.............................................................. 39
ARTICLE FOUR
SATISFACTION AND DISCHARGE
SECTION 401. Satisfaction and Discharge of Indenture.................................................. 41
SECTION 402. Application of Trust Money............................................................... 42
ARTICLE FIVE
REMEDIES
SECTION 501. Events of Default........................................................................ 42
SECTION 502. Acceleration of Maturity; Rescission and Annulment....................................... 44
SECTION 503. Collection of Indebtedness and Suits for Enforcement
by
Trustee......................................................................... 45
SECTION 504. Trustee May File Proofs of Claim......................................................... 46
SECTION 505. Trustee May Enforce Claims Without Possession of
Securities.................................................................................... 47
SECTION 506. Application of Money Collected........................................................... 47
SECTION 507. Limitation on Suits...................................................................... 48
SECTION 508. Unconditional Right of Holders to Receive Principal,
Premium and Interest............................................................ 48
SECTION 509. Restoration of Rights and Remedies....................................................... 49
SECTION 510. Rights and Remedies Cumulative........................................................... 49
SECTION 511. Delay or Omission Not Waiver............................................................. 49
SECTION 512. Control by Holders....................................................................... 49
SECTION 513. Waiver of Past Defaults.................................................................. 50
SECTION 514. Waiver of Stay or Extension Laws......................................................... 50
ARTICLE SIX
THE TRUSTEE
<PAGE>
v
Page
SECTION 601. Certain Duties and Responsibilities...................................................... 50
SECTION 602. Notice of Default........................................................................ 52
SECTION 603. Certain Rights of Trustee................................................................ 52
SECTION 604. Trustee Not Responsible for Recitals or Issuance of
Securities.................................................................................... 53
SECTION 605. May Hold Securities...................................................................... 54
SECTION 606. Money Held in Trust...................................................................... 54
SECTION 607. Compensation and Reimbursement........................................................... 54
SECTION 608. Corporate Trustee Required; Eligibility; Conflicting
Interests..................................................................................... 55
SECTION 609. Resignation and Removal; Appointment of Successor........................................ 55
SECTION 610. Acceptance of Appointment by Successor................................................... 57
SECTION 611. Merger, Conversion, Consolidation or Succession to
Business...................................................................................... 57
ARTICLE SEVEN
HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY
SECTION 701. Disclosure of Names and Addresses of Holders............................................. 58
SECTION 702. Reports by Trustee....................................................................... 58
SECTION 703. Reports by Company....................................................................... 58
ARTICLE EIGHT
CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE
SECTION 801. Company May Consolidate, Etc., Only on Certain Terms
............................................................................................. 58
SECTION 802. Successor Substituted.................................................................... 60
ARTICLE NINE
SUPPLEMENTAL INDENTURES
SECTION 901. Supplemental Indentures Without Consent of Holders....................................... 60
SECTION 902. Supplemental Indentures with Consent of Holders.......................................... 61
SECTION 903. Execution of Supplemental Indentures..................................................... 62
SECTION 904. Effect of Supplemental Indentures........................................................ 62
SECTION 905. Conformity with Trust Indenture Act...................................................... 62
SECTION 906. Reference in Securities to Supplemental Indentures....................................... 62
SECTION 907. Notice of Supplemental Indentures........................................................ 62
ARTICLE TEN
COVENANTS
SECTION 1001. Payment of Principal, Premium, if Any, and Interest
............................................................................................. 63
SECTION 1002. Maintenance of Office or Agency......................................................... 63
SECTION 1003. Money for Security Payments to Be Held in Trust......................................... 63
SECTION 1004. Corporate Existence..................................................................... 65
SECTION 1005. Payment of Taxes and Other Claims....................................................... 65
SECTION 1006. Maintenance of Properties............................................................... 65
SECTION 1007. Insurance............................................................................... 66
SECTION 1008. Provision of Financial Statements....................................................... 66
<PAGE>
vi
Page
SECTION 1009. Statement by Officers as to Default..................................................... 66
SECTION 1010. Purchase of Securities upon Change of Control........................................... 67
SECTION 1011. Limitation on Consolidated Debt......................................................... 68
SECTION 1012. Limitation on Debt and Preferred Stock of
Restricted
Subsidiaries.................................................................... 70
SECTION 1013. Limitation on Restricted Payments....................................................... 72
SECTION 1014. Limitation on Dividend and Other Payment
Restrictions
Affecting Restricted Subsidiaries.............................................. 74
SECTION 1015. Limitation on Liens..................................................................... 75
SECTION 1016. Limitation on Issuances of Certain Guarantees by,
and Debt
Securities of, Restricted Subsidiaries.......................................... 76
SECTION 1017. Limitation on Sale and Leaseback Transactions........................................... 76
SECTION 1018. Limitation on Asset Dispositions........................................................ 76
SECTION 1019. Limitation on Issuances and Sales of Capital Stock
of
Restricted Subsidiaries......................................................... 77
SECTION 1020. Transactions with Affiliates and Related Persons........................................ 78
SECTION 1021. Limitation on Designations of Unrestricted
Subsidiaries.................................................................................. 78
SECTION 1022. No Repayment of Existing Parent Company Advances
with
the Proceeds of the Securities.................................................. 79
SECTION 1023. Waiver of Certain Covenants............................................................. 80
SECTION 1024. Trustee Not to Monitor Performance...................................................... 80
ARTICLE ELEVEN
REDEMPTION OF SECURITIES
SECTION 1101. Right of Redemption..................................................................... 80
SECTION 1102. Applicability of Article................................................................ 80
SECTION 1103. Election to Redeem; Notice to Trustee................................................... 80
SECTION 1104. Selection by Trustee of Securities to Be Redeemed....................................... 81
SECTION 1105. Notice of Redemption.................................................................... 81
SECTION 1106. Deposit of Redemption Price............................................................. 82
SECTION 1107. Securities Payable on Redemption Date................................................... 82
SECTION 1108. Securities Redeemed in Part............................................................. 83
ARTICLE TWELVE
DEFEASANCE AND COVENANT DEFEASANCE
SECTION 1201. Company's Option to Effect Defeasance or Covenant
Defeasance...................................................................... 83
SECTION 1202. Defeasance and Discharge................................................................ 83
SECTION 1203. Covenant Defeasance..................................................................... 84
SECTION 1204. Conditions to Defeasance or Covenant Defeasance......................................... 84
SECTION 1205. Deposited Money and Government Securities to Be
Held in
Trust; Other Miscellaneous Provisions........................................... 86
SECTION 1206. Reinstatement........................................................................... 86
<PAGE>
vii
Page
TESTIMONIUM..................................................................................................... 87
SIGNATURES AND SEALS............................................................................................ 87
</TABLE>
EXHIBIT A - Form of Security
EXHIBIT B - Form of Certificate to Be Delivered in Connection with
Transfers Pursuant to Regulation S
<PAGE>
4.2-1
EXHIBIT
4.2
QWEST COMMUNICATIONS INTERNATIONAL INC.
$555,890,000
9.47% Senior Discount Notes Due 2007
REGISTRATION AGREEMENT
Dated: October 15, 1997
<PAGE>
4.2-1
QWEST COMMUNICATIONS INTERNATIONAL INC.
$555,890,000 9.47% SENIOR DISCOUNT NOTES DUE 2007
REGISTRATION AGREEMENT
New York, New York
October 15, 1997
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
Qwest Communications International Inc., a Delaware corporation
(the "Company"), proposes to issue and sell to certain initial purchasers (the
"Initial Purchasers"), upon the terms set forth in a purchase agreement dated
October 9, 1997 (the "Purchase Agreement"), its $555,890,000 9.47% Senior
Discount Notes Due 2007 (the "Securities") (the "Initial Placement"). As an
inducement to the Initial Purchasers to enter into the Purchase Agreement, the
Company agrees with you, (i) for your benefit and the benefit of the other
Initial Purchasers and (ii) for the benefit of the holders from time to time of
the Securities (including you and the other Initial Purchasers), as follows:
1. Definitions. Capitalized terms used herein without definition
shall have their respective meanings set forth in the Purchase Agreement. As
used in this Agreement, the following capitalized defined terms shall have the
following meanings:
"Act" means the Securities Act of 1933, as amended, and the rules
and regulations of the Commission promulgated thereunder.
"Affiliate" of any specified person means any other person which,
directly or indirectly, is in control of, is controlled by, or is under common
control with, such specified person. For purposes of this definition, control of
a person means the power, direct or indirect, to direct or cause the direction
of the management and policies of such person whether by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Closing Date" has the meaning set forth in the Purchase Agreement.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Exchange Offer Registration Period" means the 1-year period
following the consummation of the Registered Exchange Offer, exclusive of any
period during which any stop order shall be in effect suspending the
effectiveness of the Exchange Offer Registration Statement.
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4.2-2
"Exchange Offer Registration Statement" means a registration
statement of the Company on an appropriate form under the Act with respect to
the Registered Exchange Offer, all amendments and supplements to such
registration statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Exchanging Dealer" means any Holder (which may include the
Initial Purchasers) that is a broker-dealer, electing to exchange Securities
acquired for its own account as a result of market-making activities or other
trading activities, for New Securities.
"Expiration Date" means the date of consummation of the
Registered Exchange Offer which shall be not less than 30 days and not more than
50 days after the date on which notice of the Registered Exchange Offer is
mailed to the Holders pursuant to clause 2(c)(ii) of this Agreement.
"Final Memorandum" has the meaning set forth in the Purchase
Agreement.
"Holder" means a holder from time to time of Securities
(including the Initial Purchasers) or of New Securities.
"Indenture" means the Indenture relating to the Securities dated
as of October 15, 1997, between the Company and Bankers Trust Company, as
trustee, as the same may be amended from time to time in accordance with the
terms thereof.
"Initial Placement" has the meaning set forth in the preamble
hereto.
"Majority Holders" means the Holders of a majority of the
aggregate principal amount of securities registered under a Registration
Statement.
"Managing Underwriters" means the investment banker or investment
bankers and manager or managers that shall administer an underwritten offering.
"New Securities" means debt securities of the Company identical
in all material respects to the Securities (except that the New Securities will
not contain terms with respect to registration rights or transfer restrictions,
and interest rate and interest rate step-up provisions will be modified or
eliminated, as appropriate), to be issued under the Indenture or the New
Securities Indenture.
"New Securities Indenture" means an indenture between the Company
and the New Securities Trustee, identical in all material respects with the
Indenture (except that the interest rate and interest rate step-up provisions
and the transfer restrictions will be modified or eliminated, as appropriate).
"New Securities Trustee" means the Trustee or a bank or trust
company reasonably satisfactory to the Initial Purchasers, as trustee with
respect to the New Securities under the New Securities Indenture.
"Prospectus" means the prospectus included in any Registration
Statement (including, without limitation, a prospectus that discloses
information previously omitted from a prospectus filed as part of an effective
registration statement in reliance upon Rule 430A under the Act), as amended
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4.2-3
or supplemented by any prospectus supplement, with respect to the terms of the
offering of any portion of the Securities or the New Securities, covered by such
Registration Statement, and all amendments and supplements to the Prospectus,
including post-effective amendments.
"Registered Exchange Offer" means the proposed offer to the
Holders to issue and deliver to such Holders, in exchange for the Securities, a
like principal amount of the New Securities.
"Registration Statement" means any Exchange Offer Registration
Statement or Shelf Registration Statement that covers any of the Securities or
the New Securities pursuant to the provisions of this Agreement, amendments and
supplements to such registration statement, including post-effective amendments,
in each case including the Prospectus contained therein, all exhibits thereto
and all material incorporated by reference therein.
"Securities" has the meaning set forth in the preamble hereto.
"Shelf Registration" means a registration effected pursuant to
Section 3 hereof.
"Shelf Registration Period" has the meaning set forth in Section
3(b) hereof.
"Shelf Registration Statement" means a "shelf" registration
statement of the Company pursuant to the provisions of Section 3 hereof which
covers some or all of the Securities or New Securities, as applicable, on an
appropriate form under Rule 415 under the Act, or any similar rule that may be
adopted by the Commission, amendments and supplements to such registration
statement, including post-effective amendments, in each case including the
Prospectus contained therein, all exhibits thereto and all material incorporated
by reference therein.
"Trustee" means the trustee with respect to the Securities under the
Indenture.
"Underwriter" means any underwriter of securities in connection
with an offering thereof under an Exchange Offer Registration Statement or a
Shelf Registration Statement.
2. Registered Exchange Offer; Resales of New Securities by
Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, within
90 days following the Closing Date, shall file with the Commission the Exchange
Offer Registration Statement with respect to the Registered Exchange Offer. The
Company shall use its best efforts to cause the Exchange Offer Registration
Statement to become effective under the Act within 150 days of the Closing Date.
(b) Upon the effectiveness of the Exchange Offer Registration
Statement, the Company shall promptly commence the Registered Exchange Offer, it
being the objective of such Registered Exchange Offer to enable each Holder
electing to exchange Securities for New Securities (assuming (i) that such
Holder is not an affiliate, as defined in Rule 405 of the Act, of the Company,
(ii) that such Holder is acquiring the New Securities in the ordinary course of
such Holder's business and (iii) that such Holder has no arrangement or
undertaking with any person to participate in the distribution (within the
meaning of the Act) of the New Securities) to trade such New Securities from and
after their receipt without any limitations or
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4.2-4
restrictions under the Act and without material restrictions under the
securities laws of a substantial proportion of the several states of the United
States.
(c) In connection with the Registered Exchange Offer, the
Company shall:
(i) mail to each Holder a copy of the Prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal (which shall include deemed representations by
the Holders to the effect set forth under (i), (ii) and (iii) in
paragraph (b) above) and related documents;
(ii) keep the Registered Exchange Offer open for not less than 30
days and not more than 50 days after the date notice thereof is mailed
to the Holders (or longer if required by applicable law);
(iii) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of
New York; and
(iv) comply in all respects with all applicable laws.
(d) As soon as practicable after the close of the Registered
Exchange Offer, the Company shall:
(i) accept for exchange all Securities tendered and not
validly withdrawn pursuant to the Registered Exchange Offer;
(ii) deliver to the Trustee for cancellation all Securities
so accepted for exchange; and
(iii) cause the Trustee or the New Securities Trustee, as the
case may be, promptly to authenticate and deliver to each Holder of
Securities a principal amount of New Securities equal in principal
amount to the Securities of such Holder so accepted for exchange.
(e) The Initial Purchasers and the Company acknowledge that,
pursuant to interpretations by the Commission's staff of Section 5 of the Act,
and in the absence of an applicable exemption therefrom, each Exchanging Dealer
is required to deliver a Prospectus in connection with a sale of any New
Securities received by such Exchanging Dealer pursuant to the Registered
Exchange Offer in exchange for Securities acquired for its own account as a
result of market-making activities or other trading activities. Accordingly, the
Company shall:
(i) include the information set forth in Annex A hereto on the
cover of the Exchange Offer Registration Statement, in Annex B hereto
in the forepart of the Exchange Offer Registration Statement in a
section setting forth details of the Exchange Offer, and in Annex C
hereto in the "Underwriting" or "Plan of Distribution" section of the
Prospectus forming a part of the Exchange Offer Registration Statement,
and include the information set forth in Annex D hereto in the letter
of transmittal delivered pursuant to the Registered Exchange Offer; and
(ii) keep the Exchange Offer Registration Statement continuously
effective under the Act during the Exchange Offer Registration Period
for delivery by Exchanging Dealers in connection
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4.2-5
with sales of New Securities received pursuant to the Registered
Exchange Offer, as contemplated by Section 4(h) below.
(f) In the event that any Initial Purchaser determines that it is
not eligible to participate in the Registered Exchange Offer with respect to the
exchange of Securities constituting any portion of an unsold allotment, at the
request of such Initial Purchaser, the Company shall issue and deliver to such
Initial Purchaser or the party purchasing New Securities registered under a
Shelf Registration Statement as contemplated by Section 3 hereof from such
Initial Purchaser, in exchange for such Securities, a like principal amount of
New Securities. The Company shall seek to cause the CUSIP Service Bureau to
issue the same CUSIP number for such New Securities as for New Securities issued
pursuant to the Registered Exchange Offer.
3. Shelf Registration. 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 Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for
any other reason the Registered Exchange Offer is not consummated within 180
days of the date hereof, or (iii) any Initial Purchaser so requests with respect
to Securities held by it following consummation of the Registered Exchange
Offer, or (iv) any Holder (other than an Initial Purchaser) is not eligible to
participate in the Registered Exchange Offer and so notifies the Company as soon
as practicable, but in any event not later than 30 days following consummation
of the Registered Exchange Offer, or (v) in the case of any Initial Purchaser
that participates in the Registered Exchange Offer or acquires New Securities
pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely
tradeable New Securities in exchange for Securities constituting any portion of
an unsold allotment (it being understood that, for purposes of this Section 3,
(x) the requirement that an Initial Purchaser deliver a Prospectus containing
the information required by Items 507 and/or 508 of Regulation S-K under the Act
in connection with sales of New Securities acquired in exchange for such
Securities shall result in such New Securities being not "freely tradeable" but
(y) the requirement that an Exchanging Dealer deliver a Prospectus in connection
with sales of New Securities acquired in the Registered Exchange Offer in
exchange for Securities acquired as a result of market-making activities or
other trading activities shall not result in such New Securities being not
"freely tradeable"), the following provisions shall apply:
(a) The Company shall, as promptly as practicable (but in no
event more than 30 days after so required or requested pursuant to this
Section 3), file with the Commission, and thereafter shall cause to be
declared effective under the Act, a Shelf Registration Statement
relating to the offer and sale of the Securities or the New Securities,
as applicable, by the Holders from time to time in accordance with the
methods of distribution elected by such Holders and set forth in such
Shelf Registration Statement; provided that, with respect to New
Securities received by an Initial Purchaser in exchange for Securities
constituting any portion of an unsold allotment, the Company may, if
permitted by current interpretations by the Commission's staff, file a
post-effective amendment to the Exchange Offer Registration Statement
containing the information required by Regulation S-K Items 507 and/or
508, as applicable, in satisfaction of its obligations under this
paragraph (a) with respect thereto, and any such Exchange Offer
Registration Statement, as so amended, shall be referred to herein as,
and governed by the provisions herein applicable to, a Shelf
Registration Statement.
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4.2-6
(b) The Company shall use its best efforts to keep the Shelf
Registration Statement continuously effective in order to permit the
Prospectus forming part thereof to be usable by Holders for a period of
three years from the date the Shelf Registration Statement is declared
effective by the Commission or such shorter period that will terminate
when all the Securities or New Securities, as applicable, covered by
the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement (in any such case, such period being called the
"Shelf Registration Period"). The Company shall be deemed not to have
used its best efforts to keep the Shelf Registration Statement
effective during the requisite period if it voluntarily takes any
action that would result in Holders of securities covered thereby not
being able to offer and sell such securities during that period, unless
(i) such action is required by applicable law, or (ii) such action is
taken by the Company in good faith and for valid business reasons (not
including avoidance of the Company's obligations hereunder), including
the acquisition or divestiture of assets, so long as the Company as
promptly as practicable thereafter complies with the requirements of
Section 4(k) hereof, if applicable.
4. Registration Procedures. In connection with any Shelf
Registration Statement and, to the extent applicable, any Exchange Offer
Registration Statement, the following provisions shall apply:
(a) The Company shall furnish to you, prior to the filing thereof
with the Commission, a copy of any Shelf Registration Statement and any
Exchange Offer Registration Statement, and each amendment thereof and
each amendment or supplement, if any, to the Prospectus included
therein, and shall reflect in each such document, when so filed with
the Commission, such comments as you reasonably may propose.
(b) The Company shall ensure that (i) any Registration Statement
and any amendment thereto and any Prospectus forming part thereof and
any amendment or supplement thereto complies in all material respects
with the Act and the rules and regulations thereunder, (ii) any
Registration Statement and any amendment thereto does not, when it
becomes effective, contain an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any
Prospectus forming part of any Registration Statement, and any
amendment or supplement to such Prospectus, does not include an untrue
statement of a material fact or omit to state a material fact necessary
in order to make the statements, in the light of the circumstances
under which they were made, not misleading.
(c) (1) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities covered thereby, and,
if requested by you or any such Holder, confirm such advice in writing:
(i) when a Registration Statement and any amendment thereto
has been filed with the Commission and when the Registration
Statement or any post-effective amendment thereto has become
effective; and
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the Prospectus
included therein or for additional information.
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4.2-7
(2) The Company shall advise you and, in the case of a Shelf
Registration Statement, the Holders of securities covered thereby, and,
in the case of an Exchange Offer Registration Statement, any Exchanging
Dealer which has provided in writing to the Company a telephone or
facsimile number and address for notices, and, if requested by you or
any such Holder or Exchanging Dealer, confirm such advice in writing:
(i) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
initiation of any proceedings for that purpose;
(ii) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the securities
included therein for sale in any jurisdiction or the initiation
or threatening of any proceeding for such purpose; and
(iii) of the happening of any event that requires the making
of any changes in the Registration Statement or the Prospectus so
that, as of such date, the statements therein are not misleading
and do not omit to state a material fact required to be stated
therein or necessary to make the statements therein (in the case
of the Prospectus, in light of the circumstances under which they
were made) not misleading (which advice shall be accompanied by
an instruction to suspend the use of the Prospectus until the
requisite changes have been made).
(d) The Company shall obtain the withdrawal of any order
suspending the effectiveness of any Registration Statement at the
earliest possible time.
(e) The Company shall furnish to each Holder of securities
included within the coverage of any Shelf Registration Statement,
without charge, at least one copy of such Shelf Registration Statement
and any post-effective amendment thereto, including financial
statements and schedules, and, if the Holder so requests in writing,
all exhibits (including those incorporated by reference).
(f) The Company shall, during the Shelf Registration Period,
deliver to each Holder of securities included within the coverage of
any Shelf Registration Statement, without charge, as many copies of the
Prospectus (including each preliminary Prospectus) included in such
Shelf Registration Statement and any amendment or supplement thereto as
such Holder may reasonably request; and the Company consents to the use
of the Prospectus or any amendment or supplement thereto by each of the
selling Holders of securities in connection with the offering and sale
of the securities covered by the Prospectus or any amendment or
supplement thereto.
(g) The Company shall furnish to each Exchanging Dealer which so
requests, without charge, at least one copy of the Exchange Offer
Registration Statement and any post-effective amendment thereto,
including financial statements and schedules, any documents
incorporated by reference therein, and, if the Exchanging Dealer so
requests in writing, all exhibits (including those incorporated by
reference).
(h) The Company shall, during the Exchange Offer Registration
Period, promptly deliver to each Exchanging Dealer, without charge, as
many copies of the Prospectus included in such Exchange Offer
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4.2-8
Registration Statement and any amendment or supplement thereto as such
Exchanging Dealer may reasonably request for delivery by such
Exchanging Dealer in connection with a sale of New Securities received
by it pursuant to the Registered Exchange Offer; and the Company
consents to the use of the Prospectus or any amendment or supplement
thereto by any such Exchanging Dealer, as aforesaid.
(i) Prior to the Registered Exchange Offer or any other offering
of securities pursuant to any Registration Statement, the Company shall
use its best efforts to register or qualify or cooperate with the
Holders of securities included therein and their respective counsel in
connection with the registration or qualification of such securities
for offer and sale under the securities or blue sky laws of such
jurisdictions as any such Holders reasonably request in writing and do
any and all other acts or things necessary or advisable to enable the
offer and sale in such jurisdictions of the securities covered by such
Registration Statement; provided, however, that the Company will not be
required to qualify generally to do business in any jurisdiction where
it is not then so qualified or to take any action which would subject
it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
(j) The Company shall cooperate with the Holders of securities to
facilitate the timely preparation and delivery of certificates
representing securities to be sold pursuant to any Registration
Statement free of any restrictive legends and in such denominations and
registered in such names as Holders may request prior to sales of
securities pursuant to such Registration Statement.
(k) Upon the occurrence of any event contemplated by paragraph
(c)(2)(iii) above, the Company shall as promptly as practicable prepare
a post-effective amendment to any Registration Statement or an
amendment or supplement to the related Prospectus or file any other
required document so that, as thereafter delivered to purchasers of the
securities included therein, the Prospectus will not include an untrue
statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(l) Not later than the effective date of any such Registration
Statement hereunder, the Company shall provide a CUSIP number for the
Securities or New Securities, as the case may be, registered under such
Registration Statement, and provide the trustee with printed
certificates for such Securities or New Securities, in a form eligible
for deposit with The Depository Trust Company.
(m) The Company shall comply with all applicable rules and
regulations of the Commission and shall make generally available to its
security holders as soon as practicable after the effective date of the
applicable Registration Statement an earnings statement satisfying the
provisions of Section 11(a) of the Act.
(n) The Company shall cause the Indenture or the New
Securities Indenture, as the case may be, to be qualified under the
Trust Indenture Act in a timely manner.
(o) The Company may require each Holder of securities to be
sold pursuant to any Shelf Registration Statement to furnish to the
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4.2-9
Company such information regarding the Holder and the distribution of
such securities as the Company may from time to time reasonably require
for inclusion in such Registration Statement.
(p) The Company shall, if requested, as promptly as practicable
incorporate in a Prospectus supplement or post-effective amendment to a
Shelf Registration Statement, such information as the Managing
Underwriters and Majority Holders reasonably determine and agree should
be included therein and shall make all required filings of such
Prospectus supplement or post-effective amendment as soon as notified
of the matters to be incorporated in such Prospectus supplement or
post-effective amendment.
(q) In the case of any Shelf Registration Statement, the Company
shall enter into such agreements (including underwriting agreements)
and take all other appropriate actions in order to expedite or
facilitate the registration or the disposition of the Securities, and
in connection therewith, if an underwriting agreement is entered into,
cause the same to contain indemnification provisions and procedures no
less favorable than those set forth in Section 6 (or such other
provisions and procedures acceptable to the Majority Holders and the
Managing Underwriters, if any), with respect to all parties to be
indemnified pursuant to Section 6 from Holders of Securities to the
Company.
(r) In the case of any Shelf Registration Statement, the Company
shall (i) make reasonably available for inspection by the Holders of
securities to be registered thereunder, any Underwriter participating
in any disposition pursuant to such Registration Statement, and any
attorney, accountant or other agent retained by the Holders or any such
Underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and its subsidiaries;
(ii) cause the Company's officers, directors and employees to supply
all relevant information reasonably requested by the Holders or any
such Underwriter, attorney, accountant or agent in connection with any
such Registration Statement as is customary for similar due diligence
examinations; provided, however, that any information that is
designated in writing by the Company, in good faith, as confidential at
the time of delivery of such information shall be kept confidential by
the Holders or any such Underwriter, attorney, accountant or agent,
unless such disclosure is made in connection with a court proceeding or
required by law, or such information becomes available to the public
generally or through a third party without an accompanying obligation
of confidentiality; (iii) make such representations and warranties to
the Holders of securities registered thereunder and the Underwriters,
if any, in form, substance and scope as are customarily made by issuers
to underwriters in primary underwritten offerings and covering matters
including, but not limited to, those set forth in the Purchase
Agreement; (iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the Managing Underwriters, if any)
addressed to each selling Holder and the Underwriters, if any, covering
such matters as are customarily covered in opinions requested in
underwritten offerings and such other matters as may be reasonably
requested by such Holders and Underwriters; (v) obtain "cold comfort"
letters and updates thereof from the independent certified public
accountants of the Company (and, if necessary, any other independent
certified public accountants of any subsidiary of the
<PAGE>
4.2-10
Company or of any business acquired by the Company for which financial
statements and financial data are, or are required to be, included in
the Registration Statement), addressed to each selling Holder of
securities registered thereunder and the Underwriters, if any, in
customary form and covering matters of the type customarily covered in
"cold comfort" letters in connection with primary underwritten
offerings; and (vi) deliver such documents and certificates as may be
reasonably requested by the Majority Holders and the Managing
Underwriters, if any, including those to evidence compliance with
Section 4(k) and with any customary conditions contained in the
underwriting agreement or other agreement entered into by the Company.
The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of
this Section 4(r) shall be performed at (A) the effectiveness of such
Registration Statement and each post-effective amendment thereto and
(B) each closing under any underwriting or similar agreement as and to
the extent required thereunder.
(s) In the case of any Exchange Offer Registration Statement, the
Company shall (i) make reasonably available for inspection by such
Initial Purchaser, and any attorney, accountant or other agent retained
by such Initial Purchaser, all relevant financial and other records,
pertinent corporate documents and properties of the Company and its
subsidiaries; (ii) cause the Company's officers, directors and
employees to supply all relevant information reasonably requested by
such Initial Purchaser or any such attorney, accountant or agent in
connection with any such Registration Statement as is customary for
similar due diligence examinations; provided, however, that any
information that is designated in writing by the Company, in good
faith, as confidential at the time of delivery of such information
shall be kept confidential by such Initial Purchaser or any such
attorney, accountant or agent, unless such disclosure is made in
connection with a court proceeding or required by law, or such
information becomes available to the public generally or through a
third party without an accompanying obligation of confidentiality;
(iii) make such representations and warranties to such Initial
Purchaser, in form, substance and scope as are customarily made by
issuers to underwriters in primary underwritten offerings and covering
matters including, but not limited to, those set forth in the Purchase
Agreement; (iv) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to such Initial Purchaser and its
counsel), addressed to such Initial Purchaser, covering such matters as
are customarily covered in opinions requested in underwritten offerings
and such other matters as may be reasonably requested by such Initial
Purchaser or its counsel; (v) obtain "cold comfort" letters and updates
thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public
accountants of any subsidiary of the Company or of any business
acquired by the Company for which financial statements and financial
data are, or are required to be, included in the Registration
Statement), addressed to such Initial Purchaser, in customary form and
covering matters of the type customarily covered in "cold comfort"
letters in connection with primary underwritten offerings, or if
requested by such Initial Purchaser or its counsel in lieu of a "cold
comfort" letter, an agreed-upon procedures letter under Statement on
Auditing Standards No. 35, covering matters requested by such Initial
Purchaser or its counsel; and (vi) deliver such documents and
certificates as may be reasonably requested by such Initial Purchaser
or its counsel, including those to evidence compliance
<PAGE>
4.2-11
with Section 4(k) and with conditions customarily contained in
underwriting agreements. The foregoing actions set forth in clauses
(iii), (iv), (v), and (vi) of this Section 4(s) shall be performed at
the close of the Registered Exchange Offer and the effective date of
any post-effective amendment to the Exchange Offer Registration
Statement.
5. Registration Expenses. The Company shall bear all expenses
incurred in connection with the performance of its obligations under Sections 2,
3 and 4 hereof and, in the event of any Shelf Registration Statement, will
reimburse the Holders for the reasonable fees and disbursements of one firm or
counsel designated by the Majority Holders to act as counsel for the Holders in
connection therewith, and, in the case of any Exchange Offer Registration
Statement, will reimburse the Initial Purchasers for the reasonable fees and
disbursements of counsel acting in connection therewith.
6. Indemnification and Contribution. (a) In connection with any
Registration Statement, the Company agrees to indemnify and hold harmless each
Holder of securities covered thereby (including each Initial Purchaser and, with
respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each
Exchanging Dealer), the directors, officers, employees and agents of each such
Holder and each person who controls any such Holder within the meaning of either
the Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement as originally filed or in any amendment thereof, or
in any preliminary Prospectus or Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and agrees to reimburse
each such indemnified party, as incurred, for any legal or other expenses
reasonably incurred by them in connection with investigating or defending any
such loss, claim, damage, liability or action; provided, however, that the
Company will not be liable in any case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of any such Holder specifically for inclusion therein.
This indemnity agreement will be in addition to any liability which the Company
may otherwise have.
The Company also agrees to indemnify or contribute to Losses of,
as provided in Section 6(d), any Underwriters of Securities registered under a
Shelf Registration Statement, their officers and directors and each person who
controls such Underwriters on substantially the same basis as that of the
indemnification of the Initial Purchaser and the selling Holders provided in
this Section 6(a) and shall, if requested by any Holder, enter into an
underwriting agreement reflecting such agreement, as provided in Section 4(q)
hereof.
(b) Each Holder of securities covered by a Registration Statement
(including each Initial Purchaser and, with respect to any Prospectus delivery
as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally agrees
to indemnify and hold harmless (i) the Company, (ii) each of its directors,
(iii) each of its officers who signs such Registration Statement and (iv) each
person who controls the Company within the meaning of
<PAGE>
4.2-12
either the Act or the Exchange Act to the same extent as the foregoing indemnity
from the Company to each such Holder, but only with reference to written
information relating to such Holder furnished to the Company by or on behalf of
such Holder specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any such Holder may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 or notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section 6, notify the indemnifying party in writing of the
commencement thereof; but the failure so to notify the indemnifying party (i)
will not relieve it from liability under paragraph (a) or (b) above unless and
to the extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and defenses
and (ii) will not, in any event, relieve the indemnifying party from any
obligations to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be entitled
to appoint counsel of the indemnifying party's choice at the indemnifying
party's expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall not
thereafter be responsible for the fees and expenses of any separate counsel
retained by the indemnified party or parties except as set forth below);
provided, however, that such counsel shall be satisfactory to the indemnified
party. Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party shall have
the right to employ separate counsel (including local counsel), and the
indemnifying party shall bear the reasonable fees, costs and expenses of such
separate counsel (and local counsel) if (i) the use of counsel chosen by the
indemnifying party to represent the indemnified party would present such counsel
with a conflict of interest, (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that there may be legal defenses available to it and/or other indemnified
parties which are different from or additional to those available to the
indemnifying party, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of the institution of such action or (iv) the
indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indemnifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or
(b) of this Section 6 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, then each applicable indemnifying party, in
lieu of indemnifying such indemnified party, shall have a joint and several
obligation to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in connection
with investigating or defending same) (collectively "Losses") to which such
indemnified party may be subject in such proportion as is
<PAGE>
4.2-13
appropriate to reflect the relative benefits received by such indemnifying
party, on the one hand, and such indemnified party, on the other hand, from the
Initial Placement and the Registration Statement which resulted in such Losses;
provided, however, that in no case shall any Initial Purchaser or any subsequent
Holder of any Security or New Security be responsible, in the aggregate, for any
amount in excess of the purchase discount or commission applicable to such
Security, or in the case of a New Security, applicable to the Security which was
exchangeable into such New Security, as set forth on the cover page of the Final
Memorandum, nor shall any Underwriter be responsible for any amount in excess of
the underwriting discount or commission applicable to the securities purchased
by such Underwriter under the Registration Statement which resulted in such
Losses. If the allocation provided by the immediately preceding sentence is
unavailable for any reason, the indemnifying party and the indemnified party
shall contribute in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of such indemnifying party, on the
one hand, and such indemnified party, on the other hand, in connection with the
statements or omissions which resulted in such Losses as well as any other
relevant equitable considerations. Benefits received by the Company shall be
deemed to be equal to the sum of (x) the total net proceeds from the Initial
Placement (before deducting expenses) as set forth on the cover page of the
Final Memorandum and (y) the total amount of additional interest which the
Company was not required to pay as a result of registering the securities
covered by the Registration Statement which resulted in such Losses. Benefits
received by the Initial Purchasers shall be deemed to be equal to the total
purchase discounts and commissions as set forth on the cover page of the Final
Memorandum, and benefits received by any other Holders shall be deemed to be
equal to the value of receiving Securities or New Securities, as applicable,
registered under the Act. Benefits received by any Underwriter shall be deemed
to be equal to the total underwriting discounts and commissions, as set forth on
the cover page of the Prospectus forming a part of the Registration Statement
which resulted in such Losses. Relative fault shall be determined by reference
to whether any alleged untrue statement or omission relates to information
provided by the indemnifying party, on the one hand, or by the indemnified
party, on the other hand. The parties agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this paragraph (d), no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 6,
each person who controls a Holder within the meaning of either the Act or the
Exchange Act and each director, officer, employee and agent of such Holder shall
have the same rights to contribution as such Holder, and each person who
controls the Company within the meaning of either the Act or the Exchange Act,
each officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to the applicable terms and conditions of this
paragraph (d).
(e) The provisions of this Section 6 will remain in full force
and effect, regardless of any investigation made by or on behalf of any Holder
or the Company or any of the officers, directors or controlling persons referred
to in Section 6 hereof, and will survive the sale by a Holder of securities
covered by a Registration Statement.
<PAGE>
4.2-14
7. Miscellaneous.
(a) No Inconsistent Agreements. The Company has not, as of the
date hereof, entered into, nor shall it, on or after the date hereof, enter
into, any agreement with respect to its securities that is inconsistent with the
rights granted to the Holders herein or otherwise conflicts with the provisions
hereof.
(b) Amendments and Waivers. The provisions of this Agreement,
including the provisions of this sentence, may not be amended, qualified,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given, unless the Company has obtained the written
consent of the Holders of at least a majority of the then outstanding aggregate
principal amount of Securities (or, after the consummation of any Exchange Offer
in accordance with Section 2 hereof, of New Securities); provided that, with
respect to any matter that directly or indirectly affects the rights of any
Initial Purchaser hereunder, the Company shall obtain the written consent of
each such Initial Purchaser against which such amendment, qualification,
supplement, waiver or consent is to be effective. Notwithstanding the foregoing
(except the foregoing proviso), a waiver or consent to departure from the
provisions hereof with respect to a matter that relates exclusively to the
rights of Holders whose securities are being sold pursuant to a Registration
Statement and that does not directly or indirectly affect the rights of other
Holders may be given by the Majority Holders, determined on the basis of
securities being sold rather than registered under such Registration Statement.
(c) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand-delivery, first-class mail,
telex, telecopier, or air courier guaranteeing overnight delivery:
(1) if to a Holder, at the most current address given by such
Holder to the Company in accordance with the provisions of this Section
7(c), which address initially is, with respect to each Holder, the
address of such Holder maintained by the Registrar under the Indenture,
with a copy in like manner to Salomon Brothers Inc;
(2) if to you, initially at the respective addresses set
forth in the Purchase Agreement; and
(3) if to the Company, initially at its address set forth in
the Purchase Agreement.
All such notices and communications shall be deemed to have been
duly given when received.
The Initial Purchasers or the Company by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
(d) Successors and Assigns. This Agreement shall inure to the
benefit of and be binding upon the successors and assigns of each of the
parties, including, without the need for an express assignment or any consent by
the Company thereto, subsequent Holders of Securities and/or New Securities. The
Company hereby agrees to extend the benefits of this Agreement to any Holder of
Securities and/or New Securities and any such Holder may specifically enforce
the provisions of this Agreement as if an original party hereto.
<PAGE>
4.2-15
(e) Counterparts. This agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
(g) Governing Law. This agreement shall be governed by and
construed in accordance with the internal laws of the State of New York
applicable to agreements made and to be performed in said State.
(h) Severability. In the event that any one or more of the
provisions contained herein, or the application thereof in any circumstances, is
held invalid, illegal or unenforceable in any respect for any reason, the
validity, legality and enforceability of any such provision in every other
respect and of the remaining provisions hereof shall not be in any way impaired
or affected thereby, it being intended that all of the rights and privileges of
the parties shall be enforceable to the fullest extent permitted by law.
(i) Securities Held by the Company, Etc. Whenever the consent or
approval of Holders of a specified percentage of principal amount of Securities
or New Securities is required hereunder, Securities or New Securities, as
applicable, held by the Company or its Affiliates (other than subsequent Holders
of Securities or New Securities if such subsequent Holders are deemed to be
Affiliates solely by reason of their holdings of such Securities or New
Securities) shall not be counted in determining whether such consent or approval
was given by the Holders of such required percentage.
<PAGE>
4.2-16
Please confirm that the foregoing correctly sets forth the
agreement between the Company and you.
Very truly yours,
QWEST COMMUNICATIONS INTERNATIONAL INC.
By: /s/
Name:
Title:
Accepted in New York, New York
October 15, 1997
SALOMON BROTHERS INC
By: /s/
Name:
Title:
<PAGE>
4.2-17
ANNEX A
Each broker-dealer that receives New Securities for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such New Securities. 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 New Securities received in exchange for Securities where such
New Securities were acquired by such broker-dealer as a result of market-making
activities or other trading activities. The Company has agreed that, starting on
the Expiration Date (as defined herein) and ending on the close of business on
the first anniversary of the Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution" in the Exchange Offer Registration Statement.
<PAGE>
ANNEX B
Each broker-dealer who holds Securities for its own account
acquired as a result of marketmaking activities or other trading activities and
who receives New Securities pursuant to a Registered Exchange Offer may be
deemed to be an "underwriter" within the meaning of he Securities Act of 1933,
as amended, and must acknowledge that it will deliver a Prospectus meeting the
requirements of the Securities Act in connection with any sale or transfer of
the New Securities covered by the Prospectus or any amendment or supplement
thereto. See "Plan of Distribution" in the Exchange Offer Registration
Statement.
<PAGE>
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Securities for its own
account pursuant to the Registered Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such New Securities. 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 New Securities received in
exchange for Securities where such Securities were acquired as a result of
market-making activities or other trading activities. The Company has agreed
that, starting on the Expiration Date and ending on the close of business on the
first anniversary of the Expiration Date, it will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until ______, 19__, all dealers effecting
transactions in the New Securities may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New
Securities by broker-dealers. New Securities 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 New Securities 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 New
Securities. Any broker-dealer that resells New Securities 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 New Securities may be deemed to be
an "underwriter" within the meaning of the Securities Act and any profit of any
such resale of New Securities 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 1 year after the Expiration Date, 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 Exchange Offer (including the expenses of one counsel for the
holders of the Securities) other than commissions or concessions of any brokers
or dealers and will indemnify the Holders of the Securities (including any
broker-dealers) 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 New Securities to be received
in the Exchange Offer.
<PAGE>
C-2
ANNEX D
Rider A
CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE
ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS
OR SUPPLEMENTS THERETO.
Name:
Address:
Number of copies:
- ------------------------------------------
Rider B
If the undersigned is not a broker-dealer, the undersigned
represents that it is not engaged in, and does not intend to engage in, a
distribution of New Securities. If the undersigned is a broker-dealer that will
receive New Securities for its own account in exchange for Securities, it
represents that the Securities to be exchanged for New Securities were acquired
by it as a result of market-making activities or other trading activities and
acknowledges that it will deliver a Prospectus meeting the requirements of the
Securities Act in connection with any resale of such New Securities; however, by
so acknowledging and by delivering a Prospectus, the undersigned will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act.
<PAGE>
5.1-3
Exhibit 5.1
December 19, 1997
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Qwest Communications International Inc.
Form S-4 Registration Statement Filed December 19, 1997
Ladies and Gentlemen:
As counsel for Qwest Communications International Inc., a Delaware
corporation (the "Company"), we have examined the above-referenced Registration
Statement on Form S-4 under the Securities Act of 1933, as amended (the
"Registration Statement"), which the Company has filed covering the exchange of
the Company's 9.47% Series B Senior Discount Notes Due 2007(the "Exchange
Notes") for its outstanding 9.47% Senior Discount Notes Due 2007(the "Old
Notes")
We have examined the Company's Amended and Restated Certificate of
Incorporation, By-Laws and the record of its corporate proceedings and have made
such other investigation as we have deemed necessary in order to express the
opinions set forth below.
Based on such investigation, it is our opinion that the Exchange Notes, when
sold as described in the prospectus included in the Registration Statement, will
be legally issued, fully paid and non-assessable.
We hereby consent to all references to us in the Registration Statement and
all amendments to the Registration Statement. We further consent to the use of
this opinion as an exhibit to the Registration Statement.
HOLME ROBERTS & OWEN LLP
By: /s/ Martha Dugan Rehm
------------------------
Martha Dugan Rehm
<PAGE>
8-4
EXHIBIT 8
December 19, 1997
Qwest Communications International Inc.
555 Seventeenth Street, Suite 1000
Denver, Colorado 80202
Re: 9.47% Series B Senior Discount Notes Due 2007
Form S-4 Registration Statement
Filed December 19, 1997
Ladies and Gentlemen:
This opinion is given in connection with the proposed offering by Qwest
Communications International Inc., a Delaware corporation (the "Company"), of
its 9.47% Series B Senior Discount Notes Due 2007 in exchange for its 9.47%
Senior Discount Notes Due 2007 issued on October 15, 1997, as described in the
registration statement on Form S-4 to be filed with the Securities and Exchange
Commission on December 19, 1997 (the "Registration Statement"). Capitalized
terms used in this letter that are not otherwise defined herein have the same
meanings given to them in the Registration Statement.
Our opinion is based on the current provisions of 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, all of which are subject to change, which changes could be
applied retroactively. Our opinion also is based on the facts set forth in the
Registration Statement, the Note Documents (as that term is defined in the
representation letter, dated December 19, 1997, from you), which we assume set
forth the complete agreement among the parties with respect to the Notes, and on
certain representations from you with respect to factual matters, which
representations we have not independently verified. We assume that all Note
Documents have been or will be properly executed and will be valid and binding
when executed.
We have prepared the discussion included in the Registration Statement under the
caption "Certain United States Federal Income Tax Considerations." It is our
opinion that the discussion under that caption describes the material United
States federal income tax consequences expected to result to the Holders,
subject to the conditions and limitations described therein.
The discussion does not cover all aspects of federal taxation that may be
relevant to, or the actual tax effect that any of the matters described therein
will have on, any particular Holder, and it does not address foreign, state, or
local tax consequences. The discussion does not cover the tax consequences that
might be applicable to 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 that hold the Notes as part of a "straddle" or as a "hedge"
against currency risk or in connection with a conversion transaction, persons
<PAGE>
8-1
that have a functional currency other than the United States dollar, investors
in pass-through entities, and except as expressly addressed therein, Non-U.S.
Holders). The discussion does not address the federal income tax consequences
that may result from a modification of the Notes.
Our opinion may change if the applicable law changes, if any of the facts with
respect to the Notes (as included in the Registration Statement, the Note
Documents, and the representations made by you) are inaccurate, incomplete, or
change, or if the conduct of the parties is materially inconsistent with the
facts reflected in the Registration Statement, the Note Documents, or the
representations.
Our opinion represents only our legal judgment based on current law and the
facts as described above. Our opinion has no binding effect on the Internal
Revenue Service or the courts. The Service may take a position contrary to our
opinion, and if the matter is litigated, a court may reach a decision contrary
to the opinion.
We hereby consent to the filing of this opinion letter with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the use
of our name therein.
Very truly yours,
HOLME ROBERTS & OWEN LLP
By:/s/ Robert J. Welter
---------------------------
Robert J. Welter, Partner
<PAGE>
8-2
EXHIBIT 12.1
QWEST COMMUNICATIONS INTERNATIONAL INC.
CALCULATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
(AMOUNTS IN THOUSANDS, EXCEPT FOR RATIOS)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months
Ended September 30, Year Ended December 31,
-------------------------- -----------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------------------------- -----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Income (loss) before income taxes $ 4,454 $ (13,211) $ (10,201) $ (38,467) $ (10,685) $111,711 $ (8,562)
Add:
Interest on debt, net of
capitalized interest 8,886 5,004 6,827 4,248 219 3,319 2,779
Interest expense portion of
rental expense 1,434 1,166 1,666 1,548 1,049 1,168 825
Other - - 234 57 - - -
-------------------------- -----------------------------------------------------------
Earnings available for fixed
charges $ 14,774 $ (7,041) $ (1,474) $ (32,614) $ (9,417) $116,198 $ (4,958)
========================== ===========================================================
Fixed Charges:
Interest on debt $ 20,072 $ 6,625 $ 9,426 $ 6,161 $ 502 $ 3,319 $ 2,779
Interest expense portion of
rental expense 1,434 1,166 1,666 1,548 1,049 1,168 825
Preferred stock dividend - - - - - 15,981 5,912
-------------------------- -----------------------------------------------------------
Total fixed charges $ 21,506 $ 7,791 $ 11,092 $ 7,709 $ 1,551 $ 20,468 $ 9,516
========================== ===========================================================
Ratio of earnings to fixed charges - - - - - 5.68 -
Deficiency $ (6,732) $ (14,832) $ (12,566) $ (40,323) $ (10,968) $ - $(14,474)
</TABLE>
<PAGE>
12-1
<PAGE>
EXHIBIT 21.1
Subsidiaries of the Registrant
<TABLE>
<CAPTION>
Name of Subsidiary State or Other Jurisdiction Other Names Under Which
- - ------------------ --------------------------- -----------------------
of Incorporation or Organization Subsidiary Does Business
-------------------------------- ------------------------
<S> <C> <C>
Qwest Communications Corporation/1/ Delaware a) Qwest Communications Corporation d/b/a Qwest
Communications The Power of Connections
b) Qwest Communications Corporation of Delaware
c) Qwest Communications Corporation d/b/a The
Power of Connections
d) Qwest Communications The Power of Connections,
Inc.
Qwest Corporation Colorado None
SuperNet, Inc. Colorado None
</TABLE>
- - -------------------------------
/1/ Qwest Communications Corporation also uses the trade name "SP
Construction Services."
<PAGE>
21-1
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS'
The Board of Directors
Qwest Communications International Inc.:
We consent to the use of our report, dated February 19, 1997, except as to
note 1, paragraph (i) and note 18, which are as of May 23, 1997, relating to the
consolidated balance sheets of Qwest Communications International Inc. and
subsidiaries as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholder's equity and cash flows for each of the
years in the three-year period ended December 31, 1996, included herein, and the
incorporation by reference, herein, of our report, dated February 19, 1997,
except as to note 2, which is as of May 23, 1997, pertaining to the related
consolidated financial statement schedules, which report appears in the
registration statement on Form S-1 (No. 333-25391) of Qwest Communications
International Inc., and to the reference to our firm under the headings "Summary
Consolidated Financial and Operating Data," "Selected Consolidated Financial
Data" and "Experts" in the registration statement.
KPMG Peat Marwick LLP
Denver, Colorado
December 19, 1997
<PAGE>
23.2-1
Exhibit 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in the Registration Statement of Qwest Communications
International Inc. on Form S-4 of our report dated September 26, 1997 relating
to the balance sheet of SuperNet, Inc. as of June 30, 1997 and the related
statements of operations, changes in stockholder's equity and cash flows for the
year then ended. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
DOLLINGER, SMITH & CO.
Englewood, Colorado
December 18, 1997
<PAGE>
23.2-2
Exhibit 24
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Qwest Communications International
Inc. (the "Company"), hereby severally constitute and appoint Joseph P. Nacchio,
Robert S. Woodruff and Richard L. Smith, and each of them singly, our true and
lawful attorneys, with full power to them and each of them singly, to sign for
us in our names in the capacities indicated below, a Registration Statement
relating to the Company's High Yield Notes and all pre-effective and
post-effective amendments to such Registration Statement and any abbreviated
Registration Statement in connection with such Registration Statement pursuant
to Rule 462(b) under the Securities Act of 1933, as amended, and generally to do
all things in our names and on our behalf in such capacities to enable the
Company to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission.
______/s/_________________________ _____________/s/__________________
Philip F. Anschutz Joseph P. Nacchio
_______/s/________________________ ________/s/_______________________
Cannon Y. Harvey Douglas L. Polson
______/s/_________________________ ________/s/_______________________
Craig D. Slater Richard T. Liebhaber
______/s/_________________________ __________________________________
Robert S. Woodruff W. Thomas Stephens
______/s/_________________________ _____________/s/__________________
James Q. Crowe Jordan L. Haines
________/s/_______________________
Richard L. Smith
<PAGE>
25-1
1
EXHIBIT 25.1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) ___________
------------------------------
BANKERS TRUST COMPANY
(Exact name of trustee as specified in its charter)
NEW YORK 13-4941247
(Jurisdiction of Incorporation or (I.R.S. Employer
organization if not a U.S. national bank) Identification no.)
FOUR ALBANY STREET
NEW YORK, NEW YORK 10006
(Address of principal (Zip Code)
executive offices)
BANKERS TRUST COMPANY
LEGAL DEPARTMENT
130 LIBERTY STREET, 31ST FLOOR
NEW YORK, NEW YORK 10006
(212) 250-2201
(Name, address and telephone number of agent for service)
---------------------------------
QWEST COMMUNICATIONS INTERNATIONAL, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 84-0978360
(State or other jurisdiction of (I.R.S. employer
Incorporation or organization) Identification no.)
555 SEVENTEENTH STREET
DENVER, CO 80202
(Address of principal executive offices) (Zip Code)
<PAGE>
25-2
9.47% SENIOR DISCOUNT NOTES DUE 2007
(Title of the indenture securities)
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee.
(a) Name and address of each examining or supervising authority
to which it is subject.
NAME ADDRESS
---- -------
Federal Reserve Bank (2nd District) New York, NY
Federal Deposit Insurance Corporation Washington, D.C.
New York State Banking Department Albany, NY
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the Trustee, describe each such
affiliation.
None.
ITEM 3.-15. NOT APPLICABLE
ITEM 16. LIST OF EXHIBITS.
EXHIBIT 1 - Restated Organization Certificate of Bankers Trust
Company dated August 7, 1990, Certificate of Amendment
of the Organization Certificate of Bankers Trust Company
dated June 21, 1995 - Incorporated herein by reference
to Exhibit 1 filed with Form T-1 Statement, Registration
No. 33-65171, Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
March 20, 1996, incorporated by referenced to Exhibit 1
filed with Form T-1 Statement, Registration No.
333-25843 and Certificate of Amendment of the
Organization Certificate of Bankers Trust Company dated
June 19, 1997, incorporated by reference to Exhibit 1
filed with Form T-1 Statement, Registration No.
333-32935.
EXHIBIT 2 - Certificate of Authority to commence business
Incorporated herein by reference to Exhibit 2 filed with
Form T-1 Statement, Registration No. 33-21047.
EXHIBIT 3 - Authorization of the Trustee to exercise corporate
trust powers Incorporated herein by reference to Exhibit
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2 filed with Form T-1 Statement, Registration No.
33-21047.
EXHIBIT 4 - Existing By-Laws of Bankers Trust Company, as
amended on February 18, 1997, Incorporated herein by
reference to Exhibit 4 filed with Form T-1 Statement,
Registration No. 333-24509-01.
EXHIBIT 5 - Not applicable.
EXHIBIT 6 - Consent of Bankers Trust Company required by Section
321(b) of the Act. Incorporated herein by reference to
Exhibit 4 filed with Form T-1 Statement, Registration
No. 22-18864.
EXHIBIT 7 - The latest report of condition of Bankers Trust
Company dated as of September 30, 1997, as attached
hereto.
EXHIBIT 8 - Not Applicable.
EXHIBIT 9 - Not Applicable.
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the trustee, Bankers Trust Company, a corporation organized and
existing under the laws of the State of New York, has duly caused this statement
of eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in The City of New York, and State of New York, on the __th day
of December, 1997.
BANKERS TRUST COMPANY
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By: /s/ MELISSA KAYE ADELSON
-------------------------------
Melissa Kaye Adelson
Vice President
EXHIBIT 7
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<TABLE>
<S> <C> <C> <C> <C>
Legal Title of Bank: Bankers Trust Company Call Date: 09/30/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-1
City, State ZIP: New York, NY 10006 11
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
</TABLE>
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR SEPTEMBER 30, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, reported the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS //////////////////
1. Cash and balances due from depository institutions (from Schedule RC-A): //////////////////
a. Noninterest-bearing balances and currency and coin (1) ................ 0081 1,526,000 1.a.
b. Interest-bearing balances (2) ......................................... 0071 2,591,000 1.b.
2. Securities: //////////////////
a. Held-to-maturity securities (from Schedule RC-B, column A) ............ 1754 0 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)........... 1773 3,903,000 2.b.
3. Federal funds sold and securities purchased under agreements to resell....... 1350 29,339,000 3.
4. Loans and lease financing receivables: //////////////////
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 19,343,000 ////////////////// 4.a.
b. LESS: Allowance for loan and lease losses.......................RCFD 3123 723,000 ////////////////// 4.b.
c. LESS: Allocated transfer risk reserve ..........................RCFD 3128 0 ////////////////// 4.c.
d. Loans and leases, net of unearned income, //////////////////
allowance, and reserve (item 4.a minus 4.b and 4.c) ........................ 2125 18,620,000 4.d.
5. Trading Assets (from schedule RC-D) ............................................. 3545 43,032,000 5.
6. Premises and fixed assets (including capitalized leases) ......................... 2145 766,000 6.
7. Other real estate owned (from Schedule RC-M) ..................................... 2150 186,000 7.
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25-6
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M) 2130 59,000 8.
9. Customers' liability to this bank on acceptances outstanding ..................... 2155 703,000 9.
10. Intangible assets (from Schedule RC-M) ........................................... 2143 84,000 10.
11. Other assets (from Schedule RC-F) ................................................ 2160 5,343,000 11.
12. Total assets (sum of items 1 through 11) ......................................... 2170 106,152,000 12.
- --------------------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
Legal Title of Bank: Bankers Trust Company Call Date: 09/30/97 ST-BK: 36-4840 FFIEC 031
Address: 130 Liberty Street Vendor ID: D CERT: 00623 Page RC-2
City, State Zip: New York, NY 10006 12
FDIC Certificate No.: | 0 | 0 | 6 | 2 | 3
SCHEDULE RC--CONTINUED
Dollar Amounts in Thousands //////// Bil Mil Thou
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LIABILITIES ////////////////////////
13. Deposits: ////////////////////////
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E, part I) RCON 2200 22,016,000 13.a.
(1) Noninterest-bearing(1) .....................RCON 6631 2,272,000......... //////////////////////// 13.a.(1)
(2) Interest-bearing .................................RCON 6636 19,744,000......... //////////////////////// 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs (from Schedule RC-E ////////////////////////
part II) RCFN 2200 26,396,000 13.b.
(1) Noninterest-bearing ..............................RCFN 6631 1,304,000 //////////////////////// 13.b.(1)
(2) Interest-bearing .................................RCFN 6636 25,092,000 //////////////////////// 13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase RCFD 2800 11,779,000 14.
15. a. Demand notes issued to the U.S. Treasury ..............................................RCON 2840 0 15.a.
b. Trading liabilities (from Schedule RC-D)...............................................RCFD 3548 23,059,000 15.b.
16. Other borrowed money (includes mortgage indebtedness and obligations under capitalized
leases): ////////////////////////
a. With a remaining maturity of one year or less .........................................RCFD 2332 6,391,000 16.a.
b. With a remaining maturity of more than one year through three years...................A547 369,000 16.b.
c. With a remaining maturity of more than three years.....................................A548 3,176,000 16.c
17. Not Applicable. /////////////////////// 17.
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18. Bank's liability on acceptances executed and outstanding ...................................RCFD 2920 703,000 18.
19. Subordinated notes and debentures (2).......................................................RCFD 3200 1,250,000 19.
20. Other liabilities (from Schedule RC-G) .....................................................RCFD 2930 5,222,000 20.
21. Total liabilities (sum of items 13 through 20) .............................................RCFD 2948 100,361,000 21.
22. Not Applicable ////////////////////////
//////////////////////// 22.
EQUITY CAPITAL ////////////////////////
23. Perpetual preferred stock and related surplus ..............................................RCFD 3838 1,000,000 23.
24. Common stock ...............................................................................RCFD 3230 1,202,000 24.
25. Surplus (exclude all surplus related to preferred stock) ...................................RCFD 3839 540,000 25.
26. a. Undivided profits and capital reserves ................................................RCFD 3632 3,409,000 26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities ................RCFD 8434 15,000 26.b.
27. Cumulative foreign currency translation adjustments ........................................RCFD 3284 (375,000) 27.
28. Total equity capital (sum of items 23 through 27) ..........................................RCFD 3210 5,791,000 28.
29. Total liabilities and equity capital (sum of items 21 and 28)...............................RCFD 3300 106,152,000 29.
</TABLE>
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that
best describes the most comprehensive level of auditing work performed for
the bank by independent external auditors as of any date during 1996
Number ......................RCFD 6724 N/A M.1
1 = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2 = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3 = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
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4 = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5 = Review of the bank's financial statements by external auditors
6 = Compilation of the bank's financial statements by external auditors
7 = Other audit procedures (excluding tax preparation work)
8 = No external audit work
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(1) Including total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
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