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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER 000-22609
QWEST COMMUNICATIONS INTERNATIONAL INC.
(EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER)
DELAWARE 84-1339282
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
700 QWEST TOWER
555 SEVENTEENTH STREET
DENVER, COLORADO 80202
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(303) 992-1400
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(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS:
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COMMON STOCK, $.01 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of March 5, 1999, approximately 350 million shares of the Registrant's
Common Stock, $.01 par value, were issued and outstanding. The aggregate market
value of the Common Stock held by non-affiliates of the Registrant, based on the
closing price of the Common Stock as reported on the Nasdaq Stock Market
(National Market System) on March 5, 1999 was approximately $11 billion.
DOCUMENTS INCORPORATED BY REFERENCE
Document Where Incorporated
- ----------------------------------------------------------- -------------------
Annual Report for the year ended December 31, 1998 Part II, Items 5,
6, 7, 7A, and 8
Proxy Statement for Qwest's Annual Meeting of Part III, Items
Stockholders to be held May 5,1999 10, 11, 12 and 13
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QWEST COMMUNICATIONS INTERNATIONAL INC.
FISCAL YEAR ENDED DECEMBER 31, 1998
TABLE OF CONTENTS
Page
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Part I
Item 1 Business................................................... 4
Item 2 Properties................................................. 18
Item 3 Legal Proceedings.......................................... 18
Item 4 Submission of Matters to a Vote of Security Holders........ 20
Part II
Item 5 Market for Registrant's Common Equity and
Related Stockholder Matters................................ 21
Item 6 Selected Financial Data.................................... 21
Item 7 Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 21
Item 7A Quantitative and Qualitative Disclosures About Market Risk. 21
Item 8 Financial Statements and Supplementary Data................ 21
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................... 21
Part III
Item 10 Directors and Executive Officers of the Registrant......... 22
Item 11 Executive Compensation..................................... 22
Item 12 Security Ownership of Certain Beneficial Owners and
Management................................................. 22
Item 13 Certain Relationships and Related Transactions............. 22
Part IV
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8-K.................................... 23
Signature Page............................................. 26
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Information Regarding Forward-Looking Statements
This report contains or incorporates by reference "forward-looking
statements" as that term is used in federal securities laws about our financial
condition, results of operations and business. These statements include, among
others:
. statements concerning the benefits that Qwest expects will result from
its business activities and certain transactions Qwest has completed,
such as increased revenues, decreased expenses and avoided expenses
and expenditures,
. Qwest's plans to complete its communications network, and
. other statements of Qwest's expectations, beliefs, future plans and
strategies, anticipated developments and other matters that are not
historical facts.
These statements may be made expressly in this document, or may be
incorporated by reference to other documents Qwest has filed with the SEC. You
can find many of these statements by looking for words such as "believes,"
"expects," "anticipates," "estimates," or similar expressions used in this
report or incorporated by reference in this report.
These forward-looking statements are subject to numerous assumptions, risks
and uncertainties that may cause Qwest's actual results to be materially
different from any future results expressed or implied by Qwest in those
statements. The risks and uncertainties include those risks, uncertainties and
risk factors identified, among other places, under "Risk Factors" in Qwest's
registration statement on Form S-4, SEC file number 333-71603, beginning on page
20, and under "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in the Annual Report incorporated by reference in this
report.
The most important factors that could prevent Qwest from achieving its
stated goals include, but are not limited to, the following:
. Qwest's failure to construct its communications network on schedule
and on budget;
. operating and financial risks related to managing rapid growth,
integrating acquired businesses and sustaining operating cash flow to
meet Qwest's debt service requirements, make capital expenditures and
fund operations;
. potential fluctuation in quarterly results;
. volatility of stock price;
. intense competition in the communications services market;
. dependence on new product development;
. Qwest's ability to achieve year 2000 compliance;
. rapid and significant changes in technology and markets;
. adverse changes in the regulatory or legislative environment affecting
Qwest's business; and
. failure to maintain necessary rights of way.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. Qwest cautions you not to place undue reliance on
the statements, which speak only as of the date of this report or, in the case
of documents incorporated by reference, the date of the document.
The cautionary statements contained or referred to in this section should
be considered in connection with any subsequent written or oral forward-looking
statements that Qwest or persons acting on its behalf may issue. Qwest
undertakes no obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this report or to reflect
the occurrence of unanticipated events.
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Part I.
Item 1. Business
Qwest is a leading communications services provider with a nationwide,
high-capacity fiber optic communications network. Qwest is engaged in two core
business segments: communications services and construction services.
Qwest's communications services business offers Internet and multimedia
services as well as traditional voice communications services. Internet and
multimedia services include a broad range of services related to the
transmission of video, data and voice information. Qwest provides services to
business customers, governmental agencies and consumers in domestic and
international markets. Qwest also provides wholesale services to other
communications providers, including Internet service providers and other data
service companies.
Qwest's network uses both Internet communications technology and
traditional telephone communications technology. Communications on the Internet
are governed by Internet protocol, a standard that allows communication across
the Internet regardless of the hardware and software used.
Qwest's construction services business builds and installs fiber optic
systems for other communications providers, as well as for our own use.
While Qwest's main source of revenue in 1998 was traditional voice
communications services, our strategy for the future is to focus on providing
video, data and voice services using Internet communications protocols that can
be more effectively provided over our high-capacity network than over more
traditional telecommunications networks. Qwest is developing Internet-based
services according to market demand in partnership with leading information
technology companies, including:
. Microsoft Corporation, which provides business applications and
services,
. Netscape Communications Corporation, which provides one-stop access
for various communications services that can be accessed over the
Internet, and
. Covad Communications Group, Inc., which provides high-speed local
network connectivity.
Qwest's Macro Capacity (SM) Fiber Network, a high-capacity fiber optic
network that uses Internet communications protocols, is Qwest's principal asset.
The network is designed to allow customers to transmit video, data and voice
information with the public circuit switched telephone network, seamlessly
without the need to dial access codes or follow other similar special
procedures. The network will reach approximately 18,800 route miles, with the
initial 18,500 route miles expected to be completed in mid-1999 and an
additional 300 route mile segment scheduled for completion by the end of 1999.
The technologically advanced network is designed to instantaneously re-route
traffic in the event of a fiber cut to prevent interruption in service to
Qwest's customers. This is accomplished by automatically re-routing traffic in
the opposite direction around the ring. The network is equipped with
technologically advanced fiber and state-of-the-art transmission electronics. At
full capacity, Qwest's network could transmit two trillion bits of multimedia
information per second. Qwest's network is designed to support Internet
communications protocol, as well as traditional circuit-switched services, and
alternative information transfer standards used for data transmission.
When completed, the network will connect approximately 150 metropolitan
areas coast-to-coast. Qwest's network, including 20 switches throughout the
United States and leased digital fiber optic facilities, will encompass
metropolitan areas that account for more than 95 percent of all United States
call volume. Qwest was the first network service provider to complete a
transcontinental Internet communications protocol fiber network when it
activated the Qwest network from Los Angeles to San Francisco to New York in
April 1998.
Qwest is also forming a venture with KPN, a Dutch telecommunications
company, to build and operate a pan-European, Internet communications, protocol
fiber optic network linked to Qwest's network in North America for data, video
and voice services.
Qwest is building a 1,400-route-mile extension of the U. S. network into
Mexico, which is expected to be completed in early 1999, and owns capacity on
three undersea systems linking the network to Europe. Qwest is also part of a
consortium of communications companies that is building a submarine 13,125-mile,
four-fiber pair cable system connecting the U.S. to Japan that will be capable
of transmitting information at the rate of 640 gigabits per second. The U.S. to
Japan project is scheduled for completion by the second quarter of 2000.
In addition to significant advantages in service, speed, sophistication,
reliability and security, the Qwest network's advanced technologies should also
provide a cost advantage over older fiber systems generally in commercial use
today. Qwest expects an additional cost benefit from the sale of dark fiber
along the network, which will reduce its net cost in the network retained for
its own use. Qwest believes that the technological advantages and
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growing reach of its network will position Qwest to capture market share and
take full advantage of the rapidly growing global demand for video, data and
voice transmission capacity and services.
Mergers, Acquisitions and Other Transactions
Qwest continually evaluates opportunities to become a stronger competitor
and to accelerate the growth of its business. A key strategy has been to add
strength through investments in and acquisitions of businesses, facilities or
other assets that build on Qwest's service and technology base.
In June 1998, Qwest acquired LCI for approximately 129.9 million shares of
Qwest's common stock (including outstanding LCI stock options assumed by Qwest),
then valued at approximately $3.9 billion. The merger created a company with
1998 combined pro forma revenue of approximately $3.0 billion. LCI has brought
to Qwest a nationwide customer base that can now fully access the growing
service capabilities and efficiencies of Qwest's network. Qwest will benefit
from LCI's sales and marketing expertise, distribution channels, including a
nationwide system of approximately 80 sales offices and six support facilities,
intelligent network platform and customer care and billing system. Looking
forward, Qwest expects the merger to result in improvements in revenues and
costs for the combined company.
The following are descriptions of Qwest's other acquisitions since the
beginning of 1998.
In March 1998, Qwest acquired Phoenix Network, Inc., a reseller of long
distance services, for approximately 0.8 million shares of Qwest's common stock,
then valued at approximately $27.2 million.
In April 1998, Qwest acquired Amsterdam-based EUnet International Limited
for approximately $4.2 million in cash and approximately 4.0 million shares of
Qwest's common stock, then valued at approximately $154.0 million. EUnet, a
leading European Internet service provider, has business operations in 14
European countries. It was founded in 1982 as the first European provider of
Internet services for business use. Today, it serves more than 60,000 primarily
business customers throughout Europe, offering a suite of Internet services
through a network that spans 42 countries and 400 points of presence. The
acquisition of EUnet gives Qwest a significant presence in the European data
market, which is expected to reach $55.0 billion by the year 2000.
In December 1998, Qwest acquired Icon CMT Corp., a leading Internet
solutions provider, for approximately $254.1 million in Company common stock.
Qwest issued approximately 5.9 million shares of Qwest's common stock (including
outstanding Icon stock options and warrants assumed by Qwest). The addition of
Icon's sales channels, data centers and more than 400 information technology
professionals gives Qwest new resources in developing, integrating and
maintaining advanced web hosting services, including dedicated electronic
commerce.
Also in December, Qwest and Microsoft entered into a strategic alliance to
enhance Icon's level of performance and breadth of services in electronic
commerce, web hosting and other software applications and services critical to
business customers.
In January 1999, Qwest made its first investment, totaling $15.0 million in
cash, in high-speed, digital subscriber line ("DSL") local networks through an
agreement with Covad, a packet-switch based competitive local exchange carrier.
Under this agreement, Qwest expects to have access to 22 metropolitan areas by
the end of 1999, while enhancing its ability to provide its customers with
high-speed digital subscriber line connections to its network.
Qwest is in the process of forming its venture with KPN. KPN will
contribute to the venture two two-way, self-healing fiber optic rings presently
under construction, covering approximately 2,100 miles. Qwest will contribute
EUnet to the venture. Qwest and KPN will also contribute cash and transatlantic
cable capacity to the venture to connect with Qwest's network in North America.
Communications Industry Overview
Communications services consist primarily of local exchange services,
long distance services and Internet access services.
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A local call is one that does not require the services of a long distance
carrier. It originates and terminates along a local exchange network. Local
exchange carriers connect end user customers within their local exchange areas
and also provide the local portion of most long distance calls.
A long distance telephone call originates with a customer within a local
exchange network and travels along the local exchange network to a long distance
carrier. The long distance carrier combines the call with other calls and sends
them along a long distance network to a different local exchange network where
the call terminates. Long distance carriers provide only the connection between
the two local networks, and pay access charges to local exchanges for
originating and terminating calls.
The Internet is a global collection of interconnected computer networks
that allows commercial organizations, educational institutions, government
agencies and individuals to communicate electronically, access and share
information and conduct business. As businesses have begun to use e-mail, file
transfer and area networks, commercial usage has become a major component of
Internet traffic. In the mid-1990s, Internet service providers began to offer
access, e-mail, customized content and other specialized services and products
aimed at allowing both commercial and residential customers to obtain
information from, transmit information to, and use resources available on the
Internet.
Internet access services require a local network connection from a customer
to an Internet service provider's local facilities. For large,
communication-intensive users, these connections are typically dedicated
connections direct from the customer to the Internet service provider. For
residential and small and medium sized business users, these connections are
generally connections obtained by dialing into a local exchange. Once a local
connection is made to the Internet service provider's local facilities,
information can be transmitted and obtained over a packet-switched data network.
This network may consist of segments provided by many interconnected networks
operated by a number of Internet service providers. This collection of
interconnected networks makes up the Internet. Communications on the Internet
are governed by Internet protocol, an inter-networking standard that enables
communication across the Internet regardless of the hardware and software used.
Switching is the critical process of selecting paths for the transmission
of video, data and voice information to a specific recipient. Switches on a
network route traffic to the designated recipient. There are two widely used
switching technologies in communications networks: circuit-switching systems,
generally used in traditional telephone communication, and packet-switching
systems, generally used to provide communication services over the Internet,
such as Qwest's services. Circuit-switch based communications systems establish
a dedicated channel for each communication (such as a telephone call for voice
or fax), maintain the channel for the duration of the call, and disconnect the
channel at the conclusion of the call. Packet-switch based communications
systems format the information to be transmitted, such as e-mail, voice, fax and
data, into a series of shorter digital messages called "packets," and a single
dedicated channel between communication points is never established. Each packet
consists of a portion of the complete message plus the addressing information to
identify the destination and return address.
Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communications sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
network use and efficiency, resulting in more information being transmitted
through a given communication channel. There are, however, certain disadvantages
to packet-switch based systems as currently implemented. Rapidly increasing
demands for data, in part driven by the Internet traffic volumes, are straining
capacity and contributing to delays and interruptions in communications
transmissions. With current technology, the desired voice quality and real-time
communications features of a traditional telephone call can only be achieved by
having in place a substantial cushion of communications capacity.
The Qwest network allows the transmission of traffic seamlessly between an
Internet protocol network and the circuit-based traditional telephone
communication network, providing the Qwest network with the same comprehensive
coverage as the traditional telephone communication network. Specifically, Qwest
is able to (1) originate traditional telephone communication network traffic
from a local exchange's switch (when the origination point is not on Qwest's
network), (2) route the traffic over the Qwest network and (3) deliver the
traffic either (a) directly to its destination (if the destination is on the
Qwest network) or (b) to an interconnection point where the traffic is
transferred back to the traditional telephone communication network. The routing
of traffic to this interconnection point is determined based on a least-cost
routing criteria. This gives Qwest the ability to obtain the
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benefits of packet-switch based communications protocols on its network, while
allowing its customers to use their existing equipment, telephone numbers and
dialing procedures, without additional access codes, for routing the call to the
Qwest network.
Qwest's Macro Capacity (SM) Fiber Network
Qwest's Macro Capacity (SM) Fiber Network has approximately 130 Internet
protocol routers, 45 data switches and 20 voice switches in various locations
across the United States. The Company expects to activate approximately 30
additional Internet protocol routers and 85 additional data switches in 1999.
Also, Qwest has 19 Internet protocol network nodes across the U. S. and expects
to activate ten additional nodes in 1999.
As of December 31, 1998, Qwest's network assets and physical components
included:
. Approximately 17,000 route miles of conduit in place, consisting of
approximately 15,000 route miles of cable installed, and
approximately 12,500 route miles of activated fiber;
. High-density polyethylene conduit, which is hollow tubing 1 1/2 to 2
inches in diameter;
. Fiber optic cable, which consists of fiber strands placed inside a
plastic sheath and strengthened by metal;
. Electronic equipment necessary to activate the fiber for transmission;
. Switches that enable Qwest to provide a variety of basic and enhanced
voice services to customers; and
. Approximately 120 points of presence.
With the completion of its network, Qwest will provide communications
services nationally to its customers primarily over its own network, using
leased facilities in those portions of the country not covered by its network.
Qwest's approach to building its network, and the features of the network
itself, offer a range of competitive performance and cost advantages.
Qwest is expanding its end-to-end connectivity for local service to large
and multi-location businesses in key metropolitan U.S. markets. The Company has
completed metropolitan area networks in ten major cities and is in the process
of completing another nine in other major markets by the end of 1999.
Qwest also continues to evaluate opportunities to acquire or invest in
businesses, facilities and other assets that would allow it to improve and
expand services, compete more effectively and create new opportunities for
growth.
Advanced Technology. Using an advanced network management system, Qwest is
installing technologically advanced fiber optic cable and electronic equipment
throughout its network. Qwest's network uses fiber, electronic technology, and
two-way ring technology to give the network transmission capacity and high
reliability levels.
Qwest's network is designed for superior security and reliability, based
on:
. Two-way ring architecture, a self-healing system that allows for
nearly instantaneous re-routing and virtually eliminates downtime in
the event of a fiber cut by automatically re-routing traffic in the
opposite direction around the ring;
. Fiber cable installed in high-density polyethylene conduit generally
buried 48-60 inches below the ground;
. Extensive use of railroad rights of way. This approach typically
offers greater protection of the fiber system than systems built over
more public rights of way, such as highways, telephone poles or
overhead power transmission lines.
Qwest's network is also designed for expandability and flexibility. It
contains two conduits along virtually the entire route. The first conduit
contains a cable generally housing at least 96 fibers. The second conduit serves
as a spare, allowing for future technology upgrades and capacity expansion at
costs far below the cost of new construction.
After completion of dark fiber sales, Qwest plans to retain a minimum of 48
fibers for its own use.
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Network Management. Qwest monitors its network 24 hours a day, seven days a
week from its Network Management Centers in Denver, Colorado, Dublin, Ohio,
Weehawken, New Jersey, San Antonio, Texas and Arlington, Virginia. These
facilities provide network surveillance, troubleshooting and customer service,
using technology that enables Qwest to reduce service costs and customer
downtime. The system currently allows Qwest technicians to detect a component
malfunction in the network, quickly re-route the customer to an available
alternate path and handle the repair. When the network is completed, two-way
ring architecture will allow the re-routing to be fully automated.
In addition, Qwest is putting more network control in the hands of large
business customers. Customers will be able to monitor and instantly reconfigure
their leased capacity from their own network management centers. The system's
software allows management of equipment inventory, bandwidth inventory,
configuration and fault isolation, as well as "point-and-click" supply of
communications services and alarm monitoring.
Rights of Way. As of December 31, 1998, Qwest had in place agreements for
approximately 99% of the rights of way needed to complete its network.
Approximately 65% to 70% of the network will be installed on railroad rights of
way. In addition to greater security and protection than afforded systems built
along public rights of way, railroad rights of way also generally provide the
network with a direct, continuous route between cities. This eliminates the time
and costs typically needed to piece together rights of way using a combination
of agreements with private owners and state or municipal agencies. Also,
railroad rights of way typically extend into downtown areas of strategically
important cities. Qwest's right-of-way agreements provide for cash payments,
exchanges of rights of way for network capacity or a combination of both.
Qwest has other right-of-way agreements in place, where necessary or
economically preferable, with highway commissions, utilities, political
subdivisions and others.
Network Installation. Qwest employs experienced construction personnel and
uses its own fleet of equipment, as well as leased equipment, and supplements
these resources with independent contractors.
Dark Fiber Sales. Qwest entered into agreements with Frontier, MCI WorldCom
and GTE (during 1996 and 1997) and with others (primarily during 1998) for the
purchase of dark fiber along Qwest's network. The proceeds from these contracts
for the sale of dark fiber provide cash for a significant portion of the total
estimated costs to construct the network and to provide the dark fiber that is
being sold.
Qwest expects these sales to provide it with a strategic network cost
advantage on the fibers that Qwest retains for its network. Each agreement
requires the purchaser to pay an aggregate price consisting of an initial
payment, followed by installments during the construction period based on
achieving certain milestones (e.g., commencement of construction, conduit
installation and fiber installation). The final payment for each segment will be
made at the time of acceptance.
Each agreement provides for the sharing of certain maintenance costs and
also for sharing of certain operating costs. The agreements establish
anticipated delivery dates for construction and delivery of segments along the
route of Qwest's network. The customer agreements provide for penalties in the
event of delay of segments and, in certain circumstances, allow customers to
delete non-delivered segments from the contracts. To date, Qwest has not
incurred any penalties for delayed segments.
Qwest believes that there continue to be opportunities to sell additional
dark fiber throughout its network, and management continues to explore these
opportunities with potential customers. However, Qwest does not expect to enter
into additional agreements of the size and scope of the Frontier, GTE and MCI
WorldCom contracts. Potential new customers include other inter-exchange
carriers, cable, entertainment and data transmission companies, federal and
state governments, Internet service providers, local exchange carriers and
competitive local exchange carriers. To meet the needs of a diverse group of
existing and potential customers, Qwest offers a wide variety of pricing and
system options to meet specific needs of each customer. Customers may purchase
or lease dark fiber or purchase capacity on a short- or long-term basis.
The Frontier and GTE agreements each provide for the purchase of 24 fibers
along major portions of Qwest's network, while the MCI WorldCom agreement
generally provides for the purchase of 24 or, in certain segments, 36 fibers.
Several smaller construction contracts include the sale of fewer numbers of
fibers over a more limited
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number of segments. In segments where Qwest agrees to sell dark fiber to others,
it generally will install enough fibers, by increasing the total fiber count, so
that it can retain 48 fibers for its own use along substantially all of the
route of the network.
Significant Customers
During 1998, 1997 and 1996, Qwest's top 10 customers accounted for
approximately 28.0%, 83.6%, and 69.3%, respectively, of its consolidated gross
revenue. No individual customer accounted for 10% or more of such revenue in
1998. Frontier, MCI WorldCom and GTE accounted for 31.2%, 6.1% and 36.6% of
revenue, respectively, in 1997 and 26.3%, 31.8% and 0.0% of such revenue,
respectively, in 1996, primarily from construction contracts for the sale of
dark fiber to these customers that extend through 1998 or into 1999 under their
contracts.
Business Segments
The Company has two distinct business segments: communications services and
construction services. Communications services provides a full array of
traditional telecommunications, Internet protocol communications, web-based
multimedia services and other data products and services to customers.
Construction services provides turn-key fiber optic systems for major
inter-exchange carriers and for Qwest's own use.
Communications Services
Total revenue from communications services was approximately $1,554.3
million, $115.3 million and $91.8 million in 1998, 1997 and 1996, respectively.
Internet and Multimedia Services. These services will begin throughout
1999, with the expectation that they will be available in all markets by the end
of the year.
. Dedicated Internet Access -- Solutions are designed to meet current
needs for Internet access, as well as grow to meet needs in the future
- from simply moving beyond dial-up access to sophisticated wide area
networks.
. Web Hosting -- offers significant advantages in web hosting over
managing servers in house. Qwest's advanced web hosting environment
and high-bandwidth connections ensure web site performance and
reliability. Storage and bandwidth options allow customers to easily
support more content as their businesses evolve.
. Internet Protocol Co-location -- Due to the high costs and staffing
needs in maintaining local area networks with Internet protocols, some
two-thirds of all businesses are now out-sourcing their Internet
servers. Qwest offers superior facilities, flexible bandwidth,
advanced connectivity and around-the-clock support by on-site
engineers to ensure reliability and integrity.
. Remote Access -- As the once formidable barriers of geography and time
have diminished in running a business, remote access to information
has become vital. Telecommuters need access to data; customers want
account information. Virtual private networks, alternate access and
other features provide superior - and affordable performance and
flexibility.
Business Services. Qwest markets the following products and services to
businesses:
. Virtual Private Network -- private network systems provided over
Qwest's network, and includes customized dialing plans, routing and
calling privileges and customized billing features
. Private Line -- dedicated point-to-point voice, data, video and fax in
a range of products, packages and speeds
. Outbound Voice -- voice service throughout the U.S. and to 230
countries
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. Text Messaging -- local, regional and nationwide coverage
. Broadcast Fax -- standard and totally-automated service
. Teleconferencing -- conference calling for an unlimited number of
participants, and customized options
. Campus Talk -- customized calling plans for higher education
institutions
. Worldcard -- toll-free access from domestic and international
locations.
These and other services can be bundled into service packages:
. Q.guaranteed (sm) -- allows customers to combine domestic and
international voice, data and Internet protocol services under a
single plan, with rate advantages, rate and service guarantees and a
single monthly invoice
. Q.biz (sm) -- combined voice, data and Internet protocol services for
small businesses
. Q.integrity (sm) -- a major national account plan designed for large
national and international businesses, offering voice and data service
and integrated pricing, billing, reporting and support.
Consumer Services. Qwest's Consumer Services group provides a full range of
voice, data, video and related services and products geared to consumers and
home business markets. In 1999, Qwest will introduce a new line of web-based
services for consumers under the name Q.home (sm) Internet Service. The service
is delivered through an alliance with Netscape, which will house the service on
its Internet portal. These services will include:
. Q.home Internet Access -- offering national dial-up Internet access
for a competitive flat monthly rate for unlimited access, e-mail and
news. The access software is provided by Netscape. Subscribers to
Qwest long distance services receive a reduced fee.
. Q.home Send-A-Page -- a web-based paging service that allows customers
to send text or numeric pages to other subscribers of the Qwest paging
service. Subscribers enter the number, message and return number right
on the Qwest paging web site.
. Q.home Click-to-Fax -- offers U. S. and international fax service
through a web browser - just like an email. The recipient can receive
the document through the fax or download it to a hard drive.
. Long distance -- competitive rates and simple terms on U. S. long
distance, international, calling card and home 800 service, with all
calls billed to the exact second after the first full minute
. Prepaid calling cards -- toll-free connections billed in six-second
increments.
Wholesale Services. Products offered by Wholesale Services fall into
the following four categories:
. High-Volume Capacity Services -- Qwest provides high-volume
transmission through service agreements for terms of one year or
longer. As Qwest's network is completed, Qwest is also targeting
potential large users in the long distance market that may seek to
augment their own networks or provide more diverse routing in
strategic areas of their systems.
. Conventional Dedicated Private Line Services -- Qwest provides
dedicated private line services to a wide range of customers,
generally for terms of one year or less. Qwest expects to offer these
services over a significantly expanded geographic area as its network
is completed.
. Switched Services -- Qwest provides originating and switched
terminating services over its switched services network to long
distance carriers. This business increases volume on Qwest's switched
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services network and allows for more efficient connection of circuits
between switches. While carrier switched services generate revenue at
lower margins than dedicated private line services, they contribute to
more cost-effective management of Qwest's network.
. High-speed Data Services -- Along Qwest's network, Qwest provides
voice and data services to carriers, Internet service providers and
other communications entities.
Customers are typically billed on a monthly basis and also may incur an
installation or equipment charge. After contracts expire, they 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.
Construction Services
Construction Services builds fiber optic and conduit systems for other
carriers and for its own use and sells dark fiber to other communications
entities. Qwest is using its Construction Services resources to implement its
strategic plan to complete its network, in addition to providing Construction
Services to third-party customers along the network routes. Total revenue from
Construction Services was approximately $688.4 million, $581.4 million and
$139.2 million in 1998, 1997 and 1996, respectively.
Competition.
The telecommunications industry is highly competitive. Many of Qwest's
existing and potential competitors particularly in its communications services
markets, compete with significantly greater financial, personnel, marketing and
other resources, and have other competitive advantages.
The telecommunications industry is in a period of rapid technological
evolution, marked by increasing fiber and satellite transmission capacity, new
technologies and the introduction of new products and services. For instance,
recent technological advances enable substantial increases in transmission
capacity of both new and existing fiber, which could affect capacity supply and
demand. Also, 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 Qwest.
High initial network cost and low marginal costs of carrying long distance
traffic have led to a trend among non-facilities-based carriers to consolidate
in order to achieve economies of scale. Such consolidation could result in
larger, better-capitalized competitors. However, Qwest believes that owning its
own network will offer an advantage over carriers that lease network capacity.
Increased consolidation and strategic alliances in the industry resulting
from the Telecommunications Act of 1996 (the "Telecommunications Act") have
allowed significant new competitors to enter the industry, including local
exchange carriers, previously prohibited from the inter-state market.
Communications Services. In recent years, competition has increased
dramatically in all areas of Qwest's communications services market. Qwest's
primary competitors include AT&T, Sprint and MCI WorldCom, all of whom have
extensive experience in the long distance market. The impact of continuing
consolidation in the industry, such as last year's merger of MCI and WorldCom,
is uncertain. In addition, the Telecommunications Act will eventually allow the
local exchange carriers and others to enter the long distance market.
As Qwest expands its business into Internet protocol services, it also
competes with a wide range of companies besides AT&T, Sprint and MCI WorldCom
that provide web hosting, Internet access and other Internet protocol products
and services. Significant competitors include IBM, GTE, UUNet (a subsidiary of
MCI WorldCom), Digex and Exodus. In addition, many smaller companies have
entered the market for web site design. Qwest's main advantage in this market is
offering a complete line of Internet protocol services, combined with the
advantages of its comprehensive network.
Qwest's disadvantages in the Internet protocol services market vary by type
of competitor and the specific needs of individual customers. Some customers may
choose larger competitors, such as IBM, Sprint or GTE, due to
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their scale and name recognition. Smaller companies may have an advantage
through their concentration in just one segment of the Internet protocol market.
Such companies may appeal to smaller, more specialized companies.
In addition to Qwest, there are currently three other principal
facilities-based long distance fiber optic networks (AT&T, Sprint and MCI
WorldCom). Others are building or planning additional networks that, if
constructed, could employ advanced technology similar to Qwest's network.
Frontier, GTE, IXC Communications and Williams Communications each may have a
fiber network smaller in geographic scope and similar in potential operating
capability to Qwest's network. Level 3 Communications may have a fiber network
similar in geographic scope and potential operating capability to Qwest's
network. However, the initial 18,500-route-mile portion of Qwest's network is
scheduled for completion in mid-1999, up to a year ahead of the other networks
mentioned above. Also, Qwest will be able to easily extend and expand the
capacity of its network along secured rights of way, using the additional fibers
retained by Qwest and the empty conduit being installed along the initial
build-out.
Research and Development
In connection with the acquisitions of LCI, EUnet and Icon in 1998, Qwest
expensed $760.0 million for in-process research and development projects since
the development of these projects had not yet reached technological feasibility
and the in-process research and development had no alternative future uses as of
the acquisition date. These projects relate to the development of advanced voice
and data services as well as sophisticated network management and administration
functions. (See Management's Discussion and Analysis of Financial Condition and
Results of Operations and Note 3 -- Acquisitions and Other Transactions included
in Qwest's "Notes to Consolidated Financial Statements.") Research and
development costs incurred in the normal course of business are expensed as
incurred. Qwest incurred approximately $27.7 million of such costs in 1998.
Regulatory Matters
Qwest's communications services business is subject to varying degrees of
federal, state, local, and international regulation.
Regulatory Background. Prior to its court-ordered break-up in 1984, AT&T
largely monopolized telecommunications services in the United States. The
present structure of the U.S. telecommunications market is largely the result of
the AT&T break-up. The break-up created seven local exchange carriers in
geographically defined areas. The local exchange carriers were not permitted,
under the terms of the break-up, to provide long distance telephone service
between the defined areas. These companies were separated from the long distance
provider, AT&T, resulting in the creation of two distinct market segments: local
exchange and long distance. The court order provided for direct, open
competition in the long distance segment. The court order did not provide for
competition in the local exchange market. Rather, the incumbent local exchange
carriers continued to own the networks and hold monopolies in their defined
service areas.
In 1996, Congress enacted the Telecommunications Act of 1996. The
Telecommunications Act was intended to promote competition and deregulation in
all U.S. communications markets. The Telecommunications Act made competition in
the local exchange market possible by requiring incumbent local exchange
carriers to give nondominant carriers:
. the ability to lease facilities, features, and functions of the
incumbent local exchange carriers' local exchange networks;
. the ability to interconnect nondominant carrier facilities with
the incumbent local exchange carriers' networks; and
. the ability to purchase and resell certain services provided by
the incumbent local exchange carriers. The Telecommunications Act
sought to enhance competition in the long distance market by
providing that the original local exchange carriers may enter the
long distance market outside of their local areas once they have
opened their local markets to competition. The Telecommunications
Act has been the subject of many court challenges.
Federal Regulation. The FCC is the federal entity responsible for
regulating interstate and international telecommunications services under the
Communications Act of 1934. The Communications Act imposes more
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extensive requirements on incumbent common carriers that have some degree of
market power, such as the original local exchange carriers, than it imposes on
nondominant common carriers that lack market power, such as Qwest. The FCC
permits nondominant carriers to provide domestic long distance services without
prior authorization. However, the FCC requires such carriers to obtain
authorizations to construct and operate telecommunications facilities, and to
provide or resell telecommunications services, between the United States and
international points. Qwest has obtained FCC authorization to provide
international services.
State Regulation. Intrastate telecommunications services (including local
exchange services) are regulated primarily by the state public utility
commissions. Qwest must obtain and maintain certificates of authority from
regulatory bodies in most states in which it offers intrastate services. In most
states, Qwest also must file and obtain prior regulatory approval of tariffs for
its intrastate services. State regulatory authorities can condition, modify,
terminate or revoke certificates of authority for failure to comply with state
law or the rules, regulations and policies of the state regulatory authorities.
State regulatory authorities also may impose fines and other penalties for
violations. Qwest is currently authorized to provide telecommunication services
throughout the United States.
Foreign Regulation. To the extent Qwest or its affiliates have
authorizations to provide telecommunications services in foreign countries, they
would be subject to the licensing, operational, and other requirements in those
countries.
Access Charge Reform. Qwest's costs of providing long distance services, as
well as its revenues from providing local services, could be affected by changes
in the "access charges" imposed by local exchange carriers on long distance
carriers to originate and terminate calls over local networks. In two orders
released in December 1996 and May 1997, the FCC made major changes in the
interstate access charge structure. The May 1997 order substantially increased
the amounts that certain local exchange carriers may recover through monthly
flat-rate charges and substantially decreased the amounts that these local
exchange carriers recover through per-minute access charges. The May 1997 order
also put forth a proposal to reduce interstate access charges and bring them
more in line with cost.
The FCC is expected to issue an order in 1999 addressing (a) petitions
requesting pricing flexibility for the original local exchange carriers and (b)
petitions requesting cost-based access charges. The manner in which the FCC
implements its proposal to lower access charge levels could affect the prices
Qwest and its long-distance customers and competitors pay for originating and
terminating interstate traffic. Although the ultimate outcome of the FCC's
actions in this regard is uncertain, Qwest did experience lower access charges
in 1998. This decrease, however, has been offset by increases in customer line
charges and charges for the universal service fund, which is discussed below.
Changes in the interstate access charge structure also could affect the
costs of providing long distance "phone-to-phone" voice services using Internet
protocol technology. Traditionally, providers of long distance voice services
over the Internet and companies that use Internet protocol technology to provide
long distance services have been exempt from access charges. Two of the original
local exchange carriers recently demanded, however, that carriers providing long
distance voice services using Internet protocol technology must pay access
charges. In late 1998, US West asked the FCC to consider using its accelerated
complaint procedures to determine whether Qwest's long distance phone-to-phone
voice services using Internet protocol technology is subject to the payment of
access charges. Qwest vigorously objected to the FCC's consideration of this
issue in an accelerated fashion. The FCC subsequently decided not to entertain
US West's complaint using the FCC's accelerated complaint procedures. US Wes t
has the option to file a complaint using the FCC's normal complaint procedures,
but to date, US West has not filed such a complaint. Thus, the FCC has not
finally determined whether local exchange carriers may impose access charges on
carriers providing long distance phone-to-phone voice services using Internet
protocol technology, and it is not clear when a decision will be made. The FCC
has suggested, however, that access charges might appropriately be imposed on
long distance phone-to-phone voice services under certain circumstances. If the
FCC allows local exchange carriers to levy access charges on carriers providing
long distance phone-to-phone voice services using Internet protocol technology,
Qwest's costs to provide such services could increase.
Universal Service. Universal service is a subsidy program designed to
ensure that all consumers in the United States have access to affordable
telecommunications services. The Telecommunications Act required the FCC to make
certain reforms to the universal service program. These reforms include:
. creating an explicit, independently-run subsidy mechanism,
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. ensuring that low income consumers have access to affordable
telecommunications services,
. ensuring that consumers in areas that are costly to serve have access
to affordable telecommunications services,
. ensuring that schools and libraries have access to advanced
telecommunications services, and
. making subsidies available for the use of advanced services by health
care providers in rural areas.
The FCC released an order implementing these universal service reforms in
May 1997. This order defined the services that would receive universal service
funding, identified the carriers that would be eligible to receive universal
service funding, and designated the carriers that would be required to
contribute to the universal service funding. The order also concluded that:
. contributions to universal service funding generally would be based on
the total intrastate, interstate, and international revenues of all
telecommunications carriers;
. only common carriers providing a full complement of defined local
services would be eligible to receive universal service subsidies; and
. contributions to universal service funding for schools and libraries
would be based only on a telecommunications carrier's revenue from
interstate services.
Several parties have filed petitions for reconsideration or judicial
appeals of this order. Many of these petitions are still pending. Recently, the
FCC also has suggested that it might be appropriate to require contributions to
universal service funding based on a carrier's revenues from the provision of
phone-to-phone voice services using Internet protocol technology.
Qwest expects that the FCC will issue a decision later in 1999 regarding
the amount of universal service support non-rural carriers should receive for
serving high cost areas. Qwest is unable to predict the effect on its operations
of further FCC proceedings or pending judicial appeals in this area. Qwest, like
other providers of telecommunications services, was required to contribute in
1998 a percentage of its gross retail revenues to universal service funding.
Qwest included charges for these contributions in its 1998 billings.
Local Exchange Carrier Applications to Provide Long Distance Service. The
Telecommunications Act prohibits the original local exchange carriers from
providing long distance services from within their service areas until they can
show the FCC that they have complied with the requirements of the
Telecommunications Act and opened their local exchange networks to competition.
Various local exchange carriers have applied to the FCC for authority to provide
this services in a number of states. The FCC has denied all of these
applications for various reasons, including that the original local exchange
carriers have not demonstrated compliance with the local market-opening
requirements of the Telecommunications Act. Southwestern Bell appealed the FCC's
denial of its application to provide long distance service in Oklahoma, and
BellSouth appealed the FCC's denials of its applications to provide long
distance services in South Carolina and Louisiana. BellSouth later withdrew its
Louisiana appeal and filed a new application to provide long distance service
in Louisiana. The FCC denied this application in October 1998. In March and
December of 1998, the U.S. Court of Appeals for the District of Columbia Circuit
upheld the FCC's decision to deny both Southwestern Bell's application for long
distance authority in Oklahoma and BellSouth's application for long distance
authority in South Carolina. Qwest is unable to predict when one or more local
exchange carriers will receive authority to compete in the long distance markets
in their service regions. Qwest expects, however, that the original local
exchange carriers will gain a significant share of the long distance markets in
their service territories once they obtain long distance authority.
In evaluating a local exchange carrier application for long distance
authority, the FCC must consider, among other things, the views of the
applicable state commission regarding the application. Several states are
currently in the process of considering and issuing recommendations on these
applications.
On April 6, 1998, the Chairman of the New York Public Service Commission
outlined a series of tests and conditions that Bell Atlantic had agreed to meet
in return for a positive recommendation from the New York Commission on Bell
Atlantic's application for authority to provide long distance service in New
York. Bell Atlantic agreed to provide competitors with access to combinations of
network facilities, features, and functions to allow nondominant carriers to
provide services entirely through the use of network elements leased from an
incumbent local exchange carrier. The agreement imposed a number of restrictions
on the availability of the network elements. It is possible that the terms of
this agreement may change as a result of a recent Supreme Court decision
regarding the FCC's local competition rules. This decision is discussed below.
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Bell Atlantic also must obtain approval from the FCC of its application for
authority to provide long distance service in New York. In evaluating the
application, the FCC will consider input from the state regulatory commission
and the Department of Justice, as well as from the public. Other local exchange
carriers in other states also are seeking positive state commission
recommendations on their requests for long distance authority. Qwest cannot
predict when any of the original local exchange carriers will obtain long
distance authority or predict the impact on the long distance market.
Supreme Court Decision on FCC Rules Implementing the Telecommunications
Act. On January 25, 1999, the U.S. Supreme Court issued a decision that upheld
many of the rules the FCC had created to implement the portions of the
Telecommunications Act that are designed to bring competition to local exchange
markets. In the decision, the Supreme Court upheld the FCC's authority to
implement the Telecommunications Act through rules binding on the states. The
Supreme Court also upheld the FCC's regulations regarding state review of
interconnection agreements, the granting of certain exemptions to rural
incumbent local exchange carriers, and dialing parity. "Dialing parity" means
that consumers can use nondominant carriers by dialing as they normally do,
rather than having to dial extra access codes. The Supreme Court also upheld the
FCC's rulings:
. that competitors need not own facilities in order to purchase network
elements from incumbent local exchange carriers;
. that incumbent local exchange carriers may not separate combinations
of network elements before providing them to nondominant carriers
unless requested to do so by a nondominant carrier; and
. that network elements include the features, functions, and
capabilities provided by means of network equipment.
The Supreme Court also held that nondominant carriers may adopt particular
provisions of another carrier's interconnection agreement without adopting the
entire agreement.
The Supreme Court sent back to the FCC, however, the issue of what network
elements must local exchange carriers make available to nondominant carriers.
The FCC is likely to release proposed rules on this subject in the spring of
1999 and to complete this proceeding later in 1999. In addition, a federal court
will now need to decide whether the method adopted by the FCC in 1996 for
establishing prices for network elements purchased from the incumbent local
exchange carriers and for interconnection with the incumbent local exchange
carriers' networks is permissible. Qwest is unable to predict what actions the
FCC or a federal court will take on these and other issues related to the
Supreme Court's decision.
The Supreme Court's decision is likely to have an impact on other matters
as well, including interconnection agreements between nondominant carriers and
incumbent local exchange carriers, the rules the states have adopted concerning
local exchange competition, and the original local exchange carriers'
applications for long distance authority outside of their local areas. Qwest is
unable to predict, however, how the decision will impact those matters or how
the decision will affect competition.
"Slamming" -- Unauthorized Changes of Consumers' Presubscribed Carriers. In
1997, the FCC began creating rules designed to prevent "slamming." "Slamming" is
the intentional, unauthorized change of a customer's chosen local or
long-distance carrier. Although the FCC was prepared to act in this proceeding
earlier in 1998, it held off as Congress worked on developing its own
anti-slamming legislation. Congressional efforts, however, died in October 1998.
In December 1998, the FCC released new rules governing slamming. These
rules adopt:
. more stringent requirements for verifying a consumer's consent to
change carriers,
. stronger liability provisions for carriers responsible for slamming,
and
. procedures for determining customer and carrier liability after
slamming has occurred.
The FCC's new slamming rules also broaden the scope of rules
to cover not only long distance services, but also local exchange and other
services. Qwest expects these new rules to become effective between March and
June of 1999.
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In addition, the FCC has sought comment on more proposed changes to the
slamming rules. These proposed changes include:
. the use of electronic and Internet procedures for verifying a
consumer's consent to change carriers,
. modification of the procedures for using third parties to verify a
consumer's consent to change carriers, and
. other carrier liability issues.
Qwest has taken steps to implement the changes in the FCC's slamming rules.
However, Qwest is unable to predict the outcome of further FCC proceedings or
the impact of these rules.
Advanced Telecommunications Services. On August 7, 1998, the FCC began a
rulemaking proceeding on the advanced telecommunications technology and
services. Advanced telecommunications technology and services permit services at
high speeds and allow carriers to both transmit large amounts of data and
provide multiple types of services (e.g., voice, data, and video) simultaneously
over a single line. The FCC acted in response to a provision of the
Telecommunications Act that requires the FCC to encourage advanced
telecommunications services. The FCC is considering whether advanced
telecommunications services are being made available to consumers on a
reasonable and timely basis. The FCC has also proposed to offer incumbent local
exchange carriers the option of providing advanced telecommunications services
through a separate affiliate on a largely deregulated basis. Qwest filed
comments in both proceedings. In a report released on February 2, 1999, the FCC
concluded that advanced services are being made available to consumers on a
reasonable and timely basis. The FCC's report is informational only and is
likely to have no immediate impact on advanced telecommunications services by
incumbent or nondominant local exchange carriers.
The FCC postponed action in the advanced services rulemaking proceeding
after the Supreme Court's January 25, 1999 decision sending back to the FCC the
issue of what network elements must be made available to nondominant carriers by
incumbent local exchange carriers. The FCC postponed action in this rulemaking
proceeding in order to evaluate the impact of the Supreme Court's decision on
the rights of nondominant carriers to purchase network elements, obtain
interconnection, and purchase services for resale from incumbent local exchange
carriers. Qwest is unable to predict what action the FCC is likely to take in
the advanced services rulemaking proceeding. Qwest also is unable to predict how
the FCC will regulate either the incumbent local exchange carriers' advanced
telecommunications services or the network elements used by the incumbent local
exchange carriers to provide advanced services in light of the Supreme Court's
decision. Qwest also is unable to predict what impact FCC action in this area
would have on the nature of competition.
Several companies also asked the FCC to require cable television companies
to provide competitors with access to high capacity cable television lines, such
as those used to provide Internet access services to cable television
subscribers. Several companies also asked the FCC to impose a similar
requirement on AT&T and TCI as a condition of approving their merger
application. The FCC has declined both requests for now, but has not ruled out
the possibility of imposing an "equal access" type requirement on cable
television companies in the future. Qwest cannot predict whether the FCC will
take such action.
Reciprocal Compensation for Internet Service Provider Transmissions. The
Telecommunications Act requires local exchange carriers to pay each other
reciprocal compensation for transporting and terminating each others' local
calls. In June 1997, however, the incumbent local exchange carriers asserted
that they were not required to pay reciprocal compensation to nondominant
carriers for the transport and termination of calls to Internet service
providers because they were not "local calls." To date, 29 state commissions
have concluded that the incumbent local exchange carriers should pay reciprocal
compensation for these calls. Several of these decisions have been appealed to
the courts. On February 25, 1999, the FCC ruled that calls to Internet service
providers are interstate calls, not local calls. However, the FCC did not reach
a decision on whether incumbent local exchange carriers would be required to pay
nondominant carriers reciprocal compensation for such calls. Rather, the FCC
concluded that where existing and future interconnection agreements provide for
the payment of reciprocal compensation for calls to Internet service providers,
it will be up to the state commissions to decide whether to enforce those
contract provisions. The FCC also concluded that the state commissions could
order the payment of reciprocal compensation for such calls through their
arbitrations of interconnection agreements. The FCC's ruling has been appealed
in the courts. The FCC has sought comment on proposed federal rules that would
govern the payment of reciprocal compensation for such calls.
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1+ Dialing Parity. In many states, consumers wishing to use carriers other
than the incumbent local exchange carrier for long distance services within the
incumbent local exchange carrier's area have had to dial special access codes to
do so. The need to dial extra digits in these states has put Qwest and other
carriers at a competitive disadvantage compared with incumbent local exchange
carriers whose customers can make these calls simply by dialing "1" plus the
desired number. If a nondominant carrier's customer attempts to make one of
these calls by simply dialing "1" plus the desired number, the call will
automatically be routed to the incumbent local exchange carrier in those states
that have not required 1+ dialing parity. The Supreme Court's January 25, 1999,
decision which is discussed above upholds the FCC's rule requiring that by
February 8, 1999, incumbent local exchange carriers must make it possible for
consumers to make these long distance calls on a 1+ basis, using Qwest or any
other carrier the consumer desires. Regulatory commissions in a number of states
also have issued decisions imposing similar requirements. However, some states
have stated that they will permit implementation by a slightly later date for
practical reasons. Qwest expects to benefit from the implementation of this 1+
calling capability.
Federal Tariff Requirements. Qwest is required to file tariffs for its
interstate and international long distance services with the FCC. In October
1996, the FCC adopted an order concluding that nondominant carriers, such as
Qwest, would no longer be permitted to maintain tariffs on file with the FCC for
domestic interstate services. This order applies to all nondominant interstate
carriers, including AT&T. The order does not apply to local exchange providers.
The FCC order was issued based on a provision in the Telecommunications Act
which generally permits the FCC to "forbear" from a given regulation if the FCC
determines that forbearance will serve the public interest. In February 1997,
the U.S. Court of Appeals for the District of Columbia Circuit halted
implementation of the FCC order pending the Court's review of the order.
Implementation of the order remains halted. If the FCC order is allowed to
become effective, telecommunications carriers such as Qwest will no longer be
able to rely on the filing of tariffs with the FCC as a means of providing
notice to customers of prices, terms, and conditions on which they offer their
interstate services. Instead, carriers such as Qwest will be required to
maintain and make publicly available their rate and service information. Qwest
also intends to rely on its sales force and direct marketing to provide pricing
information to its customers.
Qwest Joint Marketing Agreements. Based upon a complaint brought by AT&T,
MCI WorldCom and other long distance carriers, the FCC in September 1998
disapproved two separate joint marketing agreements entered into by Qwest with
US West and Ameritech. The FCC disapproved these agreements because it found
that under those agreements, US West and Ameritech would be providing long
distance services outside of their local areas in violation of the
Telecommunications Act. As discussed above, under the Telecommunications Act, US
West, Ameritech, and other incumbent local exchange carriers may not provide
long distance services outside of their local areas until they first demonstrate
that they have opened their local markets to competition. To date, US West and
Ameritech have not complied with this requirement. The FCC did not find that
Qwest had engaged in any unlawful conduct. Qwest, US West and Ameritech have
appealed the FCC's decision to the U.S. Court of Appeals for the District of
Columbia Circuit, arguing that the agreements were lawful efforts under the
Telecommunications Act to jointly market the local services of US West and
Ameritech with the long distance services of Qwest, and did not involve US West
and Ameritech in the provision of long distance service outside of their local
areas. Qwest is unable to predict the outcome of the appeal. If Qwest is
unsuccessful in its appeal, it may limit for a period of time the scope of any
joint marketing agreements with incumbent local exchange carriers.
State Regulation. As discussed above, Qwest's local and intrastate long
distance telecommunications operations are subject to various state laws and
regulations. Many of these state laws and regulations address competition in the
local exchange and intrastate long distance markets even though the FCC also has
authority to implement rules governing competition in these markets. The U.S.
Supreme Court's January 25, 1999, decision upholding many of the FCC's local
competition rules will likely impact many of the regulations the states have
implemented and are in the process of implementing. Qwest is unable to predict,
however, exactly what this impact will be or what actions the various states
will take in light of the Supreme Court's decision.
Municipal and Other Local Regulation. Municipalities occasionally require
Qwest to obtain street use and construction permits and licenses or franchises
in order to install and expand its fiber optic network using municipal
rights-of-way. A municipality's decision to terminate existing franchise or
license agreements before they expire or a municipality's decision to not renew
franchise or license agreements could adversely affect Qwest. A municipality's
decision to require Qwest to remove its facilities or abandon its network in
place also could adversely affect Qwest. In some municipalities where Qwest has
installed or expects to construct 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 is no guarantee that franchise fees will remain at their current
levels after existing franchises expire. In addition, Qwest
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could be placed at a competitive disadvantage if its competitors do not pay the
same level of fees as Qwest. However, the Telecommunications Act requires
municipalities to manage public rights-of-way in a competitively neutral and
non-discriminatory manner.
Regulation of International Services. On August 6, 1998, the FCC proposed
to remove certain existing restrictions on the fee arrangements between U.S.
carriers and foreign carriers for terminating switched international calls in
World Trade Organization member countries.
Pacific Rim Cable Consortium. In August 1998, Qwest announced its
participation in a consortium of communications companies that is building a
submarine cable system connecting the United States to Japan. in November 1998,
the consortium applied for authority from the FCC to land and operate the
submarine cable system. In early January 1999, a competitor, Global Crossing
Ltd., asked the FCC to postpone action on approving the consortium's application
for a U.S. cable landing license. The consortium is opposing the petition on
behalf of its members, including Qwest.
Other. Qwest monitors compliance with federal, state, and local regulations
governing the discharge and disposal of hazardous and environmentally sensitive
materials. These materials include the emission of electromagnetic radiation.
Qwest believes that it is in compliance with such regulations. However, a
discharge, disposal or emission of hazardous or environmentally sensitive
materials could expose Qwest to claims or actions that could adversely affect
Qwest.
Employees
As of December 31, 1998, Qwest employed approximately 8,700 employees. None
of Qwest's employees are currently represented by a collective bargainning
agreement. Qwest believes that its relations with its employees are good.
Corporate and Other Information
Qwest is a Delaware corporation, organized in 1997 to hold the stock of its
indirect principal subsidiary, Qwest Communications Corporation, which started
its telecommunications business in 1988.
Qwest's principal executive offices are located at 700 Qwest Tower, 555
Seventeenth Street, Denver, Colorado 80202, and its telephone number is (303)
992-1400. Qwest's web site is http://www.qwest.com.
Item 2. Properties
Qwest's network and its component assets are the principal properties owned
by Qwest. Qwest owns substantially all of the telecommunications equipment
required for its business. Qwest's installed fiber optic cable is laid under the
various rights of way held by Qwest. Other fixed assets are located at various
locations in geographic areas served by Qwest.
Qwest leases sales offices for its communications services business unit in
major metropolitan locations of the United States.
Qwest's executive and administrative offices 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 October
2004. Qwest leases additional space in the following locations: Arlington,
Virginia, housing a network operating center, customer service operations and
administrative offices; Dublin, Ohio, Weehawken, New Jersey and San Francisco,
California, each housing administrative offices and data centers; and Dallas,
Texas, housing the headquarters for operation of Qwest's microwave system.
Qwest has network management centers in the following locations: its
principal office in Denver, Colorado, Dublin, Ohio, Weehawken, New Jersey,
Arlington, Virginia, and San Antonio, Texas, all of which are leased. Qwest's
communications services business unit has customer service operations in Denver,
Colorado, Dublin, Ohio, Greenville, South Carolina, San Antonio, Texas, and
Weehawken, New Jersey.
Item 3. Legal Proceedings
In March, 1998 four putative class action complaints ("Complaints") against
LCI, its directors and in two of these cases, Qwest, were filed in the Court of
Chancery of the State of Delaware in and for New Castle County (the
18
<PAGE>
"Court"). The Complaints each made substantially the same allegations. The
plaintiffs alleged that the consummation of the LCI merger subjected LCI
stockholders to the control of Anschutz Company ("Anschutz"). The plaintiffs
further alleged that the LCI merger constitutes a change in control of LCI and
imposes heightened fiduciary duties on the members of the LCI Board to maximize
stockholder value. The plaintiffs also alleged that the members of the LCI Board
violated their fiduciary duties by failing to auction LCI or to undertake an
active "market check" for other potential bidders. The plaintiffs had sought,
among other things, to have the Court declare the suit a proper class action,
enjoin the LCI merger and require the members of the LCI Board to auction LCI
and/or conduct a "market check," and award monetary damages, together with costs
and disbursements.
On May 5, 1998, Qwest and LCI entered into a proposed settlement with the
plaintiffs in the Complaints. Pursuant to the Memorandum of Understanding
entered into by counsel for Qwest, LCI and the plaintiffs, Qwest and LCI agreed,
among other things, to (i) include in the Joint Proxy Statement/Prospectus for
the LCI merger financial information with respect to the quarter ended March 31,
1998, (ii) request Lehman Brothers to issue an updated opinion with respect to
the fairness of the LCI merger; (iii) include in the Joint Proxy
Statement/Prospectus additional disclosure regarding actions by LCI and its
representatives regarding alternative business combination transactions and (iv)
not oppose an application for legal fees and expenses by the plaintiffs'
attorneys in the amount of not more than $410,000. Pursuant to the proposed
settlement, the actions will be dismissed with prejudice and the defendants will
be released from claims that were or could have been asserted in the actions.
Because the Complaints are putative class actions, the proposed settlement is
subject to reasonable confirmatory discovery, certification of the plaintiff
class of LCI Stockholders as of March 9, 1998 through the consummation of the
LCI merger, notice to the class and Court approval. The proposed settlement does
not affect the Phillips action discussed below. On June 3, 1998, the four
putative class action lawsuits were consolidated by an Order of the Court and
the complaint in Miri Shapiro v. William F. McConnell [sic], Julius W. Erving,
Douglas M. Karp, George M. Perrin, H. Brian Thompson, John L. Vogelstein, Thomas
J. Wayne [sic], LCI International, Inc. and Qwest Communications International
Inc., was designated as the operative complaint in the consolidated action.
Confirmatory discovery was completed in June 1998. The parties had prepared for
execution a Stipulation and Agreement of Compromise, Settlement and Release. The
parties also had prepared for submission to the Court a scheduling order for
approval of the settlement. On November 2, 1998, the Court approved the
settlement.
On April 3, 1998, in an action captioned Lionel Phillips v. LCI
International Inc. and H. Brian Thompson, the plaintiffs filed a putative class
action complaint in the United States District Court for the Eastern District of
Virginia against LCI and H. Brian Thompson, the Chairman and Chief Executive
Officer of LCI. The plaintiffs brought the action purportedly on behalf of
stockholders of LCI who sold LCI Common Stock between February 17, 1998 and
March 9, 1998. The plaintiffs alleged, among other things, that the defendants
violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder
by making materially false and misleading statements that LCI was not for sale
at a time when negotiations between Qwest and LCI regarding a potential merger
were allegedly ongoing. The plaintiffs sought, among other things, to have the
Court declare the suit a proper class action and award damages, together with
costs and disbursements. On June 25, 1998, defendants moved to dismiss the
complaint on the grounds that it failed to state a claim against defendants. By
Order dated July 20, 1998, the Court granted defendants' motion to dismiss the
complaint but granted the plaintiffs leave to amend the complaint within fifteen
days. On August 4, 1998, the plaintiffs filed an amended complaint and Qwest
again moved to dismiss the lawsuit. On September 30, 1998, the Court granted the
defendant's motion to dismiss the complaint. On October 20, 1998, the plaintiffs
appealed the Court's decision and the appeal is still pending.
On September 15, 1998, in an action captioned Aaron Parnes v. Scott A.
Baxter, Wayne B. Weisman, Richard M. Brown, Scott Harmolin, Samuel A. Plum, Icon
CMT Corp. and Qwest Communications International Inc., the plaintiff filed a
putative class action complaint in the Court of Chancery of the State of
Delaware in and for New Castle County (the "Court") against Icon, its directors
and Qwest. In the suit, the plaintiff alleged that consummation of the Icon
merger will subject the Icon stockholders to the control of Mr. Anschutz, who
will continue to be the principal stockholder of Qwest after the consummation of
the merger. The plaintiff further alleged that the Icon merger constitutes a
change in control of Icon and imposes heightened fiduciary duties on the members
of the Icon board of directors to maximize stockholder value. The plaintiff also
alleged that the members of the Icon board of directors violated their fiduciary
duties by failing to auction Icon or to undertake an active "market check" for
other potential bidders. The plaintiff seeks, among other things, to have the
Court declare the suit a proper class action, enjoin the Icon merger and require
the members of the Icon board of directors to auction Icon and/or conduct a
"market check," and to award monetary damages, together with costs and
disbursements. The defendants consider the action to be without merit and intend
to vigorously defend the action. The defendants have filed answers denying the
allegations of the complaint.
19
<PAGE>
Qwest also has been named as a defendant in various other litigation
matters. Management intends to vigorously defend these outstanding claims. Qwest
believes it has adequate accrued loss contingencies and that, although the
ultimate outcome of these claims cannot be ascertained at this time, current
pending or threatened litigation matters are not expected to have a material
adverse impact on Qwest's results of operations or financial position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
20
<PAGE>
Part II.
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters
The information under the caption "Market for the Registrant's Common Stock
and Related Shareholder Matters" on page 43 of Qwest's 1998 Annual Report is
incorporated herein by reference.
Item 6. Selected Financial Data
The financial information in the table under the caption "Selected
Financial Data" on page 16 of Qwest's 1998 Annual Report is incorporated herein
by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The information under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 17-25 of Qwest's 1998
Annual Report is incorporated herein by reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information under the caption "Quantitative and Qualitative Disclosures
About Market Risk" on page 26 of Qwest's 1998 Annual Report is incorporated
herein by reference.
Item 8. Financial Statements and Supplementary Data
Qwest's Consolidated Financial Statements and related Notes thereto and the
Independent Auditors' Report on pages 27-42 of Qwest's 1998 Annual Report, as
well as the unaudited information set forth in Note 12 - Selected Consolidated
Quarterly Financial Data on page 42 of Qwest's 1998 Annual Report, are
incorporated herein by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
21
<PAGE>
Part III.
Item 10. Directors and Executive Officers of the Registrant
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
The information required by Items 10, 11, 12 and 13 of Part III of this
annual report on Form 10-K is incorporated by reference from and will be
contained in Qwest's definitive proxy statement for its annual meeting of
stockholders to be filed with the Commission by April 30, 1999.
22
<PAGE>
Part IV.
Item 14. Exhibits, Financial Statements, and Reports on Form 8-K
(a) List of documents filed as part of this report:
1. Financial Statements:
The following items are incorporated herein by reference
from the pages indicated in the Company's 1998 Annual Report:
<TABLE>
<CAPTION>
<S> <C>
Page
Consolidated Statements of Operations for the ----
three years ended December 31, 1998 28
Consolidated Balance Sheets as of December 31,
1998 and 1997 29
Consolidated Statements of Stockholders' Equity
for the three years ended December 31, 1998 30
Consolidated Statements of Cash Flows for the
three years ended December 31, 1998 31
Notes to Consolidated Financial Statements 32
</TABLE>
2. Exhibit Index:
Exhibit Number Description
-------------- -----------
3.1** Amended and Restated Certificate of Incorporation
of Qwest.
3.2***** Certificate of Amendment of Amended and Restated
Certificate of Incorporation of Qwest
3.3 Amended and Restated Bylaws.
4.1(a)*** Indenture dated as of October 15, 1997 with
Bankers Trust Company (including form of Qwest's
9.47% Senior Discount Notes due 2007 and 9.47%
Series B Senior Discount Notes due 2007 as an
exhibit thereto).
4.1(b)**** Indenture dated as of August 28, 1997 with
Bankers Trust Company (including form of Qwest's
10 7/8% Series B Senior Notes due 2007 as an
exhibit thereto).
4.1 (c)**** Indenture dated as of January 29, 1998 with
Bankers Trust Company (including form of Qwest's
8.29% Senior Discount Notes due 2008 and 8.29%
Series B Senior Discount Notes due 2008 as an
exhibit thereto).
4.1(d) Indenture dated as of November 4, 1998 with
Bankers Trust Company (including form of Qwest's
7.50% Senior Discount Notes due 2008 and 7.50%
Series B Senior Discount Notes due 2008 as an
exhibit thereto) (incorporated by reference to
Qwest's Registration Statement on Form S-4 (File
No. 333-71603) filed February 2, 1999).
4.1(e) Indenture dated as of November 27, 1998 with
Bankers Trust Company (including form of Qwest's
7.25% Senior Discount Notes due 2008 and 7.25%
Series B Senior Discount Notes due 2008 as an
exhibit thereto) (incorporated by reference to
Qwest's Registration Statement on Form S-4 (File
No. 333-71603) filed February 2, 1999).
4.2(a) Registration Agreement dated November 4, 1998
with Salomon Brothers Inc relating to Qwest's
7.50% Senior Discount Notes due 2008 (incorporated
by reference to Qwest's Registration Statement on
Form S-4 (File No. 333-71603) filed February 2,
1999).
4.2(b) Registration Agreement dated November 27, 1998
with Salomon Brothers Inc relating to Qwest's
7.25% Senior Discount Notes due 2008 (incorporated
by reference to Qwest's Registration Statement on
Form S-4 (File No. 333-71603) filed February 2,
1999).
4.3 Indenture dated as of June 23, 1997 between LCI
International, Inc., and First Trust National
Association, as trustee, Providing for the
Issuance of Senior Debt Securities, including
Resolutions of the Pricing Committee of the Board
of Directors establishing the terms of the 7.25%
Senior Notes due June 15, 2007 (incorporated by
reference to exhibit 4(c) in LCI's Current Report
on Form 8-K dated June 23, 1997).
4.4 Registration Rights Agreement dated December 14,
1998 with Microsoft Corporation (incorporated by
reference to Qwest's Current Report on Form 8-K
filed December 16, 1998).
10.1** Growth Share Plan, as amended, effective October
1,1996.*
10.2** Equity Incentive Plan.*
10.3 Qwest Communications International Inc. Employee
Stock Purchase Plan (incorporated by reference to
Qwest's Preliminary Proxy Statement for the
Annual Meeting of Stockholders, filed February
26, 1999).*
10.4 Qwest Communications International Inc. Deferred
Compensation Plan.*
23
<PAGE>
10.5**** Equity Compensation Plan for Non-Employee
Directors.*
10.6 Qwest Communications International Inc. 401-K
Plan.*
10.7** Employment Agreement dated December 21, 1996 with
Joseph P. Nacchio.*
10.8**** Growth Share Plan Agreement with Joseph P.
Nacchio, effective January 1, 1997, and Amendment
thereto.*
10.9**** Non-Qualified Stock Option Agreement with Joseph
P. Nacchio, effective June 23,1997.*
10.11** Promissory Note dated November 20, 1996 and
Severance Agreement dated December 1, 1996 with
Robert S. Woodruff.*
10.12**** Employment Agreement dated March 7, 1997 with
Stephen M. Jacobsen.*
10.13**** Employment Agreement dated September 19, 1997
with Larry Seese.*
10.14 Employment Agreement dated September 24, 1997
with Marc B. Weisberg.*
10.15**** Employment Agreement dated October 8, 1997 with
Lewis O. Wilks.*
10.16**+ IRU Agreement dated as of October 18, 1996 with
Frontier Communications International Inc.
10.17**+ IRU Agreement dated as of February 26, 1996 with
WorldCom Network Services, Inc.
10.18**+ IRU Agreement dated as of May 2, 1997 with GTE.
10.19 LCI International, Inc. 1992 Stock Option Plan
(incorporated by reference to LCI's Registration
Statement No.333-60558).*
10.20 LiTel Communications, Inc. 1993 Stock Option
Plan (incorporated by reference to LCI's
Registration Statement No. 33-60558).*
10.21 LCI International, Inc. 1994/1995 Stock Option
Plan (incorporated by reference to LCI's Annual
Report on Form 10-K for the year ended December
31, 1993).*
10.22 LCI International, Inc. 1995/1996 Stock Option
(incorporated by reference to LCI's Proxy
Statement for the 1995 Annual Meeting of
Shareowners).*
10.23 LCI International Management Services, Inc.
Supplemental Executive Retirement Plan
(incorporated by reference to LCI's Quarterly
Report on Form 10-Q for the quarter ended March
31, 1995).*
10.24 1997/1998 LCI International, Inc. Stock Option
Plan (incorporated by reference to LCI's Annual
Report on Form 10-K for the year ended December
31, 1996).*
10.25(a) 1995 Stock Option Plan of Icon CMT Corp.
(incorporated by reference to Icon CMT Corp.'s
Registration Statement on Form S-1/A, No. 333-
38339).*
10.25(b) Amendment to Amended and Restated 1995 Stock
Option Plan of Icon CMT Corp.*
10.26 U.S. Long Distance Corp. 1990 Employee Stock
Option Plan.*
10.27+ Contractor Agreement dated January 18, 1993 by
and between LCI International Telecom Corp. and
American Communications Network, Inc.
(incorporated by reference to LCI's Quarterly
Report on Form 10-Q for the quarter ended
September 30, 1995).
10.28 Participation Agreement dated as of November 1996
among LCI International, Inc.,as the Construction
Agent and as the Lessee, First Security Bank,
National Association, as the Owner Trustee under
the Stuart Park Trust the various banks and
lending institutions which are parties thereto
from time to time as the Holders, the various
banks and lending institutions which are parties
thereto from time to time as the Lenders and
NationsBank of Texas, N.A., as the Agent for the
Lenders (incorporated by reference to LCI's
Annual Report on Form 10-K for the year ended
December 31, 1996).
10.29 Agency Agreement between LCI International, Inc.,
as the Construction Agent and First Security
Bank, National Association, as the Owner Trustee
under the Stuart Park Trust as the Lessor dated
as of November 15, 1996 (incorporated by
reference to LCI's Annual Report on
24
<PAGE>
Form 10-K for the year ended December 31, 1996).
10.30 Deed of Lease Agreement dated as of November 15,
1996 between First Security Bank, National
Association as the Owner Trustee under the Stuart
Park Trust, as Lessor and LCI International, Inc.
as Lessee (incorporated by reference to LCI's
Annual Report on Form 10-K for the year ended
December 31, 1996).
13 Portions of Qwest's 1998 Annual Report to
Shareholders
21.1 Subsidiaries of the Registrant (incorporated by
reference to Qwest's Registration Statement on
Form S-4 (File No. 333-65095) filed September 30,
1998).
23 Consent of Independent Auditors
27 Financial Data Schedule
* Indicates executive contracts, compensation plans
and arrangements.
** Incorporated by reference in Form S-1 as declared
effective on June 23, 1997 (File No. 333-25391).
*** Incorporated by reference to Form S-4 as declared
effective on January 5, 1998
(File No. 333-42847).
**** Incorporated by reference in Qwest's Form 10-K
for the year ended December 31, 1997. (File No.
000-22609)
***** Incorporated by reference to the exhibit of the
same number to Qwest's Registration Statement on
Form S-3 (File No.333-58617) filed July 7, 1998).
+ Portions have been omitted pursuant to a request
for confidential treatment.
(b) Reports on Form 8-K:
During the quarter ended December 31, 1998, Qwest filed the following
Current Reports on Form 8-K:
(i) On October 19, 1998, Qwest filed a Current Report on Form 8-K/A to
amend the Form 8-K filed June 12, 1998, which announced the
consummation of the merger of LCI and Qwest, effective June 5, 1998.
The Form 8-K/A also incorporated by reference the financial
statements and pro forma financial information required pursuant to
the Form 8-K filed June 12, 1998.
(ii) On October 29, 1998, Qwest filed a Current Report on Form 8-K
announcing it third quarter 1998 results of operations.
(iii) On November 19, 1998, Qwest filed a Current Report on Form 8-K
announcing that it and KPN Telecom B. V. had entered into a letter of
intent to form a joint venture company to create a pan-European
Internet Protocol-based fiber optic network linked to Qwest's network
in North America for data, video and voice services.
(iv) On November 25, 1998, Qwest filed a Current Report on Form 8-K
announcing that it had agreed to sell $300.0 million in aggregate
principal amount of 7.25% ten-year Senior Notes due 2008.
(v) On December 7, 1998, Qwest filed a Current Report on Form 8-K
announcing that it intended to redeem on December 31, 1998, $87.5
million of its 10 7/8% Series B Senior Notes due 2007.
(vi) On December 16, 1998, Qwest filed a Current Report on Form 8-K
announcing that Qwest and Microsoft, a Washington corporation, had
agreed to enter into a business alliance to offer communications
network services. In addition, Microsoft agreed to purchase from
Qwest approximately 4.4 million shares of Qwest's common stock, at a
price of $45.00 per share, for an aggregate purchase price of $200.0
million.
25
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Qwest Communications International Inc.,
a Delaware corporation
By: /s/ Robert S. Woodruff
Robert S. Woodruff
Executive Vice President--Finance
and Chief Financial Officer
(Principal Accounting Officer)
March 19, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Titles Date
--------- ------ ----
/s/ Philip F. Anschutz Chairman of the Board of Directors March 19, 1999
- ----------------------------
Philip F. Anschutz
/s/ Joseph P. Nacchio Director, Chairman and Chief
- ---------------------------- Executive Officer March 19, 1999
Joseph P. Nacchio
/s/ Robert S. Woodruff Director, Executive Vice President
- ---------------------------- - Finance and Chief Financial
Robert S. Woodruff Officer (Principal Accounting
Officer) March 19, 1999
/s/ Cannon Y. Harvey Director March 19, 1999
- ----------------------------
Cannon Y. Harvey
/s/ Jordan L. Hanes Director March 19, 1999
- ----------------------------
Jordan L. Haines
/s/ Douglas M. Karp Director March 19, 1999
- ----------------------------
Douglas M. Karp
/s/ Vinod Khosla Director March 19, 1999
- ----------------------------
Vinod Khosla
/s/ Richard T. Liebhaber Director March 19, 1999
- ----------------------------
Richard T. Liebhaber
/s/ Douglas L. Polson Director March 19, 1999
- ----------------------------
Douglas L. Polson
/s/ Craig D. Slater Director March 19, 1999
- ----------------------------
Craig D. Slater
/s/ W. Thomas Stephens Director March 19, 1999
- ----------------------------
W. Thomas Stephens
26
<PAGE>
Independent Auditors' Report
----------------------------
The Board of Directors
Qwest Communications International Inc.:
Under date of February 2, 1999, we reported on the consolidated balance sheets
of Qwest Communications International Inc. and subsidiaries as of December 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 1998, which are incorporated by reference in the Form
10-K. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule included in the Form 10-K. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
KPMG LLP
Denver, Colorado
February 2, 1999
27
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
AND SUBSIDIARIES
Schedule II
Valuation and Qualifying Accounts
Three Years Ended December 31, 1998
(Amounts in Millions)
<TABLE>
<CAPTION>
Additions Deductions
------------------- ---------------
Balance at Write-offs, Balance at
Beginning of Charged to net of end of
Description period profit and loss Other(1) recoveries period
- ----------- ----------- ------------------------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998:
Allowance for doubtful receivables-trade $ 4.6 82.8 51.0 (82.2) $ 56.2
=========== ================ ======= ============= ===========
Year ended December 31, 1997:
Allowance for doubtful receivables-trade $ 3.7 7.8 -- (6.9) $ 4.6
=========== ================ ======= ============= ===========
Year ended December 31, 1996:
Allowance for doubtful receivables-trade $ 2.6 2.9 -- (1.8) $ 3.7
=========== ================ ======= ============= ===========
</TABLE>
(1) Represents additions resulting from acquisitions completed during 1998
28
<PAGE>
BYLAWS
OF
QWEST COMMUNICATIONS INTERNATIONAL INC.
As Amended as of February 17, 1999
<PAGE>
INDEX TO BYLAWS
OF
QWEST COMMUNICATIONS INTERNATIONAL INC.
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I
Offices 1
Section 1.01 Business Offices 1
Section 1.02 Registered Office 1
ARTICLE II
Stockholders 1
Section 2.01 Annual Meeting 1
Section 2.02 Special Meetings 1
Section 2.03 Place of Meeting
Section 2.04 Notice of Meetings 2
Section 2.05 Fixing Date for Determination of Stockholders of Record 2
Section 2.06 Voting List 2
Section 2.07 Proxies 3
Section 2.08 Quorum and Manner of Acting 3
Section 2.09 Voting of Shares 3
Section 2.10 Voting of Shares by Certain Holders 3
Section 2.11 Action Without a Meeting 4
Section 2.12 Conduct of Meetings 4
Section 2.13 Nomination of Directors 5
7
ARTICLE III
Board of Directors 7
Section 3.01 General Powers 7
Section 3.02 Number, Tenure and Qualifications 7
Section 3.03 Resignation 8
Section 3.05 Vacancies 8
Section 3.06 Regular Meetings 8
Section 3.07 Special Meetings 8
Section 3.08 Meetings by Telephone 8
Section 3.09 Notice of Meetings 9
Section 3.10 Quorum and Manner of Acting 9
Section 3.11 Interested Directors 9
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 3.12 Action Without a Meeting 10
Section 3.13 Executive and Other Committees 10
Section 3.14 Compensation 10
ARTICLE IV
Officers 11
Section 4.01 Number and Qualifications 11
Section 4.02 Election and Term of Office 11
Section 4.03 Compensation 11
Section 4.04 Resignation 11
Section 4.05 Removal 11
Section 4.06 Vacancies 12
Section 4.07 Authority and Duties 12
Section 4.08 Surety Bonds 14
ARTICLE V
Stock 14
Section 5.01 Issuance of Shares 14
Section 5.02 Stock Certificates; Uncertificated Shares 14
Section 5.03 Payment for Shares 14
Section 5.04 Lost Certificates 15
Section 5.05 Transfer of Shares 15
Section 5.06 Registered Holders 16
Section 5.07 Transfer Agents, Registrars and Paying Agents 16
ARTICLE VI
Indemnification 16
Section 6.01 Definitions 16
Section 6.02 Right to Indemnification 17
Section 6.03 Successful on the Merits 17
Section 6.04 Advancement of Expenses 18
Section 6.05 Proceedings by a Party 18
Section 6.06 Subrogation 18
Section 6.07 Other Payments 18
Section 6.08 Insurance 18
Section 6.09 Other Rights and Remedies 18
Section 6.10 Applicability; Effect 18
Section 6.11 Severability 19
</TABLE>
<PAGE>
<TABLE>
<S> <C>
ARTICLE VII
Miscellaneous 19
Section 7.01 Waivers of Notice 19
Section 7.02 Presumption of Assent 19
Section 7.03 Voting of Securities by the Corporation 19
Section 7.04 Loans to Employees and Officers; Guaranty of
Obligations of Employees and Officers 20
Section 7.05 Seal 20
Section 7.06 Fiscal Year 20
Section 7.07 Amendments 20
</TABLE>
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
QWEST COMMUNICATIONS INTERNATIONAL INC.
ARTICLE I
Offices
Section 1.01 Business Offices. The corporation may have such offices,
either within or outside Delaware, as the board of directors may from time to
time determine or as the business of the corporation may require.
Section 1.02 Registered Office. The registered office of the corporation
required by the Delaware General Corporation Law to be maintained in Delaware
shall be as set forth in the certificate of incorporation, unless changed as
provided by law.
ARTICLE II
Stockholders
Section 2.01 Annual Meeting. An annual meeting of the stockholders shall
be held on such date and at such time as the board of directors shall fix in the
notice of meeting, beginning with the year 1998, for the purpose of electing
directors and for the transaction of such other business as may come before the
meeting. If the day fixed for the annual meeting shall be a legal holiday, such
meeting shall be held on the next succeeding business day. If the election of
directors shall not be held on the day designated herein for any annual meeting
of the stockholders, or at any adjournment thereof, the board of directors shall
cause the election to be held at a meeting of the stockholders as soon
thereafter as conveniently may be. Failure to hold an annual meeting as
required by these bylaws shall not invalidate any action taken by the board of
directors or officers of the corporation.
Section 2.02 Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, unless otherwise prescribed by statute, may be called
by the Chairman of the Board or by the board of directors pursuant to a
resolution approved by the affirmative vote of a majority of directors then in
office, and shall be called by the Chairman of the Board at the written request
of the holders of not less than 25 percent of the votes of the outstanding
shares of the corporation entitled to vote generally in the election of
directors, voting together as a single class. Such written request shall state
the purpose or purposes of the proposed meeting.
<PAGE>
Section 2.03 Place of Meeting. Each meeting of the stockholders shall be
----------------
held at such place, either within or outside Delaware, as may be designated in
the notice of meeting, or, if no place is designated in the notice, at the
principal office of the corporation.
Section 2.04 Notice of Meetings. Except as otherwise required by law,
------------------
written notice of each meeting of the stockholders stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be given, either personally
(including delivery by private courier) or by first class, certified or
registered mail, to each stockholder of record entitled to notice of such
meeting, not less than ten nor more than 60 days before the date of the meeting.
Such notice shall be deemed to be given, if personally delivered, when delivered
to the stockholder, and, if mailed, when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation, but if notice of two consecutive annual meetings and
all notices of meetings of or the taking of action by written consent without a
meeting to any stockholder during the period between such two consecutive annual
meetings, or all, and at least two, payments (if sent by first class mail) of
dividends or interest on securities during a 12-month period, have been mailed
addressed to such person at his address as shown on the records of the
corporation and have been returned undeliverable, the giving of such notice to
such person shall not be required until another address for such person is
delivered to the corporation. When a meeting is adjourned to another time or
place, notice need not be given of the adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the corporation may transact any business that might have been
transacted at the original meeting. If the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting in accordance with the foregoing
provisions of this Section 2.04.
Section 2.05 Fixing Date for Determination of Stockholders of Record.
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For the purpose of determining stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for any other lawful action, the board of directors may fix a date
as the record date for any such determination of stockholders, which date shall
not precede the date upon which the resolution fixing the record date is adopted
by the board of directors, and which date shall be not more than 60 nor less
than ten days before the date of such meeting. If no record date is fixed for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, then the record date shall be the close of business on the day
next preceding the day on which notice is given, or, if notice is waived, the
close of business on the day next preceding the day on which the meeting is
held, or, for determining stockholders for any other purpose, the close of
business on the day on which the board of directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the board of directors may fix a new record
date for the adjourned meeting. Notwithstanding the foregoing provisions of
this Section 2.05, the record date for determining stockholders entitled to
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take, or receive notice of, corporate action in writing without a meeting as
provided in Section 2.11 shall be determined as provided in such Section.
Section 2.06 Voting List. The officer who has charge of the stock books
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of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 2.07 Proxies. Each stockholder entitled to vote at a meeting of
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stockholders or to express consent or dissent to corporate action in writing
without a meeting may authorize another person or persons to act for him by
proxy, but no such proxy shall be voted or acted upon after three years from its
date, unless the proxy provides for a longer period.
Section 2.08 Quorum and Manner of Acting. At all meetings of
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stockholders, a majority of the outstanding shares of the corporation entitled
to vote, represented in person or by proxy, shall constitute a quorum. If a
quorum is present, the affirmative vote of a majority of the shares represented
at a meeting and entitled to vote on the subject matter shall be the act of the
stockholders, unless the vote of a greater proportion or number or voting by
classes is otherwise required by law, the certificate of incorporation or these
bylaws. In the absence of a quorum, a majority of the shares so represented may
adjourn the meeting from time to time in accordance with Section 2.04, until a
quorum shall be present or represented.
Section 2.09 Voting of Shares. Unless otherwise provided in the
----------------
certificate of incorporation and subject to the provisions of Section 2.05, each
stockholder entitled to vote shall have one vote for each outstanding share of
capital stock held of record by such stockholder on each matter submitted to a
vote of the stockholders either at a meeting thereof or pursuant to Section
2.11. In the election of directors each record holder of stock entitled to vote
at such election shall have the right to vote the number of shares owned by him
for as many persons as there are directors to be elected, and for whose election
he has the right to vote. Cumulative voting shall not be allowed. If a
separate vote by a class or classes is required, a majority of the outstanding
shares of such class or classes, present in person or represented by proxy,
shall constitute a quorum entitled to take action with respect to that vote on
that matter and the affirmative vote of the majority of shares of such class or
classes present in person or represented by proxy at the meeting shall be the
act of such class.
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Section 2.10 Voting of Shares by Certain Holders.
(a) Fiduciaries; Pledgors. Persons holding stock in a fiduciary
capacity shall be entitled to vote the shares so held. Persons whose stock is
pledged shall be entitled to vote, unless in the transfer by the pledgor on the
books of the corporation he has expressly empowered the pledgee to vote thereon,
in which case only the pledgee or his proxy may represent such shares and vote
thereon.
(b) Joint Owners. If shares stand of record in the names of two
or more persons, whether fiduciaries, members of a partnership, joint tenants,
tenants in common, tenants by the entirety or otherwise, or if two or more
persons have the same fiduciary relationship respecting the same shares, unless
the secretary of the corporation is given written notice to the contrary and is
furnished with a copy of the instrument or order appointing them or creating the
relationship wherein it is so provided, their acts with respect to voting shall
have the following effects: (i) if only one votes, his act binds all; (ii) if
more than one votes, the act of the majority so voting binds all; and (iii) if
more than one votes, but the vote is evenly split on any particular matter, each
faction may vote the shares in question proportionally, or any person voting the
shares, or a beneficiary, if any, may apply to any court having jurisdiction to
appoint an additional person to act with the persons so voting the shares, in
which case the shares shall then be voted as determined by a majority of such
persons. If the secretary of the corporation is given notice and is furnished a
copy of the instrument or order creating a tenancy held in unequal interests, a
majority or even split for the purpose of subparagraph (iii) shall be a majority
or even split in interest.
Section 2.11 Action Without a Meeting.
(a) Written Consent. Unless otherwise provided in the certificate
of incorporation, any action required or permitted to be taken at any meeting of
the stockholders may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and voted
(which consent may be signed in counterparts). Every written consent shall bear
the date of signature of each stockholder who signs the consent and no written
consent shall be effective to take the corporate action referred to therein
unless, within 60 days of the earliest dated consent delivered to the
corporation in the manner required by the Delaware General Corporation Law,
written consents signed by a sufficient number of stockholders to take the
action are delivered to the corporation in the manner required by the Delaware
General Corporation Law.
(b) Determination of Stockholders Entitled to Act By Consent. For
purposes of determining stockholders entitled to consent to corporate action in
writing without a meeting, the board of directors may fix a date as the record
date for any such determination of stockholders, which date shall not precede
the date upon which the resolution fixing the record date is adopted by the
board of directors, and which date shall not be more than ten days after the
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date upon which the resolution fixing the record date is adopted by the board of
directors. If no record date has been fixed by the board of directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the board of directors is
required by the Delaware General Corporation Law, shall be the first date on
which a signed written consent setting forth the action taken or proposed to be
taken is delivered to the corporation in the manner required by the Delaware
General Corporation Law. If no record date has been fixed by the board of
directors and prior action by the board of directors is required by the Delaware
General Corporation Law, the record date for determining stockholders entitled
to consent to corporate action in writing without a meeting shall be the close
of business on the day on which the board of directors adopts the resolution
taking such prior action.
(c) Notice to Non-Consenting Stockholders. Prompt notice of the
taking of corporate action without a meeting by less than unanimous written
consent shall be given to those stockholders who have not consented in writing
and who, if the action had been taken at a meeting, would have been entitled to
notice of the meeting if the record date for such meeting had been the date that
written consents signed by a sufficient number of holders to take the action
were delivered to the corporation in the manner required by the Delaware General
Corporation Law. Such notice shall be given in accordance with the applicable
provisions of Section 2.04.
Section 2.12 Conduct of Meetings . The chairman of the annual or any
special meeting of the stockholders shall be the chairman of the board, if there
is one, or, if there is not one or in his absence, the chief executive officer
or president of the corporation (or in his absence, any person designated by the
board of directors), unless and until a different person is elected by a
majority of the shares entitled to vote at such meeting.
The chairman of the meeting shall appoint one or more persons to act
as inspectors of election at the meeting and to make a written report thereof.
Meetings of stockholders shall be conducted in accordance with the
following rules:
(a) The chairman of the meeting shall have absolute authority
over matters of procedure and there shall be no appeal from the ruling of the
chairman.
(b) If disorder should arise that prevents continuation of the
legitimate business of the meeting, the chairman may quit the chair and announce
the adjournment of the meeting to another time and place and upon his so doing
the meeting is immediately adjourned.
(c) The chairman may ask or require that anyone who is not a
bona fide stockholder or proxy leave the meeting.
(d) A resolution or motion shall be considered for vote only if
proposed in accordance with the provisions of Section 2.12(e) and only if
proposed by a
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stockholder or a duly authorized proxy and seconded by an individual who is a
stockholder or a duly authorized proxy, other than the individual who proposed
the resolution or motion.
(e) At any annual or special meeting of stockholders only such new
business shall be conducted, and only such proposals shall be acted upon, as
shall have been properly brought before the meeting. For any new business
proposed by management to be properly brought before the annual meeting, such
new business shall be approved by the board of directors, either directly or
through its approval by proxy solicitation materials related thereto, and shall
be stated in writing and filed with the secretary of the corporation at least
five days before the date of the annual meeting, and all business so stated,
proposed and filed shall be considered at the annual meeting.
Any stockholder may make any other proposal at a meeting and the same
may be discussed and considered, but unless properly brought before the meeting
such proposal shall not be acted upon at the meeting. No business may be
properly brought before a special meeting unless identified in the notice
thereof given in accordance with applicable law and Section 2.04 of these
bylaws. For a proposal to be properly brought before an annual meeting by a
stockholder, the stockholder must have given timely notice thereof in writing to
the secretary of the corporation. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
corporation not less than 120 days prior to the date of the corporation's proxy
statement released to stockholders in connection with the previous year or if
the date of the annual meeting has been changed by more than 30 days from the
date contemplated at the previous year's annual meeting, then 150 days prior to
the date of the annual meeting; provided, however, that in the event that less
than 40 days notice is given or made to the stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the tenth day following the day on which such notice of the date of
the annual meeting was mailed.
A stockholder's notice to the secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (i) a brief
description of the proposal desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and address, as they appear on the corporation's books, of the stockholder
proposing such business, (iii) the class and number of shares of the corporation
which are beneficially owned by the stockholder, (iv) any financial interest of
the stockholder in such proposal, and (v) any additional information as the
Board or the president of the corporation shall deem necessary or desirable.
Notwithstanding anything in the bylaws to the contrary, no business
shall be conducted at an annual or special meeting except in accordance with the
procedures set forth in this Section 2.12(e). The chairman of an annual or
special meeting shall, if the facts warrant, determine and declare to the
meeting that new business of any stockholder was not properly brought before the
meeting in accordance with the provisions of this Section 2.12(e), and if the
chairman should so determine, the chairman shall so declare to the meeting and
any such
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business or proposal not properly brought before the meeting shall not be acted
upon at the meeting.
This provision shall not prevent the consideration and approval or
disapproval at the annual meeting of reports of officers, directors and
committees, but in connection with such reports no new business shall be acted
upon at such annual meeting unless stated and filed as herein provided.
Section 2.13 Nomination of Directors. Nomination of persons to stand for
election at any annual or special stockholders meeting may be made at any time
prior to the vote thereon by the board of directors or a committee of the board
of directors. Other than as provided in the immediately preceding sentence, no
such nominations shall be entertained unless written notice of such proposed
nominations are received by the secretary of the corporation, (i) if for an
annual meeting, not less than 90 days in advance of the date that corresponds to
the date that the corporation's proxy statement was first mailed or released to
stockholders in connection with the previous year's annual meeting of
stockholders, except that if no annual meeting was held in the previous year or
the date for the annual meeting has been changed by more than 30 calendar days
from the date of the previous year's annual meeting, such written notice shall
suffice if received not less than 30 days prior to such meeting, and (ii) if for
any other stockholders meeting, not less than seven days after notice of such
meeting is first given. Such written notice shall provide the name and age of
each nominee and complete account of the business experience of each nominee
during the past five years, including the present occupation and business
activities of the nominee regardless of whether compensation in any form
whatever was received for such activities or experience.
ARTICLE III
Board of Directors
Section 3.01 General Powers. The business and affairs of the corporation
shall be managed by or under the direction of its board of directors, except as
otherwise provided in the Delaware General Corporation Law or the certificate of
incorporation.
Section 3.02 Number, Tenure and Qualifications. The board of directors
of the corporation shall consist of one or more members. The number of
directors of the corporation shall be as fixed from time to time by resolution
of the board of directors. Except as otherwise provided in Sections 2.01 and
3.05, directors shall be elected at each annual meeting of stockholders, by a
plurality of the votes present in person or represented by proxy at the meeting
and entitled to vote at the election of directors. Each director shall hold
office until his successor shall have been elected and qualified or until his
earlier death, resignation or removal. Directors need not be residents of
Delaware or stockholders of the corporation. Any reduction in the authorized
number of directors shall not have the effect of shortening the term of any
incumbent director unless such director is also removed from office in
accordance with Section 3.04.
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Section 3.03 Resignation. Any director may resign at any time by giving
written notice to the corporation. A director's resignation shall take effect
at the time specified therein; and unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
Section 3.04 Removal. Any director or the entire board of directors may
be removed, with or without cause, by the affirmative vote of holders of at
least a majority of the votes of the outstanding shares of stock generally
entitled to vote in the election of directors, voting together as a single
class, at a meeting for which notice of the proposed removal has been given in
accordance with Section 2.04.
Section 3.05 Vacancies. Unless otherwise provided in the certificate of
incorporation, any vacancy or any newly created directorship resulting from any
increase in the authorized number of directors may be filled by a majority of
directors then in office, although less than a quorum, or by a sole remaining
director, or by the stockholders if there are no directors remaining, and a
director so chosen shall hold office until the next annual meeting of
stockholders and until his successor is duly elected and qualified. When one or
more directors shall resign from the board, effective at a future date, a
majority of the directors then in office, including those who have so resigned,
shall have the power to fill such vacancy or vacancies, the vote thereon to take
effect when such resignation or resignations shall become effective, and each
director so chosen shall hold office as provided in this Section for the filling
of other vacancies.
Section 3.06 Regular Meetings. A regular meeting of the board of directors
shall be held immediately after and at the same place as the annual meeting of
stockholders, or as soon thereafter as conveniently may be, at the time and
place, either within or without Delaware, determined by the board, for the
purpose of electing officers and for the transaction of such other business as
may come before the meeting. Failure to hold such a meeting, however, shall not
invalidate any action taken by any officer then or thereafter in office. The
board of directors may provide by resolution the time and place, either within
or outside Delaware, for the holding of additional regular meetings without
other notice than such resolution.
Section 3.07 Special Meetings. Special meetings of the board of
directors may be called by or at the request of the chairman of the board or any
director. The person authorized to call special meetings of the board of
directors may fix any convenient place, either within or outside Delaware, as
the place for holding any special meeting of the board of directors called by
him.
Section 3.08 Meetings by Telephone. Unless otherwise restricted by the
certificate of incorporation, members of the board of directors or any committee
thereof may participate in a meeting of such board or committee by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and such participation
in a meeting in such manner shall constitute presence in person at the meeting.
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Section 3.09 Notice of Meetings. Notice of each meeting of the board of
directors (except those regular meetings for which notice is not required)
stating the place, day and hour of the meeting shall be given to each director
at least five days prior thereto by the mailing of written notice by first class
mail or at least three days prior thereto by personal delivery (including
delivery by courier) of written notice or by telephone, telegram, facsimile or
other similar form of communication, except that in the case of a meeting to be
held pursuant to Section 3.08 notice may be given by personal delivery or by
facsimile, telegram or telephone 24 hours prior thereto. The method of notice
need not be the same to each director. If mailed, such notice shall be deemed
to be given when deposited in the United States mail, with postage thereon
prepaid, addressed to the director at his business or residence address. If
sent by telegram, facsimile or similar form of communication, such notice shall
be deemed to be given when sent by such method to the director during normal
business hours at the location of the recipient at the last address or facsimile
number of the director furnished by him to the corporation for such purpose. If
communicated by telephone, such notice shall be deemed to be given when
communicated directly to the director or to the person designated by the
director as a person authorized to receive such notice. Neither the business to
be transacted at nor the purpose of any meeting of the board of directors need
be specified in the notice or waiver of notice of such meeting.
Section 3.10 Quorum and Manner of Acting. Except as otherwise may be
required by law, the certificate of incorporation or these bylaws, a majority of
the number of directors fixed in accordance with these bylaws, present in
person, shall constitute a quorum for the transaction of business at any meeting
of the board of directors, and the vote of a majority of the directors present
at a meeting at which a quorum is present shall be the act of the board of
directors. If less than a quorum is present at a meeting, the directors present
may adjourn the meeting from time to time without further notice other than
announcement at the meeting, until a quorum shall be present. No director may
vote or act by proxy or power of attorney at any meeting of the board of
directors.
Section 3.11 Interested Directors. No contract or transaction between
the corporation and one or more of its directors or officers, or between a
corporation and any other corporation, partnership, association, or other
organization in which one or more of its directors or officers are directors or
officers or have a financial interest, shall be void or voidable solely for this
reason, or solely because the director or officer is present at or participates
in the meeting of the board or committee which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose,
if the material facts as to his relationship or interest and as to the contract
or transaction are disclosed or are known to the board of directors or the
committee, and the board or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or the contract or transactions is fair as to the
corporation as of the time it is authorized, approved or ratified, by the board
of directors, a committee or the stockholders. Common or interested
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directors may be counted in determining the presence of a quorum at a meeting of
the board of directors or of a committee that authorizes the contract or
transaction.
Section 3.12 Action Without a Meeting. Unless otherwise restricted by
the certificate of incorporation, any action required or permitted to be taken
at any meeting of the board of directors or any committee thereof may be taken
without a meeting, without prior notice and without a vote, if all members of
the board or committee consent thereto in writing and the writing or writings
are filed with the minutes of the proceedings of the board or committee.
Section 3.13 Executive and Other Committees. The board of directors may
designate one or more committees, each committee to consist of one or more of
the directors of the corporation. The board may designate one or more directors
as alternate members of any committee, who may replace any absent or
disqualified member at any meeting of the committee. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of any such absent or disqualified
member. Any such committee, to the extent provided in the resolution of the
board of directors, shall have and may exercise all the powers and authority of
the board of directors in the management of the business and affairs of the
corporation, and may authorize the seal of the corporation to be affixed to all
papers which may require it; but no such committee shall have the power or
authority in reference to (a) approving or adopting, or recommending to the
stockholders, any action or matter expressly required by Delaware General
Corporation Law to be submitted to stockholders for approval; or (b) adopting,
amending or repealing any bylaw of the corporation. The delegation of authority
to any committee shall not operate to relieve the board of directors or any
member of the board from any responsibility imposed by law. Subject to the
foregoing, the board of directors may provide such powers, limitations and
procedures for such committees as the board deems advisable. To the extent the
board of directors does not establish other procedures, each committee shall be
governed by the procedures set forth in Sections 3.06 (except as they relate to
an annual meeting), 3.07 through 3.11 and 7.01 and 7.02 as if the committee were
the board of directors. Each committee shall keep regular minutes of its
meetings, which shall be reported to the board of directors when required and
submitted to the secretary of the corporation for inclusion in the corporate
records.
Section 3.14 Compensation. Unless otherwise restricted by the
certificate of incorporation, the board of directors, or any committee thereof
as may be authorized by the board, shall have the authority to fix the
compensation of directors. The directors may be paid their expenses, if any, of
attendance at each meeting of the board of directors and each meeting of any
committee of the board of which he is a member and may be paid a fixed sum for
attendance at each such meeting or a stated salary or both a fixed sum and a
stated salary. No such payment shall preclude any director from serving the
corporation in any other capacity and receiving compensation therefor.
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ARTICLE IV
Officers
Section 4.01 Number and Qualifications. The officers of the corporation
shall consist of a chairman of the board of directors, chairman and chief
executive officer of the corporation, a secretary, a treasurer and such other
officers, including a president and chief operating officer, one or more vice-
presidents and a controller, as may from time to time be elected or appointed by
the board. In addition, the board of directors, the chairman of the board of
directors or the chairman and chief executive officer may elect or appoint such
assistant and other subordinate officers including assistant vice-presidents,
assistant secretaries and assistant treasurers, as it or he shall deem necessary
or appropriate. Any number of offices may be held by the same person, except
that no person who holds any of the offices of chairman of the board of
directors, chairman and chief executive officer or president and chief operating
officer may also hold the office of secretary.
Section 4.02 Election and Term of Office. Except as provided in Sections
4.01 and 4.06, the officers of the corporation shall be elected by the board of
directors annually at the first meeting of the board held after each annual
meeting of the stockholders as provided in Section 3.06. If the election of
officers shall not be held as provided herein, such election shall be held as
soon thereafter as conveniently may be. Each officer shall hold office until
his successor shall have been duly elected and shall have qualified or until the
expiration of his term in office if elected or appointed for a specified period
of time or until his earlier death, resignation or removal.
Section 4.03 Compensation. Officers shall receive such compensation for
their services as may be authorized or ratified by the board of directors, or
any committee of the board as may be authorized, and no officer shall be
prevented from receiving compensation by reason of the fact that he is also a
director of the corporation. Election or appointment as an officer shall not of
itself create a contract or other right to compensation for services performed
by such officer.
Section 4.04 Resignation. Any officer may resign at any time, subject to
any rights or obligations under any existing contracts between the officer and
the corporation, by giving written notice to the corporation. An officer's
resignation shall take effect at the time stated therein; and unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 4.05 Removal. Any officer may be removed at any time by the
board of directors, or, in the case of assistant and other subordinate officers,
by the president (whether or not such officer was appointed by the president),
whenever in its or his judgment, as the case may be, the best interests of the
corporation will be served thereby, but such removal shall be without prejudice
to the contract rights, if any, of the person so removed. Election or
appointment of an officer shall not in itself create contract rights.
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Section 4.06 Vacancies. A vacancy occurring in any office by death,
resignation, removal or otherwise may be filled by the board of directors, or,
if such office may be filled by the president as provided in Section 4.01, by
the president, for the unexpired portion of the term.
Section 4.07 Authority and Duties. The officers of the corporation shall
have the authority and shall exercise the powers and perform the duties
specified below, and as may be additionally specified by these bylaws or any of
the board of directors, the chairman of the board of directors and the chairman
and chief executive officer, except that in any event each officer shall
exercise such powers and perform such duties as may be required by law:
(a) Chairman of the Board of Directors. The chairman of the board of
directors, who shall be elected from the directors, shall preside
at all meetings of the stockholders and directors of the
corporation, or his designee shall so preside, and shall have and
may exercise all such powers and perform such other duties as may
be assigned to him from time to time by the board of directors.
The chairman of the board of directors shall also serve as the
chairman of the executive committee of the board of directors, if
such committee shall exist.
(b) Chairman and Chief Executive Officer. The chairman and chief
executive officer shall, subject to the direction and supervision
of the board of directors and, when the board of directors is not
in session, of the chairman of the board of directors, (i) have
general and active control of its affairs and business and
general supervision of its officers, agents and employees; (ii)
in the absence of the chairman of the board of directors, preside
at all meetings of the stockholders and the board of directors;
(iii) see that all orders and resolutions of the board of
directors are carried into effect; and (iv) perform all other
duties incident to the office of the chairman and chief executive
officer and as from time to time may be assigned to him by the
board of directors or the chairman of the board of directors, as
the case may be.
(c) President and Chief Operating Officer. The president and chief
operating officer shall, subject to the direction and supervision
of the chairman and chief executive officer, (i) be the chief
operating officer of the corporation and have general and active
control of its affairs and business and general supervision of
its officers, agents and employees; (ii) see that all orders and
resolutions of the board of directors are carried into effect;
and (iii) perform all other duties incident to the office of
president and chief operating officer and as from time to time
may be assigned to him by the chairman and chief executive
officer.
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(d) Chief Financial Officer; Treasurer. The chief financial officer
or, in the absence of a chief financial officer, the treasurer
shall: (i) be the principal financial officer of the corporation
and have the care and custody of all its funds, securities,
evidences of indebtedness and other personal property and deposit
the same in accordance with the instructions of the board of
directors; (ii) receive and give receipts and acquittances for
moneys paid in on account of the corporation, and pay out of the
funds on hand all bills, payrolls and other just debts of the
corporation of whatever nature upon maturity; (iii) unless there
is a controller, be the principal accounting officer of the
corporation and as such prescribe and maintain the methods and
systems of accounting to be followed, keep complete books and
records of account, prepare and file all local, state and federal
tax returns, prescribe and maintain an adequate system of
internal audit and prepare and furnish to the board of directors
or the chairman and chief executive officer statements of account
showing the financial position of the corporation and the results
of its operations; (iv) upon request of the board of directors,
make such reports to it as may be required at any time; and (v)
perform all other duties incident to the office of treasurer and
such other duties as from time to time may be assigned to him by
the chairman and chief executive officer. Assistant treasurers,
if any, shall have the same powers and duties, subject to the
supervision by the treasurer.
(e) Vice-Presidents. The vice-president, if any (or, if there is more
than one, then each vice-president), shall assist the chairman
and chief executive officer and the president and chief operating
officer and shall perform such duties as may be assigned to him
by the chairman and chief executive officer. Assistant vice-
presidents, if any, shall have such powers and perform such
duties as may be assigned to them by the chairman and chief
executive officer.
(f) Secretary. The secretary shall: (i) prepare and maintain the
minutes of the proceedings of the stockholders, the board of
directors and any committees of the board; (ii) see that all
notices are duly given in accordance with the provisions of these
bylaws or as required by law; (iii) be custodian of the corporate
records and of the seal of the corporation; (iv) keep at the
corporation's registered office or principal place of business
within or outside Colorado a record containing the names and
addresses of all stockholders and the number and class of shares
held by each, unless such a record shall be kept at the office of
the corporation's transfer agent or registrar; (v) have general
charge of the stock books of the corporation, unless the
corporation has a transfer agent; (vi) authenticate records of
the
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corporation; and (vii) in general, perform all duties
incident to the office of secretary and such other duties as
from time to time may be assigned to him by the chairman and
chief executive officer. Assistant secretaries, if any, shall
have the same duties and powers, subject to supervision by
the secretary.
Section 4.08 Surety Bonds. The board of directors may require any officer
or agent of the corporation to execute to the corporation a bond in such sums
and with such sureties as shall be satisfactory to the board, conditioned upon
the faithful performance of his duties and for the restoration to the
corporation of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the corporation.
ARTICLE V
Stock
Section 5.01 Issuance of Shares. The issuance or sale by the corporation
of any shares of its authorized capital stock of any class, including treasury
shares, shall be made only upon authorization by the board of directors, except
as otherwise may be provided by law. Every issuance of shares shall be recorded
on the books of the corporation maintained for such purpose by or on behalf of
the corporation.
Section 5.02 Stock Certificates; Uncertificated Shares. The shares of
stock of the corporation shall be represented by certificates, except that the
board of directors may, in accordance with applicable provisions of law,
authorize the issuance of some or all of any or all classes or series of stock
of the corporation without certificates. If shares are represented by
certificates (or if a holder of uncertificated shares requests his shares to be
represented by a certificate), each certificate shall be signed by or in the
name of the corporation by the chairman or a vice-chairman of the board of
directors, or the president or a vice-president, and by the treasurer or an
assistant treasurer, or the secretary or an assistant secretary of the
corporation, representing the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the corporation with the same effect as if he were such officer, transfer
agent or registrar at the date of issue. Certificates of stock shall be in such
form consistent with law as shall be prescribed by the board of directors.
Section 5.03 Payment for Shares. Shares shall be issued for such
consideration (but not less than the par value thereof) as shall be determined
from time to time by the board of directors. Treasury shares shall be disposed
of for such consideration as may be determined from time to time by the board.
Such consideration shall be paid in such form and in such manner as the
directors shall determine. In the absence of actual fraud in the transaction,
the judgment of the directors as to the value of such consideration shall be
conclusive. The capital stock issued
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by the corporation shall be deemed to be fully paid and non-assessable stock if:
(a) the entire amount of the consideration has been received by the corporation
in the form of cash, services rendered, personal property, real property, leases
of real property or a combination thereof; or (b) not less than the amount of
the consideration determined to be capital pursuant to statute has been received
by the corporation in such form and the corporation has received a binding
obligation of the subscriber or purchaser to pay the balance of the subscription
or purchase price; provided, however, nothing contained herein shall prevent the
board of directors from issuing partly paid shares pursuant to statute. The
directors may, from time to time, demand payment in respect of each share of
stock not fully paid in the manner prescribed by statute. In addition, when the
whole of the consideration payable for shares of a corporation has not been paid
in, and the assets shall be insufficient to satisfy the claims of its creditors,
each holder of or subscriber for such shares shall be bound to pay on each share
held or subscribed for by him the sum necessary to complete the amount of the
unpaid balance of the consideration for which such shares were issued or are to
be issued by the corporation. No person becoming an assignee or transferee of
shares or of a subscription for shares in good faith and without knowledge or
notice that the full consideration therefor has not been paid shall be
personally liable for any unpaid portion of such consideration, but the
transferor shall remain liable therefor, and no person holding shares in any
corporation as collateral security shall be personally liable as a stockholder
but the person pledging such shares shall be considered the holder thereof and
shall be so liable. No executor, administrator, guardian, trustee or other
fiduciary shall be personally liable as a stockholder, but the estate or funds
held by such executor, administrator, guardian, trustee or other fiduciary in
such fiduciary capacity shall be liable.
Section 5.04 Lost Certificates. In case of the alleged loss, theft or
destruction of a certificate of stock the board of directors may direct the
issuance of a new certificate in lieu thereof upon such terms and conditions in
conformity with law as it may prescribe. The board of directors may in its
discretion require the owner of the lost, stolen or destroyed certificate, or
his legal representative to give the corporation a bond sufficient to indemnify
it against any claim that may be made against it on account of the alleged loss,
theft or destruction of any such certificate or the issuance of such new
certificate.
Section 5.05 Transfer of Shares. Upon presentation and surrender to the
corporation or to a transfer agent of the corporation of a certificate of stock
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, payment of all transfer taxes, if any, and the
satisfaction of any other requirements of law, including inquiry into and
discharge of any adverse claims of which the corporation has notice, the
corporation or the transfer agent shall issue a new certificate to the person
entitled thereto, cancel the old certificate and record the transaction on the
books maintained for such purpose by or on behalf of the corporation. No
transfer of shares shall be effective until it has been entered on such books.
The corporation or a transfer agent of the corporation may require a signature
guaranty or other reasonable evidence that any signature is genuine and
effective before making any transfer. Transfers of uncertificated shares shall
be made in accordance with applicable provisions of law.
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Section 5.06 Registered Holders. The corporation shall be entitled to
recognize the exclusive right of a person registered on its books as the owner
of shares to receive dividends, and to vote as such owner, and to hold liable
for calls and assessments a person registered on its books as the owner of
shares, and shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Delaware.
Section 5.07 Transfer Agents, Registrars and Paying Agents. The board of
directors may at its discretion appoint one or more transfer agents, registrars
and agents for making payment upon any class of stock, bond, debenture or other
security of the corporation. Such agents and registrars may be located either
within or outside Delaware. They shall have such rights and duties and shall be
entitled to such compensation as may be agreed.
ARTICLE VI
Indemnification
Section 6.01 Definitions. For purposes of this Article, the following
terms shall have the meanings set forth below:
(a) The Corporation. The term "the corporation" means the
corporation and shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under this Article with respect to the
resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(b) Other Enterprises. The term "other enterprises" shall include
employee benefit plans; references to "fines" shall include any excise taxes
assessed on a person with respect to any employee benefit plan; and references
to "serving at the request of the corporation" shall include any service as a
director, officer, employee or agent of the corporation which imposes duties on,
or involves services by, such director, officer, employee, or agent with respect
to an employee benefit plan, its participants or beneficiaries; and a person who
acted in good faith and in a manner he reasonably believed to be in the interest
of the participants and the beneficiaries of an employee benefit plan shall be
deemed to have acted in a manner "not opposed to the best interests of the
corporation" as referred to in this Article.
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Section 6.02 Right to Indemnification. The corporation shall indemnify,
to the fullest extent permitted by law, any person who was or is a party or is
threatened to be made a party 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 the corporation) by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he 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 his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he 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 reasonable cause to believe that his conduct was unlawful. The
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Court of
Chancery or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnify for such expenses which the Court of Chancery or such other court
shall deem proper. Any indemnification under this section (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in this section. Such determination shall be made (1) by a
majority vote of the directors who are not parties to such action, suit or
proceeding, even though less than a quorum, or (2) if there are no such
directors, or if such directors so direct, by independent legal counsel in a
written opinion, or (3) by the stockholders.
Section 6.03 Successful on the Merits. To the extent that a director,
officer, employee or agent of a corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in section
6.02, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
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Section 6.04 Advancement of Expenses. Expenses (including attorneys'
fees) incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the corporation as authorized in this Article VI.
Such expenses (including attorneys' fees) incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the board of directors
deems appropriate.
Section 6.05 Proceedings by a Party. The corporation shall indemnify or
advance expenses to a party in connection with any proceeding (or part thereof)
initiated by the party only if such proceeding (or part thereof) was authorized
by the board of directors of the corporation.
Section 6.06 Subrogation. In the event of any payment under this
Article, the corporation shall be subrogated to the extent of such payment to
all of the rights of recovery of the indemnified party, who shall execute all
papers and do everything that may be necessary to assure such rights of
subrogation to the corporation.
Section 6.07 Other Payments. The corporation shall not be liable under
this Article to make any payment in connection with any proceeding against or
involving a party to the extent the party has otherwise actually received
payment (under any insurance policy, agreement or otherwise) of the amounts
otherwise indemnifiable hereunder. A party shall repay to the corporation the
amount of any payment the corporation makes to the party under this Article in
connection with any proceeding against or involving the party, to the extent the
party has otherwise actually received payment (under any insurance policy,
agreement or otherwise) of such amount.
Section 6.08 Insurance. The corporation shall have power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the corporation would have the power to
indemnify him against such liability under this Article.
Section 6.09 Other Rights and Remedies. The indemnification and
advancement of expenses provided by, or granted pursuant to this Article shall
not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any bylaw,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
Section 6.10 Applicability; Effect. The indemnification and advancement
of expenses provided by, or granted pursuant to, this section shall, unless
otherwise provided when
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authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
Section 6.11 Severability. If any provision of this Article shall be
held to be invalid, illegal or unenforceable for any reason whatsoever (a) the
validity, legality and enforceability of the remaining provisions of this
Article (including without limitation, all portions of any Sections of this
Article containing any such provision held to be invalid, illegal or
unenforceable, that are not themselves invalid, illegal or unenforceable) shall
not in any way be affected or impaired thereby, and (b) to the fullest extent
possible, the provisions of this Article (including, without limitation, all
portions of any Section of this Article containing any such provision held to be
invalid, illegal or unenforceable, that are not themselves invalid, illegal or
unenforceable) shall be construed so as to give effect to the intent of this
Article that each party covered hereby is entitled to the fullest protection
permitted by law.
ARTICLE VII
Miscellaneous
Section 7.01 Waivers of Notice. Whenever notice is required to be given
by law, by the certificate of incorporation or by these bylaws, a written waiver
thereof, signed by the person entitled to said notice, whether before or after
the time stated therein, shall be deemed equivalent to notice. Attendance of a
person at a meeting or (in the case of a stockholder) by proxy shall constitute
a waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting was not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
meeting need be specified in any written waiver of notice unless required by
these bylaws to be included in the notice of such meeting.
Section 7.02 Presumption of Assent. A director or stockholder of the
corporation who is present at a meeting of the board of directors or
stockholders at which action on any corporate matter is taken shall be presumed
to have assented to the action taken unless his dissent shall be entered in the
minutes of the meeting or unless he shall file his written dissent to such
action with the person acting as the secretary of the meeting before the
adjournment thereof or shall forward such dissent by registered mail to the
secretary of the corporation immediately after the adjournment of the meeting.
Such right to dissent shall not apply to a director or stockholder who voted in
favor of such action.
Section 7.03 Voting of Securities by the Corporation. Unless otherwise
provided by resolution of the board of directors, on behalf of the corporation
the president or any vice-president shall attend in person or by substitute
appointed by him, or shall execute written instruments appointing a proxy or
proxies to represent the corporation at, all meetings of the stockholders of any
other corporation, association or other entity in which the corporation holds
any stock or other securities, and may execute written waivers of notice with
respect to any such
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meetings. At all such meetings and otherwise, the president or any vice-
president, in person or by substitute or proxy as aforesaid, may vote the stock
or other securities so held by the corporation and may execute written consents
and any other instruments with respect to such stock or securities and may
exercise any and all rights and powers incident to the ownership of said stock
or securities, subject, however, to the instructions, if any, of the board of
directors.
Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of
Employees and Officers. The corporation may lend money to, or guarantee any
obligation of, or otherwise assist any officer or other employee of the
corporation or of its subsidiary, including any officer or employee who is
director of the corporation or its subsidiary, whenever, in the judgment of the
directors, such loan, guaranty or assistance may reasonably be expected to
benefit the corporation. The loan, guaranty or other assistance may be with or
without interest, and may be unsecured, or secured in such manner as the board
of directors shall approve, including, without limitation, a pledge of shares of
stock of the corporation. Nothing contained in this section shall be deemed to
deny, limit or restrict the powers of guaranty or warranty of any corporation at
common law or under any statute.
Section 7.05 Seal. The corporate seal of the corporation shall be in such
form as adopted by the board of directors, and any officer of the corporation
may, when and as required, affix or impress the seal, or a facsimile thereof, to
or on any instrument or document of the corporation.
Section 7.06 Fiscal Year. The fiscal year of the corporation shall be as
established by the board of directors.
Section 7.07 Amendments. These bylaws may be amended or repealed and new
bylaws adopted by the board of directors or by the stockholders entitled to
vote.
(END)
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EXHIBIT 10.4
QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
REVISED
EFFECTIVE JANUARY 1, 1999
COPYRIGHT (C) 1998
BY COMPENSATION RESOURCE GROUP, INC.
ALL RIGHTS RESERVED
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PURPOSE.................................................................. 1
ARTICLE 1 DEFINITIONS................................................ 1
ARTICLE 2 SELECTION, ENROLLMENT, ELIGIBILITY......................... 7
2.1 Selection by Committee..................................... 7
2.2 Enrollment Requirements.................................... 7
2.3 Eligibility; Commencement of Participation................. 7
2.4 Termination of Participation and/or Deferrals.............. 7
ARTICLE 3 DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING TAXES...... 8
3.1 Minimum Deferrals.......................................... 8
3.2 Maximum Deferral........................................... 8
3.3 Election to Defer; Effect of Election Form................. 8
3.4 Withholding of Annual Deferral Amounts..................... 9
3.5 Annual Company Matching Amount............................. 9
3.6 Investment of Trust Assets................................. 9
3.7 Vesting.................................................... 9
3.8 Crediting/Debiting of Account Balances..................... 9
3.9 FICA and Other Taxes....................................... 11
3.10 Distributions.............................................. 12
3.11 Transfer of Deferred Compensation Account ................. 12
ARTICLE 4 SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES;
WITHDRAWAL ELECTION........................................ 12
4.1 Short-Term Payout.......................................... 12
4.2 Other Benefits Take Precedence Over Short-Term............. 13
4.3 Withdrawal Payout/Suspensions for Unforeseeable Financial
Emergencies................................................ 13
4.4 Withdrawal Election........................................ 13
ARTICLE 5 RETIREMENT BENEFIT......................................... 14
5.1 Retirement Benefit......................................... 14
5.2 Payment of Retirement Benefit.............................. 14
5.3 Death Prior to Completion of Retirement Benefit............ 14
</TABLE>
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QUEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
===============================================================================
<TABLE>
<S> <C>
ARTICLE 6 PRE-RETIREMENT SURVIVOR BENEFIT............................ 14
6.1 Pre-Retirement Survivor Benefit............................ 14
6.2 Payment of Pre-Retirement Survivor Benefit................. 15
ARTICLE 7 TERMINATION BENEFIT........................................ 15
7.1 Termination Benefit........................................ 15
7.2 Payment of Termination Benefit............................. 15
ARTICLE 8 DISABILITY WAIVER AND BENEFIT.............................. 16
8.1 Disability Waiver.......................................... 16
8.2 Continued Eligibility; Disability Benefit.................. 16
ARTICLE 9 BENEFICIARY DESIGNATION.................................... 17
9.1 Beneficiary................................................ 17
9.2 Beneficiary Designation; Change; Spousal Consent........... 17
9.3 Acknowledgement............................................ 17
9.4 No Beneficiary Designation................................. 17
9.5 Doubt as to Beneficiary.................................... 17
9.6 Discharge of Obligations................................... 17
ARTICLE 10 LEAVE OF ABSENCE........................................... 18
10.1 Paid Leave of Absence...................................... 18
10.2 Unpaid Leave of Absence.................................... 18
ARTICLE 11 TERMINATION, AMENDMENT OR MODIFICATION..................... 18
11.1 Termination................................................ 18
11.2 Amendment.................................................. 19
11.3 Plan Agreement............................................. 19
11.4 Effect of Payment.......................................... 20
ARTICLE 12 ADMINISTRATION............................................. 20
12.1 Committee Duties........................................... 20
12.2 Administration Upon Change In Control...................... 20
12.3 Agents..................................................... 21
12.4 Binding Effect of Decisions................................ 21
12.5 Indemnity of Committee..................................... 21
12.6 Employer Information....................................... 21
</TABLE>
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QUEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
<TABLE>
<S> <C>
ARTICLE 13 OTHER BENEFITS AND AGREEMENTS.............................. 22
13.1 Coordination with Other Benefits........................... 22
ARTICLE 14 CLAIMS PROCEDURES.......................................... 22
14.1 Presentation of Claim...................................... 22
14.2 Notification of Decision................................... 22
14.3 Review of a Denied Claim................................... 23
14.4 Decision on Review......................................... 23
14.5 Legal Action............................................... 23
ARTICLE 15 TRUST...................................................... 24
15.1 Establishment of the Trust................................. 24
15.2 Interrelationship of the Plan and the Trust................ 24
15.3 Distributions From the Trust............................... 24
ARTICLE 16 MISCELLANEOUS.............................................. 24
16.1 Status of Plan............................................. 24
16.2 Unsecured General Creditor................................. 24
16.3 Employer's Liability....................................... 25
16.4 Nonassignability........................................... 25
16.5 Not a Contract of Employment............................... 25
16.6 Furnishing Information..................................... 25
16.7 Terms...................................................... 25
16.8 Captions................................................... 25
16.9 Governing Law.............................................. 26
16.10 Notice..................................................... 26
16.11 Successors................................................. 26
16.12 Spouse's Interest.......................................... 26
16.13 Validity................................................... 26
16.14 Incompetent................................................ 26
16.15 Court Order................................................ 27
16.16 Distribution in the Event of Taxation...................... 27
16.17 Insurance.................................................. 27
16.18 Legal Fees To Enforce Rights After Change in Control....... 28
</TABLE>
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QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
QWEST COMMUNICATIONS INTERNATIONAL INC.
DEFERRED COMPENSATION PLAN
Effective January 1, 1999
PURPOSE
-------
The purpose of this Plan is to provide specified benefits to a select group of
management and highly compensated Employees and Directors who contribute
materially to the continued growth, development and future business success of
Qwest Communications International Inc., a Delaware corporation, and its
subsidiaries, if any, that sponsor this Plan. This Plan shall be unfunded for
tax purposes and for purposes of Title I of ERISA.
ARTICLE 1
DEFINITIONS
-----------
For purposes of this Plan, unless otherwise clearly apparent from the context,
the following phrases or terms shall have the following indicated meanings:
1.1 "Account Balance" shall mean, with respect to a Participant, a credit on
the records of the Employer equal to the sum of (i) the Deferral Account
balance, and (ii) the vested Company Matching Account balance. Any
deferred compensation account transferred to and assumed by this Plan
pursuant to Section 3.11 shall form a part of the Participant's Account
Balance. The Account Balance, and each other specified account balance,
shall be a bookkeeping entry only and shall be utilized solely as a device
for the measurement and determination of the amounts to be paid to a
Participant, or his or her designated Beneficiary, pursuant to this Plan.
1.2 "Annual Bonus" shall mean any compensation, in addition to Base Annual
Salary relating to services performed during any calendar year, whether or
not paid in such calendar year or included on the Federal Income Tax Form
W-2 for such calendar year, payable to a Participant as an Employee under
any Employer's annual bonus and cash incentive plans, excluding stock
options but including any bonus for reaching a sales quota or target.
1.3 "Annual Company Matching Amount" for any one Plan Year shall be the amount
determined in accordance with Section 3.5.
1.4 "Annual Deferral Amount" shall mean that portion of a Participant's Base
Annual Salary, Annual Bonus, Sales Based Compensation and Director's Fees
that a Participant elects to have, and is, deferred in accordance with
Article 3, for any one Plan Year, together with any other amount of
compensation that a Participant is permitted to defer by the
________________________________________________________________________________
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QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
Committee ("Other Compensation"). In the event of a Participant's
Retirement, Disability (if deferrals cease in accordance with Section 8.1),
death or a Termination of Employment prior to the end of a Plan Year, such
year's Annual Deferral Amount shall be the actual amount withheld prior to
such event.
1.5 "Annual Installment Method" shall be an annual installment payment over the
number of years selected by the Participant in accordance with this Plan,
calculated as follows: The Account Balance of the Participant shall be
calculated as of the close of business on the last business day of the
year. The annual installment shall be calculated by multiplying this
balance by a fraction, the numerator of which is one, and the denominator
of which is the remaining number of annual payments due the Participant.
By way of example, if the Participant elects a 10 year Annual Installment
Method, the first payment shall be 1/10 of the Account Balance, calculated
as described in this definition. The following year, the payment shall be
1/9 of the Account Balance, calculated as described in this definition.
Each annual installment shall be paid on or as soon as practicable after
the last business day of the applicable year.
1.6 "Base Annual Salary" shall mean the annual cash compensation relating to
services performed during any calendar year, whether or not paid in such
calendar year or included on the Federal Income Tax Form W-2 for such
calendar year, excluding bonuses, commissions, overtime, fringe benefits,
stock options, relocation expenses, incentive payments, non-monetary
awards, directors fees and other fees, automobile and other allowances paid
to a Participant for employment services rendered (whether or not such
allowances are included in the Employee's gross income). Base Annual
Salary shall be calculated before reduction for compensation voluntarily
deferred or contributed by the Participant pursuant to all qualified or
non-qualified plans of any Employer and shall be calculated to include
amounts not otherwise included in the Participant's gross income under Code
Sections 125, 402(e)(3), 402(h), or 403(b) pursuant to plans established by
any Employer; provided, however, that all such amounts will be included in
compensation only to the extent that, had there been no such plan, the
amount would have been payable in cash to the Employee.
1.7 "Beneficiary" shall mean one or more persons, trusts, estates or other
entities, designated in accordance with Article 9, that are entitled to
receive benefits under this Plan upon the death of a Participant.
1.8 "Beneficiary Designation Form" shall mean the form established from time to
time by the Committee that a Participant completes, signs and returns to
the Committee to designate one or more Beneficiaries.
1.9 "Board" shall mean the board of directors of the Company.
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Master Plan Document
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1.10 "Change in Control" shall be deemed to have occurred if either (i) any
individual, entity, or group (within the meaning of Section 13(d)(3) or
14(d)(2) of the 1934 Act), other than Anschutz Company, The Anschutz
Corporation, any entity or organization controlled by Philip F. Anschutz
(collectively, the "Anschutz Entities") or a trustee or other fiduciary
holding securities under an employee benefit plan of the Company, acquires
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the 1934 Act) of fifty percent (50%) or more of either (A) the then-
outstanding shares of Stock ("Outstanding Shares") or (B) the combined
voting power of the then-outstanding voting securities of the Company
entitled to vote generally in the election of directors ("Voting Power") or
(ii) at any time during any period of three consecutive years (not
including any period prior to the Effective Date), individuals who at the
beginning of such period constitute the Board (and any new director whose
election by the Board or whose nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds of the directors
then still in office who either were directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority thereof.
1.11 "Claimant" shall have the meaning set forth in Section 14.1.
1.12 "Code" shall mean the Internal Revenue Code of 1986, as it may be amended
from time to time.
1.13 "Committee" shall mean the committee described in Article 12.
1.14 "Company" shall mean Qwest Communications International Inc., a Delaware
corporation, and any successor to all or substantially all of the Company's
assets or business.
1.15 "Company Matching Account" shall mean (i) the sum of all of a Participant's
Annual Company Matching Amounts, plus (ii) amounts credited in accordance
with all the applicable crediting provisions of this Plan that relate to
the Participant's Company Matching Account, less (iii) all distributions
made to the Participant or his or her Beneficiary pursuant to this Plan
that relate to the Participant's Company Matching Account.
1.16 "Deduction Limitation" shall mean the following described limitation on a
benefit that may otherwise be distributable pursuant to the provisions of
this Plan. Except as otherwise provided, this limitation shall be applied
to all distributions that are "subject to the Deduction Limitation" under
this Plan. If an Employer determines in good faith prior to a Change in
Control that there is a reasonable likelihood that any compensation paid to
a Participant for a taxable year of the Employer would not be deductible by
the Employer solely by reason of the limitation under Code Section 162(m),
then to the extent deemed
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necessary by the Employer to ensure that the entire amount of any
distribution to the Participant pursuant to this Plan prior to the Change
in Control is deductible, the Employer may defer all or any portion of a
distribution under this Plan. Any amounts deferred pursuant to this
limitation shall continue to be credited/debited with additional amounts in
accordance with Section 3.8 below, even if such amount is being paid out in
installments. The amounts so deferred and amounts credited thereon shall be
distributed to the Participant or his or her Beneficiary (in the event of
the Participant's death) at the earliest possible date, as determined by
the Employer in good faith, on which the deductibility of compensation paid
or payable to the Participant for the taxable year of the Employer during
which the distribution is made will not be limited by Section 162(m), or if
earlier, the effective date of a Change in Control. Notwithstanding
anything to the contrary in this Plan, the Deduction Limitation shall not
apply to any distributions made after a Change in Control.
1.17 "Deferral Account" shall mean (i) the sum of all of a Participant's Annual
Deferral Amounts, plus (ii) amounts credited in accordance with all the
applicable crediting provisions of this Plan that relate to the
Participant's Deferral Account, less (iii) all distributions made to the
Participant or his or her Beneficiary pursuant to this Plan that relate to
his or her Deferral Account.
1.18 "Director" shall mean any member of the board of directors of any Employer.
1.19 "Director's Fees" shall mean the annual fees paid by any Employer,
including retainer fees and meetings fees, as compensation for serving on
the board of directors.
1.20 "Disability" shall mean a period of disability during which a Participant
qualifies for permanent disability benefits under the Participant's
Employer's long-term disability plan, or, if a Participant does not
participate in such a plan, a period of disability during which the
Participant would have qualified for permanent disability benefits under
such a plan had the Participant been a participant in such a plan, as
determined in the sole discretion of the Committee. If the Participant's
Employer does not sponsor such a plan, or discontinues to sponsor such a
plan, Disability shall be determined by the Committee in its sole
discretion.
1.21 "Disability Benefit" shall mean the benefit set forth in Article 8.
1.22 "Election Form" shall mean the form established from time to time by the
Committee that a Participant completes, signs and returns to the Committee
to make an election under the Plan.
1.23 "Employee" shall mean a person who is an employee of any Employer.
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1.24 "Employer(s)" shall mean the Company and/or any of its subsidiaries or
related entities (now in existence or hereafter formed or acquired).
1.25 "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
it may be amended from time to time.
1.26 "First Plan Year" shall mean the period beginning January 1, 1999 and
ending December 31, 1999.
1.27 "401(k) Plan" shall be that certain Qwest Communications 401(k) Savings
Plan, effective January 1, 1999.
1.28 "Maximum 401(k) Amount" with respect to a Participant, shall be the maximum
amount of elective contributions that can be made by such Participant under
the 401(k) Plan, consistent with Code Section 402(g) and the limitations of
Code Section 401(k)(3), for a given plan year under the 401(k) Plan.
1.29 "Participant" shall mean any Employee or Director (i) who is selected to
participate in the Plan, (ii) who elects to participate in the Plan, (iii)
who signs a Plan Agreement, an Election Form and a Beneficiary Designation
Form, (iv) whose signed Plan Agreement, Election Form and Beneficiary
Designation Form are accepted by the Committee, (v) who commences
participation in the Plan, and (vi) whose Plan Agreement has not
terminated. A spouse or former spouse of a Participant shall not be
treated as a Participant in the Plan or have an account balance under the
Plan, even if he or she has an interest in the Participant's benefits under
the Plan as a result of applicable law or property settlements resulting
from legal separation or divorce.
1.30 "Plan" shall mean the Company's Deferred Compensation Plan, which shall be
evidenced by this instrument and by each Plan Agreement, as they may be
amended from time to time.
1.31 "Plan Agreement" shall mean a written agreement, as may be amended from
time to time, which is entered into by and between an Employer and a
Participant. Each Plan Agreement executed by a Participant and the
Participant's Employer shall provide for the entire benefit to which such
Participant is entitled under the Plan; should there be more than one Plan
Agreement, the Plan Agreement bearing the latest date of acceptance by the
Employer shall supersede all previous Plan Agreements in their entirety and
shall govern such entitlement. The terms of any Plan Agreement may be
different for any Participant, and any Plan Agreement may provide
additional benefits not set forth in the Plan or limit the benefits
otherwise provided under the Plan; provided, however, that any such
additional benefits or benefit limitations must be agreed to by both the
Employer and the Participant.
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1.32 "Pre-Retirement Survivor Benefit" shall mean the benefit set forth in
Article 6.
1.33 "Retirement", "Retire(s)" or "Retired" shall mean, with respect to an
Employee, severance from employment from all Employers for any reason other
than a leave of absence, death or Disability on or after the attainment of
age sixty-two (62); and shall mean with respect to a Director who is not an
Employee, severance of his or her directorships with all Employers on or
after the later of the attainment of age sixty-five (65). If a Participant
is both an Employee and a Director, Retirement shall not occur until he or
she Retires as both an Employee and a Director, which Retirement shall be
deemed to be a Retirement as a Director; provided, however, that such a
Participant may elect, at least three years prior to Retirement and in
accordance with the policies and procedures established by the Committee,
to Retire for purposes of this Plan at the time he or she Retires as an
Employee, which Retirement shall be deemed to be a Retirement as an
Employee.
1.34 "Retirement Benefit" shall mean the benefit set forth in Article 5.
1.35 "Sales Based Compensation" shall mean any compensation based on a
percentage of sales and shall exclude Base Annual Salary and Annual Bonus.
1.36 "Short-Term Payout" shall mean the payout set forth in Section 4.1.
1.37 "Termination Benefit" shall mean the benefit set forth in Article 7.
1.38 "Termination of Employment" shall mean the severing of employment with all
Employers, or service as a Director of all Employers, voluntarily or
involuntarily, for any reason other than Retirement, Disability, death or
an authorized leave of absence. If a Participant is both an Employee and a
Director, a Termination of Employment shall occur only upon the termination
of the last position held; provided, however, that such a Participant may
elect, at least three years before Termination of Employment and in
accordance with the policies and procedures established by the Committee,
to be treated for purposes of this Plan as having experienced a Termination
of Employment at the time he or she ceases employment with an Employer as
an Employee.
1.39 "Trust" shall mean one or more trusts established pursuant to that certain
Master Trust Agreement, dated as of January 1, 1999 between the Company and
the trustee named therein, as amended from time to time.
1.40 "Unforeseeable Financial Emergency" shall mean an unanticipated emergency
that is caused by an event beyond the control of the Participant that would
result in severe financial hardship to the Participant resulting from (i) a
sudden and unexpected illness or accident of the Participant or a dependent
of the Participant, (ii) a loss of the Participant's
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property due to casualty, or (iii) such other extraordinary and
unforeseeable circumstances arising as a result of events beyond the
control of the Participant, all as determined in the sole discretion of the
Committee.
ARTICLE 2
SELECTION, ENROLLMENT, ELIGIBILITY
----------------------------------
2.1 ELECTION BY COMMITTEE. Participation in the Plan shall be limited to a
select group of management and highly compensated Employees and Directors
of the Employers, as determined by the Committee in its sole discretion.
From that group, the Committee shall select, in its sole discretion,
Employees and Directors to participate in the Plan.
2.2 ENROLLMENT REQUIREMENTS. As a condition to participation, each selected
Employee or Director shall complete, execute and return to the Committee a
Plan Agreement, an Election Form and a Beneficiary Designation Form, all
within 30 days after he or she is selected to participate in the Plan. In
addition, the Committee shall establish from time to time such other
enrollment requirements as it determines in its sole discretion are
necessary.
2.3 ELIGIBILITY; COMMENCEMENT OF PARTICIPATION. Provided an Employee or
Director selected to participate in the Plan has met all enrollment
requirements set forth in this Plan and required by the Committee,
including returning all required documents to the Committee within the
specified time period, that Employee or Director shall commence
participation in the Plan on the first day of the next Plan Year, in the
case of enrollment prior to a Plan Year, and on the first day of the month
following the month in which the Employee or Director completes all
enrollment requirements, in the case of a Participant who enrolls in the
Plan during a Plan Year. If an Employee or a Director fails to meet all
such requirements within the period required, in accordance with Section
2.2, that Employee or Director shall not be eligible to participate in the
Plan until the first day of the Plan Year following the delivery to and
acceptance by the Committee of the required documents.
2.4 TERMINATION OF PARTICIPATION AND/OR DEFERRALS. If the Committee determines
in good faith that a Participant no longer qualifies as a member of a
select group of management or highly compensated employees, as membership
in such group is determined in accordance with Sections 201(2), 301(a)(3)
and 401(a)(1) of ERISA, the Committee shall have the right, in its sole
discretion, to (i) terminate any deferral election the Participant has made
for the remainder of the Plan Year in which the Participant's membership
status changes, (ii) prevent the Participant from making future deferral
elections and/or (iii) immediately distribute the Participant's then
Account Balance as a Termination Benefit and terminate the Participant's
participation in the Plan.
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ARTICLE 3
DEFERRAL COMMITMENTS/COMPANY MATCHING/CREDITING/TAXES
-----------------------------------------------------
3.1 MINIMUM DEFERRALS. For each Plan Year, a Participant may elect to defer a
minimum combined amount of Base Annual Salary and/or Director's Fees of
$5,000. If an election is made for less than stated minimum amounts, or if
no election is made, the amount deferred shall be zero. There is no
minimum deferral amount for Annual Bonus, Sales Based Compensation, or
Other Compensation. Notwithstanding the foregoing, if a Participant first
becomes a Participant after the first day of a Plan Year, or in the case of
the first Plan Year of the Plan itself, the minimum Base Annual Salary
deferral shall be an amount equal to the minimum set forth above,
multiplied by a fraction, the numerator of which is the number of complete
months remaining in the Plan Year and the denominator of which is 12.
3.2 MAXIMUM DEFERRAL. For each Plan Year, a Participant may elect to defer a
maximum of up to 100% each of his or her Base Annual Salary, Annual Bonus,
Sales Based Compensation, Director's Fees and/or Other Compensation.
Notwithstanding the foregoing, if a Participant first becomes a Participant
after the first day of a Plan Year, or in the case of the first Plan Year
of the Plan itself, the maximum Annual Deferral Amount, with respect to
Base Annual Salary, Annual Bonus, Director's Fees and Other Compensation
shall be limited to the amount of compensation not yet earned by the
Participant as of the date the Participant submits a Plan Agreement and
Election Form to the Committee for acceptance.
3.3 ELECTION TO DEFER; EFFECT OF ELECTION FORM.
(a) FIRST PLAN YEAR. In connection with a Participant's commencement of
participation in the Plan, the Participant shall make an irrevocable
deferral election for the Plan Year in which the Participant commences
participation in the Plan, along with such other elections as the
Committee deems necessary or desirable under the Plan. For these
elections to be valid, the Election Form must be completed and signed
by the Participant, timely delivered to the Committee (in accordance
with Section 2.2 above) and accepted by the Committee.
(b) SUBSEQUENT PLAN YEARS. For each succeeding Plan Year, an irrevocable
deferral election for that Plan Year, and such other elections as the
Committee deems necessary or desirable under the Plan, shall be made
by timely delivering to the Committee, in accordance with its rules
and procedures, before the end of the Plan Year preceding the Plan
Year for which the election is made, a new Election Form.
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If no such Election Form is timely delivered for a Plan Year, the
Annual Deferral Amount shall be zero for that Plan Year.
3.4 WITHHOLDING OF ANNUAL DEFERRAL AMOUNTS. For each Plan Year, the Base
Annual Salary portion of the Annual Deferral Amount shall be withheld from
each regularly scheduled Base Annual Salary payroll in equal amounts, as
adjusted from time to time for increases and decreases in Base Annual
Salary. The Annual Bonus, Director's Fees, and/or Other Compensation
portion of the Annual Deferral Amount shall be withheld at the time the
Annual Bonus, Director's Fees or Other Compensation, are or otherwise would
be paid to the Participant, whether or not this occurs during the Plan Year
itself.
3.5 ANNUAL COMPANY MATCHING AMOUNT. For each Plan Year, the Company shall
contribute to each Participant's Company Matching Account an amount equal
to the Company matching contribution that would have been made to the
401(k) Plan on behalf of each such Participant for the Plan Year of the
401(k) Plan that corresponds to the Plan Year if the Participant had not
deferred any amount under this Plan and had contributed the amount of the
Participant's deferrals to this Plan for such Plan Year to the 401(k) Plan
(subject to all applicable limitations of such 401(k) Plan), reduced by the
amount of actual Company matching contributions to the 401(k) Plan for such
Plan Year. If a Participant is not employed by an Employer, or is no
longer providing services as a Director, as of the last day of a Plan Year
other than by reason of his or her Retirement or death, the Annual Company
Matching Amount for such Plan Year shall be zero (0). In the event of
Retirement or death, a Participant shall be credited with the Annual
Company Matching Amount for the Plan Year in which he or she Retires or
dies.
3.6 INVESTMENT OF TRUST ASSETS. The Trustee of the Trust shall be authorized,
upon written instructions received from the Committee or investment manager
appointed by the Committee, to invest and reinvest the assets of the Trust
in accordance with the applicable Trust Agreement, including the
disposition of stock and reinvestment of the proceeds in one or more
investment vehicles designated by the Committee.
3.7 VESTING. A Participant shall at all times be 100% vested in his or her
Deferral Account and his or her Company Matching Account.
3.8 CREDITING/DEBITING OF ACCOUNT BALANCES. In accordance with, and subject
to, the rules and procedures that are established from time to time by the
Committee, in its sole discretion, amounts shall be credited or debited to
a Participant's Account Balance in accordance with the following rules:
(a) ELECTION OF MEASUREMENT FUNDS. A Participant, in connection with his
or her initial deferral election in accordance with Section 3.3(a)
above, shall elect, on the
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Election Form, one or more Measurement Fund(s) (as described in
Section 3.8(c) below) to be used to determine the additional amounts
to be credited to his or her Account Balance for the first calendar
quarter or portion thereof in which the Participant commences
participation in the Plan and continuing thereafter for each
subsequent calendar quarter in which the Participant participates in
the Plan, unless changed in accordance with the next sentence.
Commencing with the first calendar quarter that follows the
Participant's commencement of participation in the Plan and continuing
thereafter for each subsequent calendar quarter in which the
Participant participates in the Plan, no later than the next to last
business day of the calendar quarter, the Participant may (but is not
required to) elect, by submitting an Election Form to the Committee
that is accepted by the Committee, to add or delete one or more
Measurement Fund(s) to be used to determine the additional amounts to
be credited to his or her Account Balance, or to change the portion of
his or her Account Balance allocated to each previously or newly
elected Measurement Fund. If an election is made in accordance with
the previous sentence, it shall apply to the next calendar quarter and
continue thereafter for each subsequent calendar quarter in which the
Participant participates in the Plan, unless changed in accordance
with the previous sentence.
(b) PROPORTIONATE ALLOCATION. In making any election described in Section
3.8(a) above, the Participant shall specify on the Election Form, in
increments of five percentage points (5%), the percentage of his or
her Account Balance to be allocated to a Measurement Fund (as if the
Participant was making an investment in that Measurement Fund with
that portion of his or her Account Balance).
(c) MEASUREMENT FUNDS. The Participant may elect one or more of the
measurement funds selected by the Committee (the "Measurement Funds"),
for the purpose of crediting additional amounts to his or her Account
Balance. As necessary, the Committee may, in its sole discretion,
discontinue, substitute or add a Measurement Fund. Each such action
will take effect as of the first day of the calendar quarter that
follows by thirty (30) days the day on which the Committee gives
Participants advance written notice of such change.
(d) CREDITING OR DEBITING METHOD. The performance of each elected
Measurement Fund (either positive or negative) will be determined by
the Committee, in its reasonable discretion, based on the performance
of the Measurement Funds themselves. A Participant's Account Balance
shall be credited or debited on a daily
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basis based on the performance of each Measurement Fund selected by
the Participant, as determined by the Committee in its sole
discretion, as though (i) a Participant's Account Balance were
invested in the Measurement Fund(s) selected by the Participant, in
the percentages applicable to such calendar quarter, as of the close
of business on the first business day of such calendar quarter, at the
closing price on such date; (ii) the portion of the Annual Deferral
Amount that was actually deferred during any calendar quarter were
invested in the Measurement Fund(s) selected by the Participant, in
the percentages applicable to such calendar quarter, no later than the
close of business on the day on which such amounts are actually
deferred from the Participant's Base Annual Salary through reductions
in his or her payroll, at the closing price on such date; and (iii)
any distribution made to a Participant that decreases such
Participant's Account Balance ceased being invested in the Measurement
Fund(s), in the percentages applicable to such calendar quarter, no
earlier than one business day prior to the distribution, at the
closing price on such date. The Participant's Annual Company Matching
Amount shall be credited to his or her Company Matching Account for
purposes of this Section 3.8(d) as of the close of business on the
first business day in February of the Plan Year following the Plan
Year to which it relates.
(e) NO ACTUAL INVESTMENT. Notwithstanding any other provision of this
Plan that may be interpreted to the contrary, the Measurement Funds
are to be used for measurement purposes only, and a Participant's
election of any such Measurement Fund, the allocation to his or her
Account Balance thereto, the calculation of additional amounts and the
crediting or debiting of such amounts to a Participant's Account
Balance shall not be considered or construed in any manner as an
actual investment of his or her Account Balance in any such
Measurement Fund. In the event that the Company or the Trustee (as
that term is defined in the Trust), in its own discretion, decides to
invest funds in any or all of the Measurement Funds, no Participant
shall have any rights in or to such investments themselves. Without
limiting the foregoing, a Participant's Account Balance shall at all
times be a bookkeeping entry only and shall not represent any
investment made on his or her behalf by the Company or the Trust; the
Participant shall at all times remain an unsecured creditor of the
Company.
3.9 FICA AND OTHER TAXES.
(a) ANNUAL DEFERRAL AMOUNTS. For each Plan Year in which an Annual
Deferral Amount is being withheld from a Participant, the
Participant's Employer(s) shall withhold from that portion of the
Participant's Base Annual Salary, Annual Bonus and Sales Based
Compensation that is not being deferred, in a manner determined
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by the Employer(s), the Participant's share of FICA and other
employment taxes on such Annual Deferral Amount. If necessary, the
Committee may reduce the Annual Deferral Amount in order to comply
with this Section 3.9.
(b) COMPANY MATCHING AMOUNTS. For each Plan Year with respect to which a
Participant receives an allocation of an Annual Company Matching
Amount, the Participant's Employer(s) shall withhold from the
Participant's Base Annual Salary, Annual Bonus and Sales Based
Compensation that is not being deferred, in a manner determined by the
Employer(s), the Participant's share of FICA and other employment
taxes. If necessary, the Committee may reduce the vested portion of
the Participant's Company Matching Account in order to comply with
this Section 3.9.
3.10 DISTRIBUTIONS. The Participant's Employer(s), or the trustee of the Trust,
shall withhold from any payments made to a Participant under this Plan all
federal, state and local income, employment and other taxes required to be
withheld by the Employer(s), or the trustee of the Trust, in connection
with such payments, in amounts and in a manner to be determined in the sole
discretion of the Employer(s) and the trustee of the Trust.
3.11 TRANSFER OF DEFERRED COMPENSATION ACCOUNT. The Committee may, in its sole
discretion, permit the Employer(s) to establish an account balance for a
Participant under this Plan equal to a similar balance maintained for the
Participant under a deferred compensation plan maintained by the Employer
or a related entity, with the written consent of such Participant, in which
event the account of the Participant under such other deferred compensation
plan shall be terminated.
ARTICLE 4
SHORT-TERM PAYOUT; UNFORESEEABLE FINANCIAL EMERGENCIES;
-------------------------------------------------------
WITHDRAWAL ELECTION
-------------------
4.1 SHORT-TERM PAYOUT. In connection with each election to defer an Annual
Deferral Amount, a Participant may irrevocably elect to receive a future
"Short-Term Payout" from the Plan with respect to such Annual Deferral
Amount. Subject to the Deduction Limitation, the Short-Term Payout shall be
a lump sum payment in an amount that is equal to the Annual Deferral Amount
plus amounts credited or debited in the manner provided in Section 3.8
above on that amount, determined at the time that the Short-Term Payout
becomes payable (rather than the date of a Termination of Employment).
Subject to the Deduction Limitation and the other terms and conditions of
this Plan, each Short-Term Payout elected shall be paid out during a 60 day
period commencing immediately after the
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last day of any Plan Year designated by the Participant that is at least
three Plan Years after the Plan Year in which the Annual Deferral Amount is
actually deferred. By way of example, if a three year Short-Term Payout is
elected for Annual Deferral Amounts that are deferred in the Plan Year
commencing January 1, 1999, the five year Short-Term Payout would become
payable during a 60 day period commencing January 1, 2003.
4.2 OTHER BENEFITS TAKE PRECEDENCE OVER SHORT-TERM. Should an event occur that
triggers a benefit under Article 5, 6, 7 or 8, any Annual Deferral Amount,
plus amounts credited or debited thereon, that is subject to a Short-Term
Payout election under Section 4.1 shall not be paid in accordance with
Section 4.1 but shall be paid in accordance with the other applicable
Article.
4.3 WITHDRAWAL PAYOUT/SUSPENSIONS FOR UNFORESEEABLE FINANCIAL EMERGENCIES. If
the Participant experiences an Unforeseeable Financial Emergency, the
Participant may petition the Committee to (i) suspend any deferrals
required to be made by a Participant and/or (ii) receive a partial or full
payout from the Plan. The payout shall not exceed the lesser of the
Participant's Account Balance, calculated as if such Participant were
receiving a Termination Benefit, or the amount reasonably needed to satisfy
the Unforeseeable Financial Emergency. If, subject to the sole discretion
of the Committee, the petition for a suspension and/or payout is approved,
suspension shall take effect upon the date of approval and any payout shall
be made within 60 days of the date of approval. The payment of any amount
under this Section 4.3 shall not be subject to the Deduction Limitation.
4.4 WITHDRAWAL ELECTION. A Participant (or, after a Participant's death, his
or her Beneficiary) may elect, at any time, to withdraw all of his or her
Account Balance, calculated as if there had occurred a Termination of
Employment as of the day of the election, less a withdrawal penalty equal
to 10% of such amount (the net amount shall be referred to as the
"Withdrawal Amount"). This election can be made at any time, before or
after Retirement, Disability, death or Termination of Employment, and
whether or not the Participant (or Beneficiary) is in the process of being
paid pursuant to an installment payment schedule. If made before
Retirement, Disability or death, a Participant's Withdrawal Amount shall be
his or her Account Balance calculated as if there had occurred a
Termination of Employment as of the day of the election. No partial
withdrawals of the Withdrawal Amount shall be allowed. The Participant (or
his or her Beneficiary) shall make this election by giving the Committee
advance written notice of the election in a form determined from time to
time by the Committee. The Participant (or his or her Beneficiary) shall be
paid the Withdrawal Amount within 60 days of his or her election. Once the
Withdrawal Amount is paid, the Participant's participation in the Plan
shall terminate and the Participant shall not be eligible to participate in
the Plan until two full
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consecutive Plan Years of non-participation have occurred. The payment of
this Withdrawal Amount shall not be subject to the Deduction Limitation.
ARTICLE 5
RETIREMENT BENEFIT
------------------
5.1 RETIREMENT BENEFIT. Subject to the Deduction Limitation, a Participant who
Retires shall receive, as a Retirement Benefit, his or her Account Balance.
5.2 PAYMENT OF RETIREMENT BENEFIT. A Participant, in connection with his or
her commencement of participation in the Plan, shall elect on an Election
Form to receive the Retirement Benefit in a lump sum or pursuant to an
Annual Installment Method of 5, 10 or 15 years. The Participant may
annually change his or her election to an allowable alternative payout
period by submitting a new Election Form to the Committee, provided that
any such Election Form is submitted at least one year prior to the
Participant's Retirement and is accepted by the Committee in its sole
discretion. The Election Form most recently accepted by the Committee shall
govern the payout of the Retirement Benefit. If a Participant does not make
any election with respect to the payment of the Retirement Benefit, then
such benefit shall be payable in a lump sum. The lump sum payment shall be
made, or installment payments shall commence, no later than 60 days after
the last day of the Plan Year in which the Participant Retires. Any payment
made shall be subject to the Deduction Limitation.
5.3 DEATH PRIOR TO COMPLETION OF RETIREMENT BENEFIT. If a Participant dies
after Retirement but before the Retirement Benefit is paid in full, the
Participant's unpaid Retirement Benefit payments shall continue and shall
be paid to the Participant's Beneficiary (a) over the remaining number of
years and in the same amounts as that benefit would have been paid to the
Participant had the Participant survived, or (b) in a lump sum, if
requested by the Beneficiary and allowed in the sole discretion of the
Committee, that is equal to the Participant's unpaid remaining Account
Balance.
ARTICLE 6
PRE-RETIREMENT SURVIVOR BENEFIT
-------------------------------
6.1 PRE-RETIREMENT SURVIVOR BENEFIT. Subject to the Deduction Limitation, the
Participant's Beneficiary shall receive a Pre-Retirement Survivor Benefit
equal to the Participant's
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Account Balance if the Participant dies before he or she Retires,
experiences a Termination of Employment or suffers a Disability.
6.2 PAYMENT OF PRE-RETIREMENT SURVIVOR BENEFIT. A Participant's Pre-Retirement
Survivor Benefit shall be paid in a lump sum. Notwithstanding the
foregoing, if the Participant's Account Balance at the time of his or her
death is more than $25,000, payment of the Pre-Retirement Survivor Benefit
may be made, in the sole discretion of the Committee, pursuant to an Annual
Installment Method of not more than 5 years. Lump sum payment shall be
made, or installment payments shall commence, no later than 60 days after
the last day of the Plan Year in which the Committee is provided with proof
that is satisfactory to the Committee of the Participant's death. Any
payment made shall be subject to the Deduction Limitation.
ARTICLE 7
TERMINATION BENEFIT
-------------------
7.2 TERMINATION BENEFIT. Subject to the Deduction Limitation, the Participant
shall receive a Termination Benefit, which shall be equal to the
Participant's Account Balance if a Participant experiences a Termination of
Employment prior to his or her Retirement, death or Disability.
7.3 PAYMENT OF TERMINATION BENEFIT. The Committee, in its sole discretion, may
cause the Termination Benefit to be paid in a lump sum or pursuant to an
Annual Installment Method of 5, 10 or 15 years. The lump sum payment shall
be made, or installment payments shall commence, no later than 60 days
after the last day of the Plan Year in which the Participant experiences
the Termination of Employment. Any payment made shall be subject to the
Deduction Limitation.
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ARTICLE 8
DISABILITY WAIVER AND BENEFIT
-----------------------------
8.1 DISABILITY WAIVER.
(a) WAIVER OF DEFERRAL. A Participant who is determined by the Committee
to be suffering from a Disability shall be excused from fulfilling
that portion of the Annual Deferral Amount commitment that would
otherwise have been withheld from a Participant's Base Annual Salary,
Annual Bonus and/or Director's Fees for the Plan Year during which the
Participant first suffers a Disability. During the period of
Disability, the Participant shall not be allowed to make any
additional deferral elections, but will continue to be considered a
Participant for all other purposes of this Plan.
(b) RETURN TO WORK. If a Participant returns to employment, or service as
a Director, with an Employer, after a Disability ceases, the
Participant may elect to defer an Annual Deferral Amount for the Plan
Year following his or her return to employment or service and for
every Plan Year thereafter while a Participant in the Plan; provided
such deferral elections are otherwise allowed and an Election Form is
delivered to and accepted by the Committee for each such election in
accordance with Section 3.3 above.
8.2 CONTINUED ELIGIBILITY; DISABILITY BENEFIT. A Participant suffering a
Disability shall, for benefit purposes under this Plan, continue to be
considered to be employed, or in the service of an Employer as a Director,
and shall be eligible for the benefits provided for in Articles 4, 5, 6 or
7 in accordance with the provisions of those Articles. Notwithstanding the
above, the Committee shall have the right to, in its sole and absolute
discretion and for purposes of this Plan only, and must in the case of a
Participant who is otherwise eligible to Retire, deem the Participant to
have experienced a Termination of Employment, or in the case of a
Participant who is eligible to Retire, to have Retired, at any time (or in
the case of a Participant who is eligible to Retire, as soon as
practicable) after such Participant is determined to be suffering a
Disability, in which case the Participant shall receive a Disability
Benefit equal to his or her Account Balance at the time of the Committee's
determination; provided, however, that should the Participant otherwise
have been eligible to Retire, he or she shall be paid in accordance with
Article 5. Notwithstanding any election by the Participant pursuant to
Section 5.2 to the contrary, the Disability Benefit shall be paid in a lump
sum within 60 days of the Committee's exercise of such right. Any payment
made shall be subject to the Deduction Limitation.
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ARTICLE 9
BENEFICIARY DESIGNATION
-----------------------
9.1 BENEFICIARY. Each Participant shall have the right, at any time, to
designate his or her Beneficiary(ies) (both primary as well as contingent)
to receive any benefits payable under the Plan to a beneficiary upon the
death of a Participant. The Beneficiary designated under this Plan may be
the same as or different from the Beneficiary designation under any other
plan of an Employer in which the Participant participates.
9.2 BENEFICIARY DESIGNATION; CHANGE; SPOUSAL CONSENT. A Participant shall
designate his or her Beneficiary by completing and signing the Beneficiary
Designation Form, and returning it to the Committee or its designated
agent. A Participant shall have the right to change a Beneficiary by
completing, signing and otherwise complying with the terms of the
Beneficiary Designation Form and the Committee's rules and procedures, as
in effect from time to time. If the Participant names someone other than
his or her spouse as a Beneficiary, a spousal consent, in the form
designated by the Committee, must be signed by that Participant's spouse
and returned to the Committee. Upon the acceptance by the Committee of a
new Beneficiary Designation Form, all Beneficiary designations previously
filed shall be canceled. The Committee shall be entitled to rely on the
last Beneficiary Designation Form filed by the Participant and accepted by
the Committee prior to his or her death.
9.3 ACKNOWLEDGMENT. No designation or change in designation of a Beneficiary
shall be effective until received and acknowledged in writing by the
Committee or its designated agent.
9.4 NO BENEFICIARY DESIGNATION. If a Participant fails to designate a
Beneficiary as provided in Sections 9.1, 9.2 and 9.3 above or, if all
designated Beneficiaries predecease the Participant or die prior to
complete distribution of the Participant's benefits, then the Participant's
designated Beneficiary shall be deemed to be his or her surviving spouse.
If the Participant has no surviving spouse, the benefits remaining under
the Plan to be paid to a Beneficiary shall be payable to the executor or
personal representative of the Participant's estate.
9.5 DOUBT AS TO BENEFICIARY. If the Committee has any doubt as to the proper
Beneficiary to receive payments pursuant to this Plan, the Committee shall
have the right, exercisable in its discretion, to cause the Participant's
Employer to withhold such payments until this matter is resolved to the
Committee's satisfaction.
9.6 DISCHARGE OF OBLIGATIONS. The payment of benefits under the Plan to a
Beneficiary shall fully and completely discharge all Employers and the
Committee from all further
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obligations under this Plan with respect to the Participant, and that
Participant's Plan Agreement shall terminate upon such full payment of
benefits.
ARTICLE 10
LEAVE OF ABSENCE
----------------
10.1 PAID LEAVE OF ABSENCE. If a Participant is authorized by the Participant's
Employer for any reason to take a paid leave of absence from the employment
of the Employer, the Participant shall continue to be considered employed
by the Employer and the Annual Deferral Amount shall continue to be
withheld during such paid leave of absence in accordance with Section 3.3.
10.2 UNPAID LEAVE OF ABSENCE. If a Participant is authorized by the
Participant's Employer for any reason to take an unpaid leave of absence
from the employment of the Employer, the Participant shall continue to be
considered employed by the Employer and the Participant shall be excused
from making deferrals until the earlier of the date the leave of absence
expires or the Participant returns to a paid employment status. Upon such
expiration or return, deferrals shall resume for the remaining portion of
the Plan Year in which the expiration or return occurs, based on the
deferral election, if any, made for that Plan Year. If no election was made
for that Plan Year, no deferral shall be withheld.
ARTICLE 11
TERMINATION, AMENDMENT OR MODIFICATION
--------------------------------------
11.1 TERMINATION. Although each Employer anticipates that it will continue
the Plan for an indefinite period of time, there is no guarantee that any
Employer will continue the Plan or will not terminate the Plan at any time
in the future. Accordingly, each Employer reserves the right to discontinue
its sponsorship of the Plan and/or to terminate the Plan at any time with
respect to any or all of its participating Employees and Directors, by
action of its board of directors. Upon the termination of the Plan with
respect to any Employer, the Plan Agreements of the affected Participants
who are employed by that Employer, or in the service of that Employer as
Directors, shall terminate and their Account Balances, determined as if
they had experienced a Termination of Employment on the date of Plan
termination or, if Plan termination occurs after the date upon which a
Participant was eligible to Retire, then with respect to that Participant
as if he or she had Retired on the date of Plan termination, shall be paid
to the Participants as follows: Prior to a Change in Control, if the Plan
is terminated with respect to all of its Participants, an Employer shall
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have the right, in its sole discretion, and notwithstanding any elections
made by the Participant, to pay such benefits in a lump sum or pursuant to
an Annual Installment Method of up to 15 years, with amounts credited and
debited during the installment period as provided herein. If the Plan is
terminated with respect to less than all of its Participants, an Employer
shall be required to pay such benefits in a lump sum. After a Change in
Control, the Employer shall be required to pay such benefits in a lump sum.
The termination of the Plan shall not adversely affect any Participant or
Beneficiary who has become entitled to the payment of any benefits under
the Plan as of the date of termination; provided however, that the Employer
shall have the right to accelerate installment payments without a premium
or prepayment penalty by paying the Account Balance in a lump sum or
pursuant to an Annual Installment Method using fewer years (provided that
the present value of all payments that will have been received by a
Participant at any given point of time under the different payment schedule
shall equal or exceed the present value of all payments that would have
been received at that point in time under the original payment schedule).
11.2 AMENDMENT. Any Employer may, at any time, amend or modify the Plan in
whole or in part with respect to that Employer by the action of its board
of directors; provided, however, that: (i) no amendment or modification
shall be effective to decrease or restrict the value of a Participant's
Account Balance in existence at the time the amendment or modification is
made, calculated as if the Participant had experienced a Termination of
Employment as of the effective date of the amendment or modification or, if
the amendment or modification occurs after the date upon which the
Participant was eligible to Retire, the Participant had Retired as of the
effective date of the amendment or modification, and (ii) no amendment or
modification of this Section 11.2 or Section 12.2 of the Plan shall be
effective. The amendment or modification of the Plan shall not affect any
Participant or Beneficiary who has become entitled to the payment of
benefits under the Plan as of the date of the amendment or modification;
provided, however, that the Employer shall have the right to accelerate
installment payments by paying the Account Balance in a lump sum or
pursuant to an Annual Installment Method using fewer years (provided that
the present value of all payments that will have been received by a
Participant at any given point of time under the different payment schedule
shall equal or exceed the present value of all payments that would have
been received at that point in time under the original payment schedule).
11.3 PLAN AGREEMENT. Despite the provisions of Sections 11.1 and 11.2 above, if
a Participant's Plan Agreement contains benefits or limitations that are
not in this Plan document, the Employer may only amend or terminate such
provisions with the consent of the Participant.
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11.4 EFFECT OF PAYMENT. The full payment of the applicable benefit under
Articles 4, 5, 6, 7 or 8 of the Plan shall completely discharge all
obligations to a Participant and his or her designated Beneficiaries under
this Plan and the Participant's Plan Agreement shall terminate.
ARTICLE 12
ADMINISTRATION
--------------
12.1 COMMITTEE DUTIES. Except as otherwise provided in this Article 12, this
Plan shall be administered by a Committee which shall consist of the Board,
or such committee as the Board shall appoint. Members of the Committee may
be Participants under this Plan. The Committee shall also have the
discretion and authority to (i) make, amend, interpret, and enforce all
appropriate rules and regulations for the administration of this Plan and
(ii) decide or resolve any and all questions including interpretations of
this Plan, as may arise in connection with the Plan. Any individual serving
on the Committee who is a Participant shall not vote or act on any matter
relating solely to himself or herself. When making a determination or
calculation, the Committee shall be entitled to rely on information
furnished by a Participant or the Company.
12.2 ADMINISTRATION UPON CHANGE IN CONTROL. For purposes of this Plan, the
Company shall be the "Administrator" at all times prior to the occurrence
of a Change in Control. Upon and after the occurrence of a Change in
Control, the "Administrator" shall be an independent third party selected
by the Trustee and approved by the individual who, immediately prior to
such event, was the Company's Chief Executive Officer or, if not so
identified, the Company's highest ranking officer (the "Ex-CEO"). The
Administrator shall have the discretionary power to determine all questions
arising in connection with the administration of the Plan and the
interpretation of the Plan and Trust including, but not limited to benefit
entitlement determinations; provided, however, upon and after the
occurrence of a Change in Control, the Administrator shall have no power to
direct the investment of Plan or Trust assets or select any investment
manager or custodial firm for the Plan or Trust. Upon and after the
occurrence of a Change in Control, the Company must: (1) pay all reasonable
administrative expenses and fees of the Administrator; (2) indemnify the
Administrator against any costs, expenses and liabilities including,
without limitation, attorney's fees and expenses arising in connection with
the performance of the Administrator hereunder, except with respect to
matters resulting from the gross negligence or willful misconduct of the
Administrator or its employees or agents; and (3) supply full and timely
information to the Administrator or all matters relating to the Plan, the
Trust, the Participants and their Beneficiaries, the Account Balances of
the Participants, the date of circumstances of the Retirement, Disability,
death or Termination of Employment of the
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Participants, and such other pertinent information as the Administrator may
reasonably require. Upon and after a Change in Control, the Administrator
may be terminated (and a replacement appointed) by the Trustee only with
the approval of the Ex-CEO. Upon and after a Change in Control, the
Administrator may not be terminated by the Company.
12.3 AGENTS. In the administration of this Plan, the Committee may, from time to
time, employ agents and delegate to them such administrative duties as it
sees fit (including acting through a duly appointed representative) and may
from time to time consult with counsel who may be counsel to any Employer.
12.4 BINDING EFFECT OF DECISIONS. The decision or action of the Administrator
with respect to any question arising out of or in connection with the
administration, interpretation and application of the Plan and the rules
and regulations promulgated hereunder shall be final and conclusive and
binding upon all persons having any interest in the Plan.
12.5 INDEMNITY OF COMMITTEE. All Employers shall indemnify and hold harmless
the members of the Committee, any Employee to whom the duties of the
Committee may be delegated, and the Administrator against any and all
claims, losses, damages, expenses or liabilities arising from any action or
failure to act with respect to this Plan, except in the case of willful
misconduct by the Committee, any of its members, any such Employee or the
Administrator.
12.6 EMPLOYER INFORMATION. To enable the Committee and/or Administrator to
perform its functions, the Company and each Employer shall supply full and
timely information to the Committee and/or Administrator, as the case may
be, on all matters relating to the compensation of its Participants, the
date and circumstances of the Retirement, Disability, death or Termination
of Employment of its Participants, and such other pertinent information as
the Committee or Administrator may reasonably require.
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ARTICLE 13
OTHER BENEFITS AND AGREEMENTS
-----------------------------
13.1 COORDINATION WITH OTHER BENEFITS. The benefits provided for a Participant
and Participant's Beneficiary under the Plan are in addition to any other
benefits available to such Participant under any other plan or program for
employees of the Participant's Employer. The Plan shall supplement and
shall not supersede, modify or amend any other such plan or program except
as may otherwise be expressly provided.
ARTICLE 14
CLAIMS PROCEDURES
-----------------
14.1 PRESENTATION OF CLAIM. Any Participant or Beneficiary of a deceased
Participant (such Participant or Beneficiary being referred to below as a
"Claimant") may deliver to the Committee a written claim for a
determination with respect to the amounts distributable to such Claimant
from the Plan. If such a claim relates to the contents of a notice received
by the Claimant, the claim must be made within 60 days after such notice
was received by the Claimant. All other claims must be made within 180 days
of the date on which the event that caused the claim to arise occurred. The
claim must state with particularity the determination desired by the
Claimant.
14.2 NOTIFICATION OF DECISION. The Committee shall consider a Claimant's claim
within a reasonable time, and shall notify the Claimant in writing:
(a) that the Claimant's requested determination has been made, and that
the claim has been allowed in full; or
(b) that the Committee has reached a conclusion contrary, in whole or in
part, to the Claimant's requested determination, and such notice must
set forth in a manner calculated to be understood by the Claimant:
(i) the specific reason(s) for the denial of the claim, or any part
of it;
(ii) specific reference(s) to pertinent provisions of the Plan upon
which such denial was based;
(iii) a description of any additional material or information
necessary for the Claimant to perfect the claim, and an
explanation of why such material or information is necessary;
and
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(iv) an explanation of the claim review procedure set forth in
Section 14.3 below.
14.3 REVIEW OF A DENIED CLAIM. Within 60 days after receiving a notice from the
Committee that a claim has been denied, in whole or in part, a Claimant (or
the Claimant's duly authorized representative) may file with the Committee
a written request for a review of the denial of the claim. Thereafter, but
not later than 30 days after the review procedure began, the Claimant (or
the Claimant's duly authorized representative):
(a) may review pertinent documents;
(b) may submit written comments or other documents; and/or
(c) may request a hearing, which the Committee, in its sole discretion,
may grant.
14.5 DECISION ON REVIEW. The Committee shall render its decision on review
promptly, and not later than 60 days after the filing of a written request
for review of the denial, unless a hearing is held or other special
circumstances require additional time, in which case the Committee's
decision must be rendered within 120 days after such date. Such decision
must be written in a manner calculated to be understood by the Claimant,
and it must contain:
(a) specific reasons for the decision;
(b) specific reference(s) to the pertinent Plan provisions upon which the
decision was based; and
(c) such other matters as the Committee deems relevant.
14.5 LEGAL ACTION. A Claimant's compliance with the foregoing provisions of
this Article 14 is a mandatory prerequisite to a Claimant's right to
commence any legal action with respect to any claim for benefits under this
Plan.
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ARTICLE 15
TRUST
-----
15.1 ESTABLISHMENT OF THE TRUST. The Company shall establish the Trust, and
each Employer shall at least annually transfer over to the Trust such
assets as the Employer determines, in its sole discretion, are necessary to
provide, on a present value basis, for its respective future liabilities
created with respect to the Annual Deferral Amounts, Annual Company
Contribution Amounts, and Company Matching Amounts for such Employer's
Participants for all periods prior to the transfer, as well as any debits
and credits to the Participants' Account Balances for all periods prior to
the transfer, taking into consideration the value of the assets in the
trust at the time of the transfer.
15.2 INTERRELATIONSHIP OF THE PLAN AND THE TRUST. The provisions of the Plan
and the Plan Agreement shall govern the rights of a Participant to receive
distributions pursuant to the Plan. The provisions of the Trust shall
govern the rights of the Employers, Participants and the creditors of the
Employers to the assets transferred to the Trust. Each Employer shall at
all times remain liable to carry out its obligations under the Plan.
15.3 DISTRIBUTIONS FROM THE TRUST. Each Employer's obligations under the Plan
may be satisfied with Trust assets distributed pursuant to the terms of the
Trust, and any such distribution shall reduce the Employer's obligations
under this Plan.
ARTICLE 16
MISCELLANEOUS
-------------
16.1 STATUS OF PLAN. The Plan is intended to be a plan that is not qualified
within the meaning of Code Section 401(a) and that "is unfunded and is
maintained by an employer primarily for the purpose of providing deferred
compensation for a select group of management or highly compensated
employee" within the meaning of ERISA Sections 201(2), 301(a)(3) and
401(a)(1). The Plan shall be administered and interpreted to the extent
possible in a manner consistent with that intent.
16.2 UNSECURED GENERAL CREDITOR. Participants and their Beneficiaries, heirs,
successors and assigns shall have no legal or equitable rights, interests
or claims in any property or assets of an Employer. For purposes of the
payment of benefits under this Plan, any and all of an Employer's assets
shall be, and remain, the general, unpledged unrestricted assets of the
Employer. An Employer's obligation under the Plan shall be merely that of
an unfunded and unsecured promise to pay money in the future.
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16.3 EMPLOYER'S LIABILITY. An Employer's liability for the payment of benefits
shall be defined only by the Plan and the Plan Agreement, as entered into
between the Employer and a Participant. An Employer shall have no
obligation to a Participant under the Plan except as expressly provided in
the Plan and his or her Plan Agreement.
16.4 NONASSIGNABILITY. Neither a Participant nor any other person shall have
any right to commute, sell, assign, transfer, pledge, anticipate, mortgage
or otherwise encumber, transfer, hypothecate, alienate or convey in advance
of actual receipt, the amounts, if any, payable hereunder, or any part
thereof, which are, and all rights to which are expressly declared to be,
unassignable and non-transferable. No part of the amounts payable shall,
prior to actual payment, be subject to seizure, attachment, garnishment or
sequestration for the payment of any debts, judgments, alimony or separate
maintenance owed by a Participant or any other person, be transferable by
operation of law in the event of a Participant's or any other person's
bankruptcy or insolvency or be transferable to a spouse as a result of a
property settlement or otherwise.
16.5 NOT A CONTRACT OF EMPLOYMENT. The terms and conditions of this Plan shall
not be deemed to constitute a contract of employment between any Employer
and the Participant. Such employment is hereby acknowledged to be an "at
will" employment relationship that can be terminated at any time for any
reason, or no reason, with or without cause, and with or without notice,
unless expressly provided in a written employment agreement. Nothing in
this Plan shall be deemed to give a Participant the right to be retained in
the service of any Employer, either as an Employee or a Director, or to
interfere with the right of any Employer to discipline or discharge the
Participant at any time.
16.6 FURNISHING INFORMATION. A Participant or his or her Beneficiary will
cooperate with the Committee by furnishing any and all information
requested by the Committee and take such other actions as may be requested
in order to facilitate the administration of the Plan and the payments of
benefits hereunder, including but not limited to taking such physical
examinations as the Committee may deem necessary.
16.7 TERMS. Whenever any words are used herein in the masculine, they shall be
construed as though they were in the feminine in all cases where they would
so apply; and whenever any words are used herein in the singular or in the
plural, they shall be construed as though they were used in the plural or
the singular, as the case may be, in all cases where they would so apply.
16.8 CAPTIONS. The captions of the articles, sections and paragraphs of this
Plan are for convenience only and shall not control or affect the meaning
or construction of any of its provisions.
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16.9 GOVERNING LAW. Subject to ERISA, the provisions of this Plan shall be
construed and interpreted according to the internal laws of the State of
Colorado without regard to its conflicts of laws principles.
16.10 NOTICE. Any notice or filing required or permitted to be given to the
Committee under this Plan shall be sufficient if in writing and hand-
delivered, or sent by registered or certified mail, to the address below:
Qwest Communications International, Inc.
4250 North Fairfax Drive
Arlington, Virginia 22203
Attn: Stan Surrette
Telephone: (703) 363-4550
Facsimile: (703) 363-1612
E-Mail: [email protected]
Such notice shall be deemed given as of the date of delivery or, if
delivery is made by mail, as of the date shown on the postmark on the
receipt for registration or certification. Any notice or filing required
or permitted to be given to a Participant under this Plan shall be
sufficient if in writing and hand-delivered, or sent by mail, to the last
known address of the Participant.
16.11 SUCCESSORS. The provisions of this Plan shall bind and inure to the
benefit of the Participant's Employer and its successors and assigns and
the Participant and the Participant's designated Beneficiaries.
16.12 SPOUSE'S INTEREST. The interest in the benefits hereunder of a spouse of
a Participant who has predeceased the Participant shall automatically pass
to the Participant and shall not be transferable by such spouse in any
manner, including but not limited to such spouse's will, nor shall such
interest pass under the laws of intestate succession.
16.13 VALIDITY. In case any provision of this Plan shall be illegal or invalid
for any reason, said illegality or invalidity shall not affect the
remaining parts hereof, but this Plan shall be construed and enforced as
if such illegal or invalid provision had never been inserted herein.
16.14 INCOMPETENT. If the Committee determines in its discretion that a benefit
under this Plan is to be paid to a minor, a person declared incompetent or
to a person incapable of handling the disposition of that person's
property, the Committee may direct payment of such benefit to the
guardian, legal representative or person having the care and custody of
such minor, incompetent or incapable person. The Committee may require
proof of minority,
________________________________________________________________________________
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<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
incompetence, incapacity or guardianship, as it may deem appropriate prior
to distribution of the benefit. Any payment of a benefit shall be a
payment for the account of the Participant and the Participant's
Beneficiary, as the case may be, and shall be a complete discharge of any
liability under the Plan for such payment amount.
16.15 COURT ORDER. The Committee is authorized to make any payments directed by
court order in any action in which the Plan or the Committee has been
named as a party. In addition, if a court determines that a spouse or
former spouse of a Participant has an interest in the Participant's
benefits under the Plan in connection with a property settlement or
otherwise, the Committee, in its sole discretion, shall have the right,
notwithstanding any election made by a Participant, to immediately
distribute the spouse's or former spouse's interest in the Participant's
benefits under the Plan to that spouse or former spouse.
16.16 DISTRIBUTION IN THE EVENT OF TAXATION.
(a) IN GENERAL. If, for any reason, all or any portion of a Participant's
benefits under this Plan becomes subject to federal income tax with
respect to the Participant prior to receipt, a Participant may
petition the Committee before a Change in Control, or the trustee of
the Trust after a Change in Control, for a distribution of that
portion of his or her benefit that has become taxable. Upon the grant
of such a petition, which grant shall not be unreasonably withheld
(and, after a Change in Control, shall be granted), a Participant's
Employer shall distribute to the Participant immediately available
funds in an amount equal to the taxable portion of his or her benefit
(which amount shall not exceed a Participant's unpaid Account Balance
under the Plan). If the petition is granted, the tax liability
distribution shall be made within 90 days of the date when the
Participant's petition is granted. Such a distribution shall affect
and reduce the benefits to be paid under this Plan.
(b) TRUST. If the Trust terminates in accordance with Section 3.6(e) of
the Trust and benefits are distributed from the Trust to a Participant
in accordance with that Section, the Participant's benefits under this
Plan shall be reduced to the extent of such distributions.
16.17 INSURANCE. The Employers, on their own behalf or on behalf of the trustee
of the Trust, and, in their sole discretion, may apply for and procure
insurance on the life of the Participant, in such amounts and in such
forms as the Company may choose. The Employers or the trustee of the
Trust, as the case may be, shall be the sole owner and beneficiary of any
such insurance. The Participant shall have no interest whatsoever in any
such policy or policies, and at the request of the Employers shall submit
to medical examinations and supply such information and execute such
documents as may be required
________________________________________________________________________________
-27-
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QWEST COMMUNICATIONS INTERNATIONAL INC.
Deferred Compensation Plan
Master Plan Document
================================================================================
by the insurance company or companies to whom the Employers have applied
for insurance.
16.18 LEGAL FEES TO ENFORCE RIGHTS AFTER CHANGE IN CONTROL. The Company and
each Employer is aware that upon the occurrence of a Change in Control,
the Board or the board of directors of a Participant's Employer (which
might then be composed of new members) or a shareholder of the Company or
the Participant's Employer, or of any successor corporation might then
cause or attempt to cause the Company, the Participant's Employer or such
successor to refuse to comply with its obligations under the Plan and
might cause or attempt to cause the Company or the Participant's Employer
to institute, or may institute, litigation seeking to deny Participants
the benefits intended under the Plan. In these circumstances, the purpose
of the Plan could be frustrated. Accordingly, if, following a Change in
Control, it should appear to any Participant that the Company, the
Participant's Employer or any successor corporation has failed to comply
with any of its obligations under the Plan or any agreement thereunder or,
if the Company, such Employer or any other person takes any action to
declare the Plan void or unenforceable or institutes any litigation or
other legal action designed to deny, diminish or to recover from any
Participant the benefits intended to be provided, then the Company and the
Participant's Employer irrevocably authorize such Participant to retain
counsel of his or her choice at the expense of the Company and the
Participant's Employer (who shall be jointly and severally liable) to
represent such Participant in connection with the initiation or defense of
any litigation or other legal action, whether by or against the Company,
the Participant's Employer or any director, officer, shareholder or other
person affiliated with the Company, the Participant's Employer or any
successor thereto in any jurisdiction.
IN WITNESS WHEREOF, the Company has signed this Plan document as of December
____, 1998.
"Company"
Qwest Communications International, Inc., a
Delaware corporation
By: _________________________________
Title: ______________________________
________________________________________________________________________________
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<PAGE>
EXHIBIT 10.6
This document constitutes part
of a prospectus covering
securities registered under
the Securities Act of 1933
================================================================================
QWEST COMMUNICATIONS 401(k) SAVINGS PLAN
effective January 1, 1999
SUMMARY PLAN DESCRIPTION
================================================================================
<PAGE>
PLAN ADMINISTRATION
Name of Plan: Qwest Communications 401(k) Savings Plan
Type of Plan: 401(k) Profit Sharing
Plan Number: 002
Plan Sponsor: Qwest Communications International Inc.
555 Seventeenth Street, 1000 Qwest Tower
Denver, CO 80202
Employer Identification
Number: 84-1339282
Other Adopting Employers: You can contact the Benefits Group in the Human
Resources Department for a list of adopting
employers
Plan Year: January 1 to December 31
Plan Administrator: Plan Administrative Committee
555 Seventeenth Street, 1000 Qwest Tower
Denver, CO 80202
Recordkeeper: Merrill Lynch
265 Davidson Avenue
Somerset, NJ 08873
Voice Response Number: 1-800-228-4015
Trustee: Merrill Lynch Trust Company FSB
300 Davidson Avenue
Somerset, NJ 08873
(732) 627-8128
Agent for Service of Legal General Counsel
Process: Qwest Communications International Inc.
555 Seventeenth Street, 1000 Qwest Tower
Denver, CO 80202
Legal process may also be served on the Trustee
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INTRODUCTION
Qwest Communications International Inc. (the "Company") has established the
Qwest Communications 401(k) Savings Plan (the "Plan") for its eligible employees
and the eligible employees of the Company's subsidiaries that adopt the Plan.
The Plan is effective January 1, 1999. We hope that this Plan will play a part
in helping you save for your retirement.
Two formal legal documents comprise the Plan. One is the Plan itself. The other
is a trust agreement. The plan and trust agreement are intended to be
"qualified" under the Internal Revenue Code. From time to time the Internal
Revenue Service ("IRS") may require that certain changes be made to the Plan or
trust agreement. You will be advised if any such changes affect the information
in this booklet.
This booklet (your "Summary Plan Description" or "SPD") is provided to explain
how the Plan works. It describes your benefits and rights as well as your
obligations under the Plan. It is important for you to understand that because
this SPD is a summary, it cannot cover all of the details of the Plan or how the
rules will apply to every person in every situation. All of the specific rules
governing the Plan are in the Plan document and trust agreement. You, your
beneficiaries, and your lawyer or other legal representative may examine the
Plan, the trust agreement and other documents relating to the Plan and trust
agreement during regular business hours or by appointment at a mutually
convenient time in the office of the Plan Administrator. You may obtain a copy
of the Plan and trust agreement. There is a charge for photocopying.
EVERY EFFORT HAS BEEN MADE TO ACCURATELY DESCRIBE THE COMPLICATED PROVISIONS OF
THE PLAN. IF THERE IS ANY CONFLICT BETWEEN THIS SPD AND THE PLAN DOCUMENT OR
TRUST AGREEMENT, THE PLAN DOCUMENT AND THE TRUST AGREEMENT WILL ALWAYS BE
FOLLOWED IN THE ACTUAL DETERMINATION OF YOUR BENEFITS.
If you have any questions about the Plan or trust agreement, you should contact
the Benefits Group in the Human Resources Department.
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ELIGIBILITY AND PARTICIPATION
ELIGIBILITY: GENERAL
All employees who satisfy the requirements described below are eligible to
participate, except for the following employees, who are referred to in this
Summary Plan Description as "ineligible employees":
employees who are covered by a collective bargaining agreement that
does not provide for their participation in the Plan,
non-resident aliens with no income taxable in the United States,
leased employees,
employees of a subsidiary that does not participate in the Plan,
individuals who were originally treated as independent contractors and
who are reclassified as employees as the result of a judicial or
administrative proceeding.
ELIGIBILITY: SALARY DEFERRAL CONTRIBUTIONS
You are eligible to make Salary Deferral Contributions (described under
"Participant Salary Deferral Contributions" in the next section) on the first
day of the payroll period after you receive your first paycheck.
If you are eligible to contribute to the Qwest Communications International Inc.
401(k) Plan, the LCI International 401(k) Savings Plan, or the U.S. Long
Distance Corp. 401(k) Retirement Plan on December 31, 1998, you are eligible to
contribute to this Plan on and after January 1, 1999.
ELIGIBILITY: COMPANY MATCHING CONTRIBUTIONS
You are eligible to receive Company Matching Contributions, if any, on the first
day of the payroll period in which the first anniversary of the day you started
work with the Company falls.
If you satisfied the one year requirement on January 1, 1999, you are eligible
to receive a Company Matching Contribution, if any, on and after January 1,
1999.
ELIGIBILITY: TERMINATION AND REEMPLOYMENT
If you leave the Company after you complete the eligibility requirements, and if
you come back to work for the Company, you may re-enter the Plan as of the first
day of the next payroll period after you return to work for the Company.
However, if you had not completed the one-year requirement before you left the
Company, you will not be eligible to receive a Company Matching Contribution, if
any, until you satisfy the one-year requirement.
ENROLLMENT IN THE PLAN
In order to become a participant, you must enroll in the Plan by electing to
make Salary Deferral Contributions. To enroll in the Plan, you must call Merrill
Lynch's 800 number (1-800-228-4015). When you enroll, you must select an
investment fund or funds. If you do not select at least one investment fund,
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your enrollment will not be processed. You may enroll in the Plan as of the
first date you were eligible or at any time thereafter.
HOW YOUR SERVICE IS MEASURED
In general, service refers to the length of time you are employed by the Company
and its subsidiaries. Your service is important under the Plan because it is
used to determine when you are eligible to participate and to share in any
Company contributions.
Your service is based on the number of days and months that you are employed by
the Company and its subsidiaries. In general, your service begins on your first
day of work and ends when you terminate employment. However, if you terminate
employment and return to work with the Company or a Company subsidiary within 12
months of your termination date, the period that you were absent will be
included in your service. If you have any questions about how your service is
determined, you should contact the Benefits Group in the Human Resources
Department.
All of your service with the Company and its subsidiaries counts towards your
years of service -- both service as an eligible employee and service while you
are an ineligible employee.
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CONTRIBUTIONS
PARTICIPANT SALARY DEFERRAL CONTRIBUTIONS
You may contribute from 1% to 18% of your pay in whole percentages to the Plan
as a Salary Deferral Contribution. If you are "highly compensated", the amount
that you can contribute may be limited (see "Limits on Contributions" below).
Your Salary Deferral Contributions are not subject to federal income tax, but
they are subject to Social Security taxes.
COMPANY MATCHING CONTRIBUTIONS
You may be eligible to receive a Company Matching Contribution, if any, only if
you have completed the one year of service requirement described in the
preceding section under "Eligibility: Company Matching Contribution." The
Company decides the amount of its matching contribution. The Company's matching
contribution, if any, is based on the amount and the rate of your salary
deferral contributions. Only salary deferral contributions up to 3% of your pay
may be matched.
EXAMPLE: Your rate of salary deferral contributions is 8% of your pay.
The Company's match, however, applies only to salary deferral contributions
up to 3% of your pay. The Company may contribute according to the formula
above for each dollar of salary deferral contributions you make up to 3% of
your pay. The salary deferral contributions you make in excess of 3% of
your pay are not matched.
PAY USED IN DETERMINING CONTRIBUTIONS
For purposes of determining contributions under the Plan, your pay is your
taxable wages, modified by including your Salary Deferral Contributions under
this Plan and before-tax contributions you make to Flexible Spending Accounts
and excluding your income from the exercise of stock options and from the sale
of Qwest Communications International Inc. common stock ("Qwest Stock")
purchased under the Employee Stock Purchase Plan.
LIMITS ON CONTRIBUTIONS
In general, you may elect to contribute any percentage of your pay from 1%-18%
(in whole percentages). There are several additional limitations:
1. Under federal law, the amount you can save as a Salary Deferral
Contribution in any calendar year is limited to a specific dollar amount.
This limit was originally $7,000 per year; however, it is indexed for
increases in the cost of living. For 1999, the limit is $10,000. You will
be notified if and when the annual dollar limitation is changed for future
years.
The dollar limit applies to your before-tax contributions under this Plan
as well as any other 401(k) savings plan(s) in which you may participate in
the same calendar year. If your total before-tax contributions exceed the
dollar limit applicable to a calendar year, then in order to avoid paying a
penalty tax, you should notify the Benefits Group in the Human Resources
Department as soon as possible following the end of the plan year so that
the excess may be returned to you by April 15 of the following year.
(Note: This dollar limit does NOT apply to rollover contributions or
transferred benefits (as discussed below) or to any amounts you contribute
on a before-tax basis to your Flexible Spending Accounts.)
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2. Federal law also limits the total amount you and the Company can contribute
to this Plan for each calendar year. In general, the limit is the lesser
of 25% of your pay or $30,000. This limit is based on your total pay (your
base or regular pay plus overtime, bonuses, and commissions) PLUS any
before-tax contributions you make to this plan and your Flexible Spending
Accounts. You will be advised on an individual basis if you are affected
by this limit.
3. There is also a limit on the amount of Salary Deferral Contributions that
can be made to this Plan in any year by "Highly Compensated" participants.
(Generally, "Highly Compensated" participants are participants who earn
more than $80,000 (as such amount is adjusted each year by federal law to
reflect changes in the cost of living) in the preceding calendar year and
are in the top paid 20% of employees.) If this limit is exceeded, (a)
excess amounts may be distributed to certain of the Highly Compensated
participants, or (b) "Special Company Contributions" may be made on behalf
of certain non-highly compensated participants. You will be notified
individually if you are ever affected by this limit.
CHANGES IN CONTRIBUTIONS
Generally, you may prospectively begin or resume making contributions, change
the amount of your contributions or discontinue making contributions as of the
first day of any payroll period. To begin, discontinue, resume or change the
rate of your contributions, call the voice response number (1-800-228-4015).
Your change will become effective as soon as administratively possible.
ROLLOVER CONTRIBUTIONS AND TRANSFERRED BENEFITS
If you previously worked for another employer, you may have accumulated benefits
under another employer-sponsored qualified pension or profit sharing plan.
Under certain circumstances, you may be able to put such benefits into this Plan
by making a "rollover contribution" or having your vested benefits transferred
directly from your prior employer's plan into this Plan.
Most distributions from qualified plans can be rolled over except, in general,
payments made over a single life expectancy or joint life expectancies,
installments for a period of 10 years or more, amounts that have been taxed
previously, and the minimum amount required to be distributed each year after
you reach age 70 1/2. Your distribution can be directly transferred (or rolled
over) to this Plan from your prior employer's plan by, for example, asking your
prior employer's plan to make the check payable to the Trustee of this Plan, or,
if your distribution check was made payable to you, you can deposit the check in
this Plan within 60 days after you received the check. You can also deposit an
amount equal to the amount that was withheld from your distribution from your
prior employer's plan. See "Rollovers and Income Tax Withholding," below for
more information concerning rollovers and withholding.
In addition, if you deposited your distribution in an individual retirement
account that contains ONLY funds received from one or more employer-sponsored
plans (a "Rollover IRA"), you can have your benefits (plus the earnings)
distributed from the Rollover IRA and deposit them in this Plan within 60 days
of the date you receive them from your Rollover IRA.
If your benefits have NOT been distributed (or directly rolled over as described
above) from your prior employer's plan, you may be able to have them transferred
directly from the prior plan into this Plan. You are NOT permitted to transfer
benefits from a "defined benefit pension plan," a "money purchase pension plan"
or any profit sharing plan that allows benefits to be paid in the form of an
annuity. The reason for this is that such plans require benefits to be
distributed in a form of payment that is not offered under this Plan. You are
also not permitted to directly transfer any deductible employee contributions or
after-tax employee contributions you made to a prior employer's plan. (However,
as discussed above, you may be able to have such amounts (other than after-tax
employee contributions) rolled over directly from your prior employer's plan to
this Plan as a rollover contribution.)
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If you are a newly hired employee (other than an ineligible employee), you may
make a rollover contribution or have benefits transferred directly from your
prior employer's plan into this Plan before you begin to participate in this
Plan. However, you will not be able to make any Salary Deferral Contributions
or receive Company Matching Contributions, if any, until you have satisfied the
requirements described under "Eligibility and Participation," above.
The Company must approve all rollover contributions and transferred benefits. If
you have benefits from another employer's plan or in a Rollover IRA and you want
to put these funds into this Plan, contact the Benefits Group in the Human
Resources Department to obtain the necessary forms and to determine whether your
funds may be deposited in this Plan.
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MAINTENANCE AND INVESTMENT OF YOUR ACCOUNTS
MAINTENANCE OF ACCOUNTS
All contributions to the Plan are held in the trust fund established for the
assets of the Plan. Several accounts may be maintained on your behalf. They
are as follows:
Salary Deferral Account - Generally this account reflects Salary Deferral
Contributions you make under this Plan as well as any before-tax
contributions that are transferred directly into this Plan from a prior
employer's plan and the earnings or losses on such contributions. It may
also contain Special Company Contributions because they are subject to the
same withdrawal restrictions as your Salary Deferral Contributions.
Company Matching Contributions Account - This account reflects the Company
Matching Contributions, if any, made on your behalf and the earnings and
losses on such contributions.
Rollover Account - This account reflects any rollover contributions you
made to the Plan and any benefits that were transferred directly into the
Plan (other than before-tax contributions, which are deposited in your
Salary Deferral Account) and the earnings or losses on such amounts.
Transferred Contributions Account - This account reflects the accounts
(other than before-tax accounts, which will be deposited in your Salary
Deferral Account) that will be transferred to this Plan from the LCI, USLD,
and prior Qwest 401(k) Plans and the earnings and losses on such
contributions.
Although separate account balance records are maintained, funds in the separate
accounts are commingled with the funds of other participants for investment
purposes. Account balances are merely bookkeeping entries showing your share of
the assets of the trust fund.
All accounts are valued on each day on which the stock markets are open for
trading as of the close of the trading day. You can call the voice response
number (1-800-228-4015) at any time to obtain your account balance. You will
receive a written statement of your account balance as of the close of each
calendar quarter.
INVESTMENT OF ACCOUNTS
The Plan has been designed to permit you to direct the investment of your
account(s) and is intended to qualify as a "participant-directed" plan under
Section 404(c) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the regulations promulgated by the Department of Labor
under ERISA Section 404(c). If you direct the investment of your accounts, the
Plan's fiduciaries may be relieved of liability for losses that are the direct
and necessary result of your investment directions.
The Trustee will maintain a variety of investment choices in which you may elect
to invest your account balances. The investment options (together with
information about the investment options) are listed in the Prospectus attached
to this summary plan description. You may invest your account balances, in any
whole percentage, in any one or more of the available options. When you become
eligible to participate, you will receive information concerning the various
options. When you enroll, you must select at least one investment choice. If you
do not select one or more investment choices, your enrollment will not be
processed.
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The investment options may charge transaction fees and expenses in connection
with the purchase and sale of the investments. The transaction fees and
expenses, which will be charged directly to your account, may include
commissions, sales loads, deferred sales charges, and redemption or exchange
fees.
When you invest in any investment options or securities that are subject to the
registration requirements of the Securities Act of 1933, Merrill Lynch will send
you a copy of any prospectuses that it receives on your behalf with respect to
the investment.
You can obtain the following information about the investment options, which may
be in addition to the information listed in the prospectus:
A description of the annual operating expenses, such as investment
management fees, administrative fees, and transaction costs.
Copies of prospectuses, financial statements and reports, and any other
information if such information is provided to the Plan Administrator.
A list of the assets in the investment option's portfolio and the portion
of the investment option that each asset comprises.
If any asset is a fixed rate investment contract issued by a bank, savings
and loan association, or insurance company, the name of the issuer of the
contract, the rate of return, and the term of the contract.
The value of the shares or units of the investment option and the past and
current investment performance (net of expenses).
The value of the shares or units of the investment options in which you
have invested.
You can contact the Benefits Group in the Human Resources Department to obtain
information about the investment choices, including the information listed
above.
You may change your investment elections by changing how your future
contributions are invested and/or by transferring your existing account balances
at any time. All investment elections and changes in investment elections may be
made by calling the voice response system at 1-800-228-4015. Merrill Lynch will
send a written confirmation of your investment direction to your home address as
listed in the Company's personnel records.
You can also obtain your current account balances by calling the voice response
system at 1-800-228-4015. Because your quarterly statements and written
confirmations of your investment directions will be sent to your home address,
you should notify the Company immediately if you have a change of address.
One of the investment choices permits you to invest in Qwest Stock. Although
generally you may change your investment elections at any time, your investment
in Qwest Stock is subject to the federal and state securities law rules
concerning "insider trading" and the Company's insider trading policy.
If you decide to purchase Qwest Stock, you have the right to vote the shares of
Qwest Stock allocated to your account. The Trustee will send you the
information that is sent to the other shareholders of Qwest Communications
International Inc., including the annual report, proxy statement, and proxy card
on which you can record your vote. In addition, if there is a tender offer for
the Qwest Stock or if there are other rights to be exercised with respect to the
Qwest Stock, you have the right to exercise those rights. If such rights arise,
you will receive information from the Trustee concerning how you can exercise
the rights with respect to the Qwest Stock in your accounts. All of your
decisions concerning Qwest Stock, including the
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purchase, holding and sale, and the manner in which you vote the Qwest Stock
will be kept confidential. Your decision to buy and sell the stock is made
through Merrill Lynch's voice response system (1-800-228-4015. Any information
concerning the voting of the Qwest Stock will be sent to you by the Trustee and
you will return it to the Trustee, which has agreed not to disclose the
information to the Company, except to the extent disclosure to the Company is
necessary to comply with applicable federal or state law. In that case, to the
extent possible, any information will be disclosed in the aggregate rather than
on an individual basis. In addition, the Company has appointed Todd Stanelle,
Qwest Communications Corporation, 6000 Parkwood Place, Dublin, OH 43016 (614)
798-6933, to monitor compliance with this confidentiality requirement.
How you choose to invest your account(s) in the Plan is an important decision
that you should consider carefully. THE COMPANY CANNOT ADVISE YOU CONCERNING
HOW TO INVEST your account(s) nor can it take responsibility for the performance
of any investment option that you choose.
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VESTING
You are always fully vested in all of your accounts under the Plan.
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IN-SERVICE WITHDRAWALS AND LOANS
IN-SERVICE WITHDRAWALS
AT ANY TIME: ROLLOVER CONTRIBUTIONS. You may withdraw all or any portion of
your Rollover Contributions account. The Trustee is required by federal law to
withhold federal income tax at the rate of 20% from your withdrawal unless you
direct that your withdrawal be directly rolled to an individual retirement
account. You may also be subject to the 10% penalty tax on withdrawals before
age 59 1/2. You can request a withdrawal by calling the voice response number
(1-800-228-4015). You are responsible for the fees charged to process the
withdrawal.
AFTER AGE 59 1/2. After you reach age 59 1/2, you may withdraw all or any
portion of your accounts under the Plan. The Trustee is required by federal law
to withhold federal income tax at the rate of 20% from your withdrawal unless
you direct that your withdrawal be directly rolled to an individual retirement
account. You can request a withdrawal by calling the voice response number (1-
800-228-4015). You are responsible for the fees charged to process a withdrawal.
BEFORE AGE 59 1/2: HARDSHIP. If you are employed by the Company or a
subsidiary of the Company, you may withdraw some or all of your Salary Deferral
Contributions (but not any income on such contributions), Rollover Contributions
(and the income on such contributions), and Company Matching Contributions (and
the income on such contributions) in the event of certain financial hardships
(as specified by the IRS and described below) and only after you have received
all loans available to you and withdrawn all amounts available under this Plan
and any other Company 401(k) plan in which you have an account. The maximum
amount you may withdraw is the amount of your financial need (plus any taxes
that you must pay on the amount withdrawn). Unless you specify how you want your
investments liquidated to provide cash for the hardship withdrawal, the Trustee
will liquidate your investments pro rata to provide the cash necessary for your
hardship withdrawal. You may also be subject to the 10% penalty tax on
withdrawals before age 59 1/2. You can apply for a withdrawal by filing an
application, which you can obtain from the Benefits Group in the Human Resources
Department. You are responsible for the fees charged to process a withdrawal.
In order to qualify for a hardship distribution, you must have one of the
following types of financial needs:
extraordinary medical expenses incurred by you, your spouse or your
dependents that are not paid by your health insurance;
expenses (excluding mortgage payments) related to the purchase of your
primary residence;
tuition and related educational fees for the next 12 months of post-
secondary education for you, your spouse or dependents; or
funds required to prevent you from being evicted from your principal
residence or from losing your principal residence due to mortgage
foreclosure.
If you receive a hardship distribution, you will not be permitted to make any
contributions to this Plan or the employee stock purchase plan or exercise any
stock options for at least 12 months following the date of any such withdrawal.
In addition, in the year following the year in which you received a hardship
distribution, the maximum amount of Salary Deferral Contributions you can make
to the Plan is the dollar limit in effect for that year (i.e. $10,000 for 1999)
minus the amount of Salary Deferral Contributions you made in the year in which
you received your hardship withdrawal.
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EXAMPLE: If you contributed $1,205 in the period from January 1, 1998
through May 31, 1998 and then took a hardship withdrawal from the plan on
May 31, 1998, you would not be allowed to make any Salary Deferral
Contributions until June 1, 1999 and the maximum amount of contributions
you could make in 1999 would be $8,795 ($10,000 minus $1,205).
LOANS.
You may be able to borrow from your account(s), other than amounts subject to a
qualified domestic relations order, as described below, if you are employed by
the Company. Beneficiaries and alternate payees may not borrow from the Plan.
The minimum loan amount is $500. You may pay the loan application fee and loan
origination fee, if any, that may be charged by the Trustee by submitting a
personal check to the Trustee or by having the fee deducted from your account.
All loans are subject to the following rules and conditions:
There are limits on the maximum amount that you can borrow from this Plan.
First, the total amount of outstanding loans from this Plan is limited to
50% of your vested account balances in this Plan. Second, the total amount
you may borrow is $50,000 MINUS the highest outstanding balance of any
other plan loans made to you from this Plan in the 12 months immediately
before the date of your new loan.
The minimum loan amount is $500.
You may have no more than one loan outstanding at one time.
Your loan will be secured by an equal amount of your vested account
balances, which remain in the Plan.
All loans will bear a reasonable interest rate. The Trustee will determine
the interest rate, which will be the prime rate on the last day of the
calendar quarter before the calendar quarter in which the loan is made plus
one percentage point.
Generally, all loans from the Plan must be repaid within 60 months. One
exception to this rule is that loans that are obtained to acquire your
principal residence may be repaid over a period of up to 180 months.
Another exception to the general rule is that all loans must be repaid by
your 62nd birthday (your normal retirement date). The minimum loan term is
12 months.
All loans must be repaid in substantially equal payments through payroll
deduction from each paycheck, if you are still employed by the Company. If
a paycheck is insufficient, you must submit a check within 5 days for the
remaining amount due.
You may prepay your loan balance at any time by submitting a check to the
plan administrator. You must prepay your loan balance in full. Partial
prepayments are not permitted.
All loans will be in default if any payment is not made within 5 days of
its due date If you do not cure a default by the last day of the calendar
quarter following the calendar quarter in which the default occurred, you
will be deemed to have receive a taxable distribution from the Plan. Your
taxable distribution is equal to the outstanding balance of the loan on the
last day of the calendar quarter following the calendar quarter in which
the default occurred.
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When you terminate employment with the Company, all outstanding loans will
become due and payable. If the loan is not repaid within 3 months after
your termination, the loan will be treated as a taxable distribution to
you.
Generally, a loan that meets all of the above-described conditions will not be
considered to be a taxable distribution from the Plan. However, if a loan
exceeds the above-described dollar or percentage limits or if a loan (other than
a home loan) is not repaid with timely repayments within five years, SOME OR ALL
OF SUCH LOANS WILL BE TREATED AS TAXABLE INCOME TO YOU.
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<PAGE>
PAYMENT OF BENEFITS FOLLOWING TERMINATION OF EMPLOYMENT
WHAT AMOUNT IS PAYABLE
Because you are always fully vested in all of your accounts under the Plan, you
will be entitled to receive your entire account balance when you terminate
employment for any reason. Generally, the amount distributable will be
calculated as of the valuation date immediately prior to the date your benefits
are distributed. Such amount will be reduced by any amounts pledged as security
for a loan from the Plan and any amounts subject to a Qualified Domestic
Relations Order, as discussed below. Any outstanding loans become due and
payable in full when you terminate employment.
FORM AND TIME OF PAYMENT
The Plan provides that your account balances will be paid to you in a lump sum.
If you have invested in Qwest Stock, you can have the shares of Qwest Stock
distributed (fractional shares will be paid in cash) or you can choose to have
your entire distribution paid to you in cash.
If your vested account balance(s) total more than $5,000, you may postpone
receiving your distribution. However, your account must be paid no later than
your "required beginning date." See, "Required Distributions," below.
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REQUIRED DISTRIBUTIONS
Under federal law, your benefits must be paid to you in a lump sum no later than
April 1 of the calendar year following the later of (1) the calendar year in
which you turn age 70 1/2 or (2) the calendar year in which you terminate
employment with the Company. However, if you own more than 5% of the value or
voting power of the Company's stock, your benefits must be paid to you in a lump
sum no later than April 1 of the calendar year following the calendar year in
which you turn age 70 1/2 even if you are still working. The date by which your
benefits must be paid is called your "required beginning date."
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<PAGE>
BENEFICIARIES AND DEATH BENEFITS
DESIGNATING YOUR BENEFICIARY(IES).
When you become a Plan participant, you must complete a beneficiary designation
form to indicate to whom you want your vested benefits paid if you die before
all of your benefits have been paid to you. Generally, you may designate one or
more beneficiaries, and you may designate contingent beneficiaries (i.e., if
your primary beneficiary dies before you or before all of your benefits have
been paid to your primary beneficiary, your benefits would be paid to the
contingent beneficiary).
NOTWITHSTANDING THE ABOVE, IF YOU ARE MARRIED ON THE DATE OF YOUR DEATH, YOUR
SPOUSE IS AUTOMATICALLY YOUR SOLE PRIMARY BENEFICIARY UNLESS YOUR SPOUSE
CONSENTED IN WRITING TO YOUR DESIGNATION OF ANOTHER PRIMARY BENEFICIARY. (You
can name whomever you want as contingent beneficiary/ies, without your spouse's
consent.) To be valid, your spouse's consent must be in writing, it must have
been witnessed by a notary public and it must have been filed with the plan
administrator at the same time as your beneficiary designation. If you designate
your spouse as your beneficiary and are later divorced, your beneficiary
designation will become invalid as of the date of your divorce. If you still
wish your benefits to be paid to your former spouse, you must submit a
Beneficiary Designation Form that names your former spouse as beneficiary and is
signed after the date of your divorce to the Benefits Group in the Human
Resources Department.
If no valid beneficiary designation is on file with the plan administrator at
the time of your death, your benefits will be paid to your surviving spouse, if
any, otherwise to your estate.
FORM AND TIME OF PAYMENT TO YOUR BENEFICIARY(IES)
The Plan provides that your beneficiary's share of your account balance will be
paid as a single sum as soon as administratively practicable after your death.
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CLAIMING BENEFITS
APPLICATIONS FOR BENEFITS
When you terminate employment and wish to receive your account balances, call
the voice response system (1-800-228-4015) to request a distribution. In the
event of your death, your beneficiary should contact the Benefits Group in the
Human Resources Department. If your beneficiary is entitled to a benefit, the
Benefits Group will furnish information concerning the payment of your benefits.
You or your beneficiary must provide such documentation as the Plan
Administrator may require to support the claim for benefits.
NOTICE OF DENIAL
If you or your beneficiary apply for a benefit under the Plan and the claim is
denied in full or in part, the Plan Administrator will notify you or your
beneficiary in writing within 90 days (or within 180 days if you are notified
that additional time is needed to make a decision). The notice of denial will
state the reasons for the denial, refer to the specific Plan provisions on which
the denial is based, describe additional materials that may be required to
perfect your claim and explain the claim review procedures. If no response to
the initial claim is received within 90 days, you or your beneficiary may
consider the claim to have been denied.
RIGHT TO APPEAL
If all or part of a claim is denied, you or your beneficiary may request a
review of your denied claim. The request for review (your "appeal") must be
submitted to the Plan Administrator within 60 days and it must be in writing.
If you do not file a written appeal within 60 days after the denial, the
decision of the plan administrator will become final. To help you prepare the
appeal, you or your beneficiary (and/or your representative) have the right to
review pertinent documents regarding the claim and its denial and you may submit
issues and comments in writing as part of your appeal.
The Plan Administrator will furnish you or your beneficiary with the decision
regarding the appeal within 60 days (or within 120 days, if you are notified of
the need for additional time). The decision of the Plan Administrator on the
appeal will be final.
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CIRCUMSTANCES THAT MAY AFFECT YOUR PLAN BENEFITS
The Plan is designed to provide you with a source of income during your
retirement. As a "qualified" plan under federal law, your vested rights to your
benefits are protected in a number of ways. However, there are certain
circumstances under which your benefits may be forfeited, delayed or decreased,
as follows:
. If you fail to repay a loan from the Plan when the loan is due, the amount
of your account that is equal to the outstanding loan obligation (including
unpaid interest and costs) may be applied by the Trustee to satisfy the
indebtedness.
. Some or all of your benefits may be lost to the extent that they are
required to be paid to your spouse, former spouse, child or other dependent
pursuant to a judgment, decree or order made pursuant to a state domestic
relations law. For more information about domestic relations orders, see
the section entitled "Qualified Domestic Relations Orders" below.
. Benefits may also be reduced by adverse investment experience, by any taxes
assessed against or payable by the fund or your account, and by
administrative costs.
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<PAGE>
GENERAL INFORMATION
FEDERAL PENSION BENEFIT INSURANCE - PLAN NOT COVERED
Under ERISA, a new corporation was established within the United States
Department of Labor to insure the adequacy of defined benefit pension plan trust
funds. Under present law, the Pension Benefit Guaranty Corporation does not
insure the adequacy of defined contribution profit sharing plan trust funds in
any way. This Plan is a defined contribution profit sharing plan, not a defined
benefit pension plan. Accordingly, the benefits under this Plan are not
insured.
ASSIGNMENT OF BENEFITS
You cannot assign, pledge, encumber or otherwise alienate your benefits under
this Plan. However, under an exception to this general rule, any amount
borrowed from the Plan trust may be secured by a pledge of your vested interest
in the trust fund.
Another exception to this general rule provides that all or a portion of your
accounts may be paid to your spouse, former spouse, children or other dependents
pursuant to a judgment, decree or order that is a "qualified domestic relations
order" issued pursuant to a state domestic relations law. (See below.)
QUALIFIED DOMESTIC RELATIONS ORDERS
GENERAL. A domestic relations order is any judgement or decree that has been
made pursuant to state domestic relations laws (including community property
laws). Such orders relate to provisions for child support, alimony payments or
marital property rights to a spouse, former spouse, child or other dependent.
In general, such orders are made pursuant to divorce proceedings.
DEFINITION. A "qualified domestic relations order" or "QDRO" is any domestic
relations order that recognizes the existence of or creates or assigns the right
to a spouse, former spouse, child or other dependent (an "alternate payee") to
receive all or a portion of the benefits payable to a plan participant. A QDRO
must clearly specify certain information, including your name and address and
the amount or percentage of your benefits to be paid by the Plan to the
alternate payee.
NOTICE. Upon receipt of a domestic relations order, the Plan Administrator will
notify both you and the alternate payee that the order has been received. In
addition, the Plan Administrator will notify you of the Plan's procedures for
determining whether the order is a QDRO.
HOLD ON PARTICIPANT'S ACCOUNT. When the Plan Administrator receives a domestic
relations order (whether in draft or entered by a court) or when the Plan
Administrator receives information that it may receive a domestic relations
order, the Plan Administrator will place a "hold" on your accounts. While the
hold is in effect, you may not withdraw or borrow funds from your account or if
you have terminated employment, you may not receive a distribution. If the hold
was placed on the account because the Plan Administrator received an order, the
hold will continue until the first to occur of (1) the 90th day after the Plan
Administrator gives the parties its comments on the order or (2) the date your
accounts are divided between you and the alternate payee on the records of the
plan after the Plan Administrator has determined that the order is a QDRO. If
the hold was placed on your account because the Plan Administrator received
information that it would receive an order, the hold will be removed if the Plan
Administrator has not received an order within 90 days after it placed the hold
on the account.
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PAYMENT TO ALTERNATE PAYEE. After the Plan Administrator has determined that a
domestic relations order addressed to the plan is a QDRO, the amount payable to
the alternate payee will be paid to the alternate payee in a lump sum as soon as
practical.
If you have any questions about QDROs or the payment of benefits under a
domestic relations order you should contact the Plan Administrator.
TERMS AND CONDITIONS OF EMPLOYMENT
Neither the establishment of the Plan nor your participation in the Plan is a
contract of employment. Every employee, whether or not a participant, is
subject to discharge just as though the Plan had never been adopted.
PLAN CHANGES AND TERMINATION
The Company reserves the right to amend, suspend or terminate the Plan and trust
for any reason.
Upon the termination of the Plan, the Plan Administrator will notify the
Trustee. The Trustee will then determine the net worth of the trust fund and
advise the Plan Administrator of any increase or decrease in such net worth
occurring since the last preceding valuation date. Any increase or decrease in
the net worth of the trust fund will be allocated among the accounts of
participants then remaining in the Plan.
In the case of a full or partial Plan termination, after the allocations have
been completed, the Trustee will distribute to each participant affected by the
termination of the Plan the entire amount then credited to his or her account or
accounts if applicable law permits a distribution. If applicable law does not
permit a distribution, the Trustee will distribute each participant's account
when the participant reaches age 59 1/2, terminates employment, becomes disabled
or dies.
PAYMENTS TO MINORS, ETC.
A benefit payable to a minor, an incompetent person or other person incapable of
receiving the benefit will be paid to the person's guardian or to the party
providing or reasonably appearing to provide for the care of such person.
CONTROLLING LAW
The Plan will be enforced according to the laws of Colorado to the extent that
those laws have not been preempted by federal law.
STATEMENT OF ERISA RIGHTS
(1) As a participant in the Qwest Communications 401(k) Savings Plan, you are
entitled to certain rights and protections under the Employee Retirement
Income Security Act of 1974 (ERISA). ERISA provides that all plan
participants are entitled to:
(a) examine, without charge, at the plan administrator's office, and at
other specified locations, such as worksites, all Plan documents,
including insurance contracts and copies of all documents filed by the
Plan with the U.S. Department of Labor, such as detailed annual
reports and plan descriptions.
(b) obtain copies of all Plan documents and other Plan information upon
written request to the plan administrator. The administrator may make
a reasonable charge for the copies.
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<PAGE>
(c) receive a summary of the Plan's annual financial report. The Plan
Administrator is required by law to furnish each participant with a
copy of this summary annual report.
(d) obtain a statement of your right to receive a benefit at normal
retirement age and if so, what your benefits would be at normal
retirement age if you stop working now. If you do not have a right to
a benefit, the statement will tell you how many more years you have to
work to get a right to a benefit. This statement must be requested in
writing and is not required to be given more than once a year. The
Plan must provide the statement free of charge.
(2) In addition to creating rights for plan participants, ERISA imposes duties
upon the people who are responsible for the operation of the Plan.
(3) The people who operate the Plan, called "fiduciaries," have a duty to do so
prudently and in the interest of you and other Plan participants and
beneficiaries.
(4) No one, including the Company or any other person, may fire you or
otherwise discriminate against you for the purpose of preventing you from
obtaining a benefit or exercising your rights under ERISA. Employment may
always be terminated for other customary reasons, however.
(5) If your claim for a benefit is denied in whole or in part you must receive
a written explanation of the reason for the denial. You have the right to
have the plan administrator review and reconsider your claim.
(6) Under ERISA, there are steps you can take to enforce your rights. For
instance, if you request materials from the Plan and do not receive them
within 30 days, you may file suit in a federal court. In such a case, the
court may require the plan administrator to provide the materials and pay
you up to $100 a day until you receive the materials, unless the materials
were not sent because of reasons beyond the control of the administrator.
If you have a claim for benefits which is denied or ignored, in whole or in
part, you may file suit in a state or federal court. If it should happen
that plan fiduciaries misuse the plan's money, or if you are discriminated
against for asserting your rights, you may seek assistance from the U.S.
Department of Labor, or you may file suit in a federal court. The court
will decide who should pay court costs and legal fees. If you are
successful the court may order the person you have sued to pay these costs
and fees. If you lose, the court may order you to pay these costs and
fees, for example, if it finds your claim is frivolous.
(7) If you have any questions about your plan, you should contact the plan
administrator. If you have any questions about this statement or about
your rights under ERISA, you should contact the nearest office of the
Pension and Welfare Benefits Administration, U.S. Department of Labor,
listed in your telephone directory or the Division of Technical Assistance
and Inquiries, U.S. Department of Labor, Pension and Welfare Benefits
Administration, 200 Constitution Ave., N.W., Washington, D.C. 20210.
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EXHIBIT 10.14
[LOGO]
QWEST COMMUNICATIONS
THE POWER OF CONNECTIONS
Joseph P. Nacchio
President & Chief Executive Officer
555 17th Street, Suite 1000
Denver, CO 80202
September 24, 1997
Marc B. Weisberg
6 Cherry Hills Farm Ct.
Englewood, CO 80110
Dear Marc:
I am delighted to be able to offer you the position of Sr. Vice President,
Corporate Development at Qwest Communications. This letter is intended to set
forth the terms and conditions of your employment with Qwest.
1. Your annual base salary will be $210,000.
2. You will be eligible to participate in Qwest's long-term incentive plan
(Equity Incentive Plan). You will receive a non-qualified option of 200,000
shares at the market price on September 26, 1997 exercisable over ten
years.
3. You will be eligible to participate in the executive bonus plan which is
currently under development. This plan is projected to have an upside
potential of a 40% bonus pay out. However, in your case, at the end of the
first year of your employment, you are entitled to a guaranteed bonus of
$80,000.
4. If you are terminated for any reason other than cause during your first
year of employment, you will be entitled to a lump sum payment of one
year's salary.
5. Paid time off and disability plan information is attached.
6. This offer of employment is contingent upon your statement that you are not
subject to any non-compete clause or similar restrictions which would in
any way prevent you from exerting all your efforts toward the goals and
objectives of Qwest.
Marc, I would like you to begin work at Qwest on Monday, September 29, 1997.
________________________________________
QWEST COMMUNICATIONS
555 SEVENTEENTH STREET DENVER, COLORADO 80202. 303-291-1400 FAX 203-291-1724
<PAGE>
Marc B. Weisberg
September 24, 1997
Page 2
Finally, I am really looking forward to your joining me at Qwest and working
together to make this a great company. If you agree with the above terms and
conditions, please sign below and return this letter to me. If you have any
questions or need more information, I can be reached at 303/291-1410 or feel
free to contact Ray Lee at 303/291-1688, who is working with me to help build
our senior management team.
Sincerely,
/s/ Joseph B. Nacchio
Joseph B. Nacchio
President
Chief Executive Officer
I accept the above offer:
/s/ Marc B. Weisberg 9-24-97
- ------------------------------ ---------------------------
Marc. B. Weisberg Date:
<PAGE>
EXHIBIT 10.25(b)
AMENDMENT TO
AMENDED AND RESTATED
1995 STOCK OPTION PLAN
OF
ICON CMT CORP.
THIS AMENDMENT to the Amended and Restated 1995 Stock Option Plan of Icon
CMT Corp. (the "Plan") is effective as of March 15, 1999.
RECITALS
1. The Plan was adopted by the Board of Directors of Icon CMT Corp., now
known as Qwest Internet Solutions, Inc. ("QIS") and approved by the shareholders
on October 23, 1995.
2. Effective as of January 1, 1999, Qwest Communications International
Inc. ("Qwest") acquired all of the stock of QIS and QIS became a wholly-owned
subsidiary of Qwest. Qwest assumed the Plan and substituted options to purchase
shares of the common stock of Qwest for the options outstanding under the Plan
(the "Substituted Options").
3. Qwest now wishes to amend the Plan to provide that upon a "change in
control,: the Substituted Options will become fully vested.
AMENDMENT
The Plan shall be amended, effective as of March 15, 1999, by the addition
of new Sections 12A and 12B to follow existing Section 12 and to provide as
follows:
"12A. CHANGE IN CONTROL OF QWEST COMMUNICATIONS INTERNATIONAL INC.
(a) In General. Upon a change in control of Qwest Communications
International Inc. ("Qwest") as defined in subsection 12A(b), then all
options shall become immediately exercisable in full during the remaining
term thereof, and shall remain so, whether or not the optionees to whom
such options have been granted remain employees or consultants of the
Company.
(b) Definition. For purposes of this Plan, a "change in control"
shall be deemed to have occurred if either (i) any individual, entity, or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act),
other than Anschutz Company, The Anschutz Corporation, any entity or
organization controlled by Philip F. Anschutz (collectively, the "Anschutz
Entities") or a trustee or other fiduciary holding securities under an
employee benefit plan of Qwest, acquires beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty percent
(50%) or more of either (A) the then-outstanding shares of the stock of
Qwest ("Outstanding Shares") or (B) the combined voting power
1
<PAGE>
of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors ("Voting Power") or (ii) at any time
during any period of three consecutive years (not including any period
prior to June 23, 1997), individuals who at the beginning of such period
constitute the Board (and any new director whose election by the Board or
whose nomination for election by Qwest's stockholders was approved by a
vote of at least two-thirds of the directors then still in office who
either were directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority thereof.
12B. REORGANIZATION OF SUBSIDIARIES. If Subsidiary is merged or
consolidated with another corporation (other than a merger or consolidation
pursuant to which the Subsidiary continues to be, or the continuing
corporation is, affiliated with Qwest through stock ownership or control),
or if all or substantially all of the assets or more than fifty percent
(50%) of the stock of the Subsidiary is acquired by any other corporation,
business entity or person (other than a transaction in which the successor
is affiliated with Qwest through stock ownership or control), or in the
case of a reorganization (other than a reorganization under the United
States Bankruptcy Code) including a divisive reorganization under Section
355 of the Code, or liquidation of the Subsidiary, the Board of Directors
may, as to outstanding options, make appropriate provision for the
protection of outstanding options granted to employees of, and consultants
to, the affected Subsidiary by (i) providing for the assumption of
outstanding options or the substitution of new options for outstanding
options by the successor on terms comparable to the outstanding options,
(ii) providing for the adjustment of outstanding options, or (iii) taking
such other action with respect to outstanding options as the Board of
Directors deems appropriate."
IN WITNESS WHEREOF, this Amendment has been signed this 12th day of March,
1999, to be effective as of March 15, 1999.
ICON CMT CORP.
By:_____________________________
Robert S. Woodruff
Executive Vice President
2
<PAGE>
EXHIBIT 10.26
U.S. LONG DISTANCE CORP.
1990 EMPLOYEE STOCK OPTION PLAN
1. PURPOSE. The purpose of this 1990 Stock Option Plan (hereinafter
called the "Plan") is to further the success of U.S. Long Distance Corp., a
Delaware corporation (hereinafter called the "Company"), and certain of its
affiliates by making available Common Stock of the Company for purchase by
certain officers and employees of the Company and its affiliates, and thus to
provide an additional incentive to such individuals to continue in the service
of the Company or its affiliates and to give them a greater interest as
shareholders in the success of the Company. Subject to compliance with the
provisions of the Plan and the Internal Revenue Code of 1986, as amended,
Incentive Stock Options are authorized by Section 422A of the Code and stock
options which do not qualify under Section 422A of the Code are authorized and
may be granted under the Plan.
2. DEFINITIONS. As used in this Plan the following terms shall have the
meanings indicated as follows:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Committee" means the Committee administering the Plan described in
Paragraph 3 hereof.
(d) "Common Stock" means the Company's Common Stock, par value $.01 per
share.
(e) "Date of Grant" means the date on which an option is granted under a
written option agreement executed by the Company and a Participant pursuant
to the Plan.
(f) "Disinterested Person" means a "disinterested person" in Rule 16b-3
promulgated under the Exchange Act or any successor provision.
(g) "Effective Date" means the effective date of this Plan specified in
Paragraph 13 hereof.
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<PAGE>
(h) "Exchange Act" means the Securities Exchange Act of 1934, as it may be
amended from time to time.
(i) "Incentive Stock Option" means an option qualifying under Section 422A
of the Code.
(j) "Parent" means a parent corporation of the Company as defined in
Section 425(e) of the Code.
(k) "Participants" means the employees and officers of the Company, its
Subsidiaries and its Parents and those directors of the Company who are
also employees of the Company or its subsidiaries.
(l) "Subsidiary" means a subsidiary corporation of the Company as defined
in Section 425(f) of the Code.
3. ADMINISTRATION OF THE PLAN. The Board of Directors of the Company
shall appoint a committee (the "Committee") comprised of two directors to
administer the Plan. Only directors who are Disinterested Persons shall be
eligible to serve as members of the Committee. The Committee shall report all
action taken by it to the Board, which shall review and ratify or approve those
actions that are by law required to be so reviewed and ratified or approved by
the Board. The Committee shall have full and final authority in its discretion,
subject to the provisions of the Plan, to determine the Participants to whom,
and the time or times at which, options shall be granted and the number of
shares and purchase price of Common Stock covered by each option; to construe
and interpret the Plan and any agreements made pursuant to the Plan; to
determine the terms and provisions (which need not be identical or consistent
with respect to each Participant) of the respective option agreements and any
agreement ancillary thereto including, but without limitation, terms covering
the payment of the option price; and to make all other determinations and to
take all other actions deemed necessary or advisable for the proper
administration of the Plan. All such actions and determinations shall be
conclusively binding for all purposes and upon all persons.
4. OPTIONS AUTHORIZED. The options granted under this Plan may be
Incentive Stock Options or stock options that do not qualify as Incentive Stock
Options (sometimes referred to herein
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<PAGE>
as "nonqualified options" or "nonqualified stock options"). The Committee shall
have the full power and authority to determine which options shall be
nonqualified stock options and which shall be Incentive Stock Options; to grant
only Incentive Stock Options or, alternatively, only nonqualified stock options;
and to, in its sole discretion, grant to the holder of an outstanding option, in
exchange for the surrender and cancellation of such option, a new option having
a purchase price lower than that provided in the option so surrendered and
cancelled and containing such other terms and conditions as the Committee may
prescribe in accordance with the provisions of the Plan. Under no circumstances
may nonqualified stock options be granted where the exercise of such
nonqualified stock options may affect the exercise of Incentive Stock Options
granted pursuant to the Plan. No options may be granted under the Plan prior to
the Effective Date. In addition to any other limitations set forth herein, the
aggregate fair market value (determined in accordance with Paragraph 7(a) of the
Plan as of the time the option is granted) of the stock with respect to which
Incentive Stock Options are exercisable for the first time by a Participant in
any calendar year (under all plans of the Company and of any Parent or
Subsidiary) shall not exceed $100,000.
5. COMMON STOCK SUBJECT TO OPTIONS. The aggregate number of shares of
the Company's Common Stock which may be issued upon the exercise of options
shall not exceed one million four hundred sixty-six thousand six hundred sixty-
six (1,466,666), subject to adjustment under the provisions of Paragraph 8. The
shares of Common Stock to be issued upon the exercise of options may be
authorized but unissued shares, or shares issued and reacquired by the Company.
In the event any option shall, for any reason, terminate or expire or be
surrendered without having been exercised in full, the shares subject to such
option shall again be available for options to be granted under the Plan, except
that shares for which relinquished options (or portions thereof) are exercisable
shall not again be available for options under the Plan.
6. PARTICIPANTS. Except as hereinafter provided, options may be granted
under the Plan to any Participant. In determining the Participants to whom
options shall be granted and the number of shares to be covered by such option,
the Committee may take into account the nature of the services rendered by the
respective
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<PAGE>
Participants, their present and potential contributions to the Company's success
and such other factors as the Committee in its discretion shall deem relevant. A
participant who has been granted an option under the Plan may be granted an
additional option or options under the Plan, in the Committee's discretion.
7. TERMS AND CONDITIONS OF OPTIONS. The grant of an option under the
Plan shall be evidenced by a written agreement executed by the Company and the
applicable Participant and shall contain such terms and be in such form as the
Committee may from time to time approve, subject to the following limitations
and conditions:
(A) OPTION PRICE. The option price per share with respect to each option
shall be determined by the Committee, but shall in no instance be less than
the par value of the shares subject to the option. In addition, the option
price per share with respect to Incentive Stock Options granted hereunder
shall in no instance be less than the fair market value of the shares
subject to the option as determined by the Committee. For the purposes of
this Paragraph 7(a), fair market value shall be, where applicable, the
closing price of the Common Stock on the Date of Grant as reported on the
Vancouver Stock Exchange or other national securities exchange on which the
Common Stock may be traded. If the stock is not listed on a national
securities exchange but is publicly traded on any securities exchange or in
the over the counter market, the Committee shall determine the fair market
value based on the closing prices or the bid and ask prices on any such
exchange or market. If the Common Stock was not traded on the Date of
Grant, the nearest preceding date on which there was a trade shall be
substituted. Notwithstanding the foregoing, however, fair market value
shall be determined consistent with Code Section 422A(b)(4) or any
successor provisions. The Committee may permit the option purchase price to
be payable by transfer to the Company of Common Stock owned by the option
holder with a fair market value at the time of the exercise equal to the
option purchase price.
(B) PERIOD OF OPTION. The expiration date of each option shall be fixed
by the Committee but, notwithstanding any provision of the Plan to the
contrary, such expiration date shall not be more than ten (10) years from
the Date of Grant.
-4-
<PAGE>
(C) VESTING OF SHAREHOLDER RIGHTS. Neither the optionee nor his successor
in interest shall have any of the rights of a shareholder of the Company
until the shares relating to the option hereunder are issued by the Company
and are properly delivered to such optionee, or successor.
(D) EXERCISE OF OPTION. Each option shall be exercisable from time to
time (but not less than six (6) months after the Date of Grant) over such
period and upon such terms and conditions as the Committee shall determine,
but not at any time as to less than twenty-five (25) shares unless the
remaining shares which have become so purchasable are less than twenty-five
(25) shares. After the death of the optionee, an option may be exercised as
provided in Paragraph 15 hereof.
(E) NONTRANSFERABILITY OF OPTION. No option shall be transferable or
assignable by an optionee, other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order and each
option shall be exercisable, during the optionee's lifetime, only by him or
her or, during periods of legal disability, by his or her legal
representative. No option shall be subject to execution, attachment, or
similar process.
(F) DISQUALIFYING DISPOSITION. The option agreement evidencing any
Incentive Stock Options granted under this Plan shall provide that if the
optionee makes a disposition, within the meaning of Section 425(c) of the
Code and regulations promulgated thereunder, of any share or shares of
Common Stock issued to him or her pursuant to exercise of the option within
the two-year period commencing on the day after the Date of Grant of such
option or within the one-year period commencing on the day after the date
of issuance of the share or shares to him or her pursuant to the exercise
of such option, he or she shall, within ten (10) days of such disposition
date, notify the Company of the sales price or other value ascribed to or
used to measure the disposition of the share or shares thereof and
immediately deliver to the Company any amount of federal income tax
withholding required by law.
-5-
<PAGE>
(G) LIMITATION ON GRANTS TO CERTAIN SHAREHOLDERS. An Incentive Stock
Option may be granted to a Participant only if such Participant, at the
time the option is granted, does not own, after application of the
attribution rules of Code Section 425, stock possessing more than 10% of
the total combined voting power of all classes of Common Stock of the
Company or of its Parent or Subsidiary. The preceding restrictions shall
not apply if at the time the option is granted the option price is at least
110% of the fair market value (as defined in Paragraph 7(a) above) of the
Common Stock subject to the option and such option by its terms is not
exercisable after the expiration of five (5) years from the Date of Grant.
(H) CONSISTENCY WITH CODE. Notwithstanding any other provision in this
Plan to the contrary, the provisions of all agreements granting incentive
stock options pursuant to the Plan shall not violate the requirements of
the Code applicable to the Incentive Stock Options authorized hereunder.
8. ADJUSTMENTS. The Committee, in its discretion, may make such
adjustments in the option price and the number of shares covered by outstanding
options that are required to prevent any dilution or enlargement of the rights
of the holders of such options that would otherwise result from any
reorganization, recapitalization, stock split, stock dividend, combination of
shares, merger, consolidation, issuance of rights or any other change in the
capital structure of the Company. The Committee, in its discretion, may also
make such adjustments in the aggregate number of shares that may be the subject
of options which are appropriate to reflect any transaction or event described
in the preceding sentence.
9. RESTRICTION OF ISSUING SHARES. The exercise of each option shall be
subject to the condition that if at any time the Company shall determine in its
discretion that the satisfaction of withholding tax or other withholding
liabilities, or that the listing, registration, or qualification of any shares
otherwise deliverable upon such exercise upon any securities exchange or under
any state or federal law, or that the consent or approval of any regulatory
body, is necessary or desirable as a condition of, or in connection with, such
exercise or the delivery or purchase
-6-
<PAGE>
of shares pursuant thereto, then in any such event, such exercise shall not be
effective unless such withholding, listing, registration, qualification,
consent, or approval shall have been effected or obtained free of any conditions
not acceptable to the Company.
10. USE OF PROCEEDS. The proceeds received by the Company from the sale
of Common Stock pursuant to the exercise of options granted under the Plan shall
be added to the Company's general funds and used for general corporate purposes.
11. AMENDMENT, SUSPENSION, AND TERMINATION OF PLAN. The Board may at any
time suspend or terminate the Plan or may amend it from time to time in such
respects as the Board may deem advisable in order that the options granted
thereunder may conform to any changes in the law or in any other respect that
the Board may deem to be in the best interests of the Company; provided,
however, that without approval by the shareholders of the Company voting the
proper percentage of its voting power, no such amendment shall make any change
in the Plan for which shareholder approval is required of the Company in order
to comply with (i) Rule 16b-3, as amended, promulgated under the Exchange Act,
(ii) the Code or regulatory provisions dealing with Incentive Stock Options,
(iii) any rules for listed companies promulgated by any national stock exchange
on which the Company's stock is traded or (iv) any other applicable rule or law.
Unless sooner terminated hereunder, the Plan shall terminate ten (10) years
after the Effective Date. No option may be granted during any suspension or
after the termination of the Plan. Except as provided in Paragraph 12, no
amendment, suspension, or termination of the Plan shall, without an optionee's
consent, impair or negate any of the rights or obligations under any option
theretofore granted to such optionee under the Plan.
12. TAX WITHHOLDING. The Committee may, in its sole discretion, (a)
require an optionee to remit to the Company a cash amount sufficient to satisfy,
in whole or in part, any federal, state or local withholding tax requirements
prior to the delivery of any certificate for shares pursuant to the exercise of
an option hereunder; or (b) satisfy such withholding requirements through
another lawful method.
-7-
<PAGE>
13. EFFECTIVE DATE OF PLAN. This Plan shall become effective on the date
(the "Effective Date") of the last to occur of (i) the adoption of the Plan by
the Board and (ii) the approval, within twelve (12) months of such adoption, by
a majority (or such other proportion as may be required by state law) of the
outstanding voting shares of the Company, voted either in person or by proxy, at
a duly held stockholders meeting.
14. TERMINATION OF EMPLOYMENT. In the event of the retirement (with the
written consent of the Company) or other termination of the employment of an
employee to whom an option has been granted under the Plan, other than (a) a
termination that is either (i) for cause or (ii) voluntary on the part of the
employee and without the written consent of the Company, or (b) a termination by
reason of death, the employee may (unless otherwise provided in his option
agreement) exercise his option at any time within three (3) months after such
retirement or other termination of employment (or within one (1) year after
termination of employment due to disability within the meaning of Code Section
422A(c)(7)), or within such other time as the Committee shall authorize, but in
no event after ten (10) years from the date of granting thereof (or such lesser
period as may be specified in the stock option agreement), but only to the
extent of the number of shares for which his options were exercisable by him at
the date of the termination of his employment. In the event of the termination
of the employment of an employee to whom an option has been granted under the
Plan that is either (i) for cause or (ii) voluntary on the part of the employee
and without the written consent of the Company, any option held by him under the
Plan, to the extent not previously exercised, shall forthwith terminate on the
date of such termination of employment. Options granted under the Plan shall not
be affected by any change of employment so long as the holder continues to be an
employee of the Company, a Subsidiary or a Parent. The option agreement may
contain such provisions as the Committee shall approve with respect to the
effect of approved leaves of absence. Nothing in the Plan or in any option
granted pursuant to the Plan shall confer on any individual any right to
continue in the employ of the Company or any of its Subsidiaries or Parents or
interfere in any way with the right of the Company or any of its Subsidiaries or
Parents to terminate his employment at any time.
-8-
<PAGE>
15. DEATH OF HOLDER OF OPTION. In the event an employee to whom an option
has been granted under the Plan dies during, or within three (3) months after
the termination of, his employment by the Company or a Subsidiary or Parent,
such option (unless it shall have been previously terminated pursuant to the
provisions of the Plan or unless otherwise provided in his option agreement) may
be exercised (to the extent of the entire number of shares covered by the option
whether or not purchasable by the employee at the date of his death) by the
executor or administrator of the optionee's estate or by the person or persons
to whom the optionee shall have transferred such option by will or by the laws
of descent and distribution, at any time within a period of one (1) year after
his death, but not after the exercise termination date set forth in the relevant
stock option agreement.
16. LOANS TO ASSIST IN EXERCISE OF OPTIONS. If approved by the Board, the
Company or any Parent or Subsidiary may lend money or guarantee loans by third
parties to an individual to finance the exercise of any option granted under the
Plan to carry Common Stock thereby acquired. No such loans to finance the
exercise of an Incentive Stock Option shall have an interest rate or other terms
that would cause any part of the principal amount to be characterized as
interest for purposes of the Code.
17. RULE 16B-3 PLAN. This Plan is intended and has been drafted to comply
in all respects with Rule 16b-3, as amended, under the Exchange Act. If any
provision of this Plan does not comply with Rule 16b-3, as amended, this Plan
shall be automatically amended to comply with Rule 16b-3, as amended.
-9-
<PAGE>
SELECTED FINANCIAL DATA EXHIBIT 13
The selected financial data related to the Company's financial condition and
results of operations for each of the years in the five-year period ended
December 31, 1998 are summarized as follows and should be read in conjunction
with the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and the Consolidated Financial Statements
of the Company and the notes thereto, appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
(in millions, except per share information and route mile data) 1998(1) 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenue $ 2,242.7 $ 696.7 $ 231.0 $ 125.1 $ 70.9
Total operating expenses 2,996.4 673.2 243.0 161.2 81.5
Earnings (loss) from operations (753.7) 23.5 (12.0) (36.1) (10.6)
Earnings (loss) before income taxes (849.8) 23.6 (10.1) (38.5) (10.7)
Net earnings (loss) $ (844.0) $ 14.5 $ (6.9) $ (25.1) $ (6.9)
Net earnings (loss) per share - basic $ (3.02) $ 0.08 $ (0.04) $ (0.15) $ (0.04)
Net earnings (loss) per share - diluted $ (3.02) $ 0.07 $ (0.04) $ (0.15) $ (0.04)
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Total assets $ 8,067.6 $1,398.1 $ 262.6 $ 184.2 $ 89.5
Long-term debt $ 2,307.1 $ 630.5 $ 109.3 $ 68.8 $ 27.0
Total stockholders' equity(2) $ 4,238.2 $ 381.8 $ 9.4 $ 26.5 $ 24.6
<CAPTION>
1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
EBITDA(3) $ 294.5 $ 43.7 $ 6.9 $(26.0) $ (6.3)
Net cash provided by (used in)
operating activities $ 44.5 (36.4) $ 32.5 $(56.6) $ 3.3
Net cash used in investing
activities $(1,438.8) $(356.8) $(52.6) $(58.9) $(41.7)
Net cash provided by financing
activities $ 1,477.3 $ 766.1 $ 25.5 $113.9 $ 34.3
Capital expenditures $ 1,413.2 $ 345.8 $ 57.1 $ 48.7 $ 40.9
OPERATING DATA:
Route miles of conduit installed 17,000 9,500 3,650
Route miles of fiber activated 12,500 3,400 900
Minutes of use (for the year ended, in millions) 10,800 669 382
</TABLE>
(1) The selected financial and operating data for the year ended and as of
December 31, 1998 include the effect of the acquisitions of LCI International,
Inc., Icon CMT Corp., EUnet International Limited and Phoenix Network, Inc.,
which occurred during 1998. (See further discussion of these acquisitions in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations.")
(2) The Company has not paid cash dividends on its Common Stock since becoming a
public company in June 1997 and does not anticipate paying cash dividends in the
foreseeable future.
<PAGE>
(3)EBITDA represents net earnings (loss) before interest, income tax expense
(benefit), depreciation and amortization, a non-recurring expense of $2.6
million in the year ended December 31, 1996 to restructure operations, the
non-recurring gain on sale of telecommunications agreements of $6.1 million in
the year ended December 31, 1996, the non-recurring gain on sale of contract
rights of approximately $9.3 million in the year ended December 31, 1997, and
non-recurring merger-related expenses of $846.5 million in the year ended
December 31, 1998. EBITDA does not represent cash flow for the periods presented
and should not be considered as an alternative to net earnings (loss) as an
indicator of the Company's operating performance or as an alternative to cash
flows as a source of liquidity, and may not be comparable with EBITDA as defined
by other companies.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with the
Company's accompanying audited consolidated financial statements and the notes
thereto.
OVERVIEW
Qwest Communications International Inc. ("Qwest" or the "Company") is a
facilities-based multimedia communications services provider engaged in two core
businesses: Communications Services and Construction Services.
Communications Services includes Internet and Multimedia Services, Business
Services, Consumer Services and Wholesale Services. Internet and Multimedia
Services provides Internet Protocol ("IP") - enabled services such as Internet
access, web hosting, co-location and remote access. Internet and Multimedia
Services are being developed according to market demand in partnership with
leading information technology companies. They include Microsoft Corporation
("Microsoft") (business applications and services), Netscape Communications
Corporation ("Netscape") (one-stop access for an array of communications
services accessed over the Internet) and Covad Communications Group, Inc.
("Covad") (high-speed local network connectivity). Business Services and
Consumer Services provide a full range of voice, data, video and related
services to business customers, governmental agencies and consumers. Wholesale
Services provides high-volume voice and conventional private line services to
other communications providers, as well as to Internet service providers
("ISPs"), and other data service companies.
Construction Services constructs and installs fiber optic systems for other
communications 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. The
Company entered into major construction contracts for the sale of dark fiber to
Frontier, MCI WorldCom and GTE whereby the Company has agreed to install and
provide dark fiber to each along portions of the Company's network. In addition
to these contracts, the Company has signed agreements with other communications
providers and government agencies for the sale of dark fiber along the Company's
network. Revenue from Construction Services generally is recognized under the
percentage of completion method as performance milestones relating to the
contract are satisfactorily completed.
Central to Qwest's strategy is the Qwest Macro CapacitySM Fiber Network, a
high-capacity Internet protocol ("IP")-based fiber optic network designed to
allow customers to seamlessly exchange multimedia content -- images, data and
voice. The technologically advanced network will reach approximately 18,800
route miles, with the initial 18,500-route-mile network scheduled for completion
in mid-1999 and an additional
17
300-route-mile segment scheduled for completion by the end of 1999. The network
employs a self-healing SONET ring architecture. It is equipped with advanced
fiber and state-of-the-art transmission electronics. At full capacity, Qwest's
network could transmit two trillion bits of multimedia information per second.
Qwest's network architecture supports IP, ATM and Frame Relay services, as well
as circuit switched services.
In April 1998, Qwest became the first network service provider to complete a
transcontinental IP-based fiber optic network when it activated its network from
Los Angeles to San Francisco to New York.
The Company is also expanding its network to carry international data and voice
traffic to Mexico, Europe and the Far East. Completion of the Mexico network is
scheduled for early 1999. The network expansion into Europe includes capacity on
three undersea submarine systems. The transatlantic capacity includes up to
eight STM-1s (the European equivalent to SONET OC-3) from New York City to
London and other European destinations. The Company is also participating in a
consortium of communications companies that is building a submarine cable system
connecting the United States to Japan. Scheduled for completion by the second
quarter of 2000, the 13,125-mile four-fiber pair cable will ultimately be
capable of transmitting information at the rate of 640 gigabits per second.
<PAGE>
In November 1998, the Company activated the nation's first OC-48 native IP
network along certain routes of the Company's network. Along this OC-48 network,
the Company will offer high-speed dedicated Internet access, web hosting,
IP-based virtual private network services and expanded availability of voice
over IP long distance services. Additionally, the Company's European subsidiary,
EUnet International Limited ("EUnet"), provides a pan-European Internet
broadcasting network. The services offered allow customers in Europe to
broadcast video, data and voice globally. The Company will contribute EUnet to
the KPN joint venture. (See discussion of KPN joint venture below.)
Investment in Covad. In January 1999, Qwest made its first investment, totaling
$15.0 million in cash, in high-speed, digital subscriber line ("DSL") local
networks through an agreement with Covad, a packet-based Competitive Local
Exchange Carrier ("CLEC"). Under this agreement, the Company expects to have
access to 22 metropolitan areas by the end of 1999, while enhancing its ability
to provide its customers with high-speed DSL connectivity to its network.
Alliance With Microsoft. In December 1998, the Company entered into a strategic
alliance with Microsoft that will enable businesses to utilize high-speed
network services that maximize network resources, reduce costs, generate new
sources of revenue and optimize management of computing operations. The
Company's service, to be built on the Microsoft(R) Windows NT(R) Server
operating system and the Company's IP-based fiber optic network, is designed for
businesses of all sizes. Microsoft will license a broad range of its software to
Qwest. The parties will jointly market and sell the services. In addition,
Microsoft purchased 4.4 million shares of Qwest for $200.0 million.
Under this agreement, the Company expects to offer businesses a high-speed
service that is scalable and secure commencing in 1999. The Company will also
support the development, integration and maintenance of advanced hosting
services, including dedicated electronic commerce, web application hosting,
streaming media, managed software services and virtual private networking built
on Microsoft platforms.
KPN Joint Venture. On November 19, 1998, the Company and KPN Telecom B.V.
("KPN") entered into a letter of intent to form a joint venture to create a pan-
European IP-based fiber optic network, linked to the Company's network in North
America, for data, video and voice services. The venture is expected to be
formed in the first quarter of 1999, subject to definitive documentation and
customary regulatory approvals.
The venture will offer wholesale, private line and IP-based services, including
intranets, extranets, web hosting, IP-Virtual Private Networks ("VPN"), Internet
access, data and voice services. The venture will also sell dark fiber and plans
to offer frame relay and ATM-based services. Customers of the venture will
include Internet service and content providers, multinational firms in Europe
and North America, as well as telecommunications carriers, operators and others
who want to purchase wholesale or retail network capacity, fiber or services.
The Company and KPN will each own 50 percent of the venture. The venture will be
governed by a six-person supervisory board, to which the Company and KPN each
will name three members. KPN will contribute to the venture two bi-directional,
self-healing fiber optic rings (EuroRings(TM) 1 and 2), covering approximately
2,100 miles. The Company and KPN will also contribute transatlantic cable
capacity to the venture that will connect EuroRings(TM) with the Company's
network in North America, as well as approximately $78.0 million and $20.0
million, respectively. The Company will contribute EUnet, which has net assets
of approximately $80.0 million.
Acquisitions. Each of the acquisitions discussed below was accounted for as a
purchase. The results of operations of each of these acquisitions have been
included in the accompanying consolidated statements of operations of the
Company from the date of acquisition. The Company will complete
18
final allocation of purchase price of each acquisition within one year from the
acquisition date. The accompanying consolidated financial statements reflect the
preliminary allocation of purchase price of each acquisition, which is subject
to adjustment.
Icon Acquisition. In December 1998, the Company completed its acquisition of
Icon CMT Corp. ("Icon"), a provider of integrated Internet solutions associated
with web hosting and IP integration, for approximately $254.1 million in Company
common stock, including approximately $3.5 million of direct acquisition costs.
At the close of the acquisition, the Company issued approximately 5.9 million
shares of the Company's common stock (including outstanding Icon stock options
and warrants assumed by the Company).
<PAGE>
In connection with the acquisition of Icon, the Company allocated $10.0 million
of the purchase price to in-process research and development ("R&D") projects,
$2.3 million to developed technology, $71.8 million to other intangible assets
and $194.0 million to goodwill. This allocation to the in-process R&D represents
the estimated fair value based on risk-adjusted cash flows related to the
incomplete projects. The in-process R&D was expensed at the date of acquisition
as the in-process R&D had not reached technological feasibility. The developed
technology, other intangible assets and goodwill are being amortized on a
straight-line basis from 4 to 15 years. (See further discussion of the Icon
acquisition in RESULTS OF OPERATIONS.)
LCI Acquisition. In June 1998, the Company acquired LCI International, Inc. and
subsidiaries ("LCI"), a communications services provider, for approximately $3.9
billion in Company common stock, including approximately $13.5 million in direct
acquisition costs. At the close of the acquisition, the Company issued
approximately 129.9 million shares of the Company's common stock (including
outstanding LCI stock options assumed by the Company).
In connection with the acquisition of LCI, the Company allocated $682.0 million
of the purchase price to in-process R&D projects, $318.0 million to developed
technology, $65.0 million to other intangible assets and $3,071.0 million to
goodwill. The allocation to the in-process R&D represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. The
in-process R&D was expensed at the date of acquisition as the in-process R&D had
not reached technological feasibility. The developed technology, other
intangible assets and goodwill are being amortized on a straight-line basis from
10 to 40 years. (See further discussion of the LCI acquisition in RESULTS OF
OPERATIONS.)
EUnet Acquisition. In April 1998, the Company acquired EUnet, a European ISP
with subsidiaries in 14 countries, for approximately $154.0 million in Company
common stock, including approximately $3.5 million in direct acquisition costs,
and $4.2 million in cash. At the close of the acquisition, the Company issued
approximately 4.0 million shares of Company common stock. Approximately 0.6
million shares were placed in escrow for two years and may be recovered by the
Company to satisfy any indemnification claims. At the expiration of the escrow
period, these shares revert to the EUnet stockholders.
The Company allocated $68.0 million of the purchase price to in-process R&D
projects. The allocation to the in-process R&D represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. The
in-process R&D was expensed at the date of acquisition as the in-process R&D had
not reached technological feasibility. The remaining intangibles from the
purchase relate to developed technology and goodwill and are being amortized on
a straight-line basis over five years and ten years, respectively. (See further
discussion of the EUnet acquisition in RESULTS OF OPERATIONS.)
Phoenix Acquisition. In March 1998, the Company acquired Phoenix Network, Inc.
("Phoenix"), a non-facilities-based reseller of long distance services.
Approximately 0.8 million shares of the Company common stock having a value of
approximately $27.2 million were exchanged for the outstanding shares of
Phoenix.
SuperNet Acquisition. In October 1997, the Company acquired SuperNet, Inc.
("SNI"), an ISP, for $20.0 million in cash, including acquisition costs.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
COMPARED TO YEAR ENDED DECEMBER 31, 1997
The Company reported a net loss of $844.0 million in the year ended December 31,
1998, compared to net earnings of $14.5 million in the same period of the prior
year. For the comparative periods presented, the Company's results of operations
include the acquisitions of the following: SNI from October 1997; Phoenix from
March 1998; EUnet from April 1998; and LCI from June 1998. Excluding the effects
of the merger-related costs and the write-off of in-process R&D costs related to
the LCI, EUnet and Icon acquisitions in 1998 and the charge for the redemption
of a total of $87.5 million in principal amount of its 107/8% Notes, the
Company's reported net loss would have been $(19.4) million for the year ended
December 31, 1998 compared to net earnings of $14.5 million for the same period
of the prior year.
19
<PAGE>
Revenue. Components of revenue for the years ended December 31, 1998 and 1997
were as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
(in millions) 1998 1997 Increase
- --------------------------------------------------------------------------------
Communications services $ 1,554.3 $ 115.3 $ 1,439.0
Construction services 688.4 581.4 107.0
----------------------------------------
Total revenue $ 2,242.7 $ 696.7 $ 1,546.0
- --------------------------------------------------------------------------------
During the year ended December 31, 1998, as compared to the prior year,
Communications Services revenue increased due to the addition of revenue from
the acquisitions discussed above, and due to growth in all aspects of
Communications Services. Construction Services revenue increased during the year
ended December 31, 1998, as compared to the prior year, primarily as a result of
additional dark fiber sales to other carriers and the further completion of
construction of the Company's nationwide network. As the completion of the
Company's network occurs in 1999, the Company expects that revenue from
Construction Services will be less significant to the Company's operations.
Operating Expenses. Components of operating expenses for the years ended
December 31, 1998 and 1997 were as follows:
Year Ended December 31,
- --------------------------------------------------------------------------------
(in millions) 1998 1997 Increase
- --------------------------------------------------------------------------------
Access and network operations $ 961.8 $ 86.0 $ 875.8
Construction services 446.8 408.3 38.5
Selling, general and administrative 539.6 158.7 380.9
Depreciation and amortization 201.7 20.2 181.5
Merger-related costs 846.5 -- 846.5
----------------------------------------
Total operating expenses $2,996.4 $ 673.2 $ 2,323.2
- --------------------------------------------------------------------------------
Expenses for access and network operations primarily consist of the cost of
operating the Company's network, Local Exchange Carrier ("LEC") access charges
and the cost of leased capacity. The increase in access and network operations
for the year ended December 31, 1998 over the prior year was primarily
attributable to growth in revenue from acquisitions, as well as internally
generated growth in Communications Services revenue. As the network is completed
and activated, the Company expects that it will be able to serve more customer
needs over its own network, thereby reducing such costs as a percentage of
revenue.
Expenses for Construction Services consist primarily of costs to construct the
Company's network, including conduit, fiber, cable, construction crews and
rights of way. Costs attributable to the construction of the network for the
Company's own use are capitalized. Expenses for construction services increased
for the year ended December 31, 1998, as compared to the prior year, due to
additional contracts that were signed during 1998 and further completion of the
Company's network.
Selling, general and administrative ("SG&A") expense includes the cost of
salaries, benefits, occupancy costs, commissions, sales and marketing expenses
and administrative expenses. The increase in SG&A for the year ended December
31, 1998, as compared to the prior year, was due primarily to the following:
additional expenses related to acquired entities; increased sales and marketing
efforts; additional bad debt expense related to the increase in Communications
Services revenues; increased payroll-related costs from the recruiting and
hiring of additional sales and administrative personnel; increased commissions
expense related to the growth in Communications Services revenue; additional
building rent expense related to increased space obtained in response to the
Company's infrastructure growth; and increased property taxes and maintenance
costs related to the increase of fixed assets along the Company's network.
During the year ended December 31, 1998, as compared to the prior year, the
number of employees increased, due to acquisitions and the expansion of the
sales and customer support infrastructure, from approximately 1,600 employees at
December 31, 1997 to approximately 8,700 employees at December 31, 1998. The
increase in SG&A was partially offset by a decrease in Growth Share Plan expense
in 1998. Growth Share Plan expense is not expected to be material to the
operations of the Company in the future. SG&A is expected to increase as the
Company continues to grow, as segments of the Company's network become
operational and as the Company continues the expansion of its Communications
Services business.
<PAGE>
The Company's depreciation and amortization expense increased due primarily to
activating segments of the Company's network during the year ended December 31,
1998, purchases of assets to accommodate the Company's growth and depreciation
and amortization of assets and goodwill related to the Company's acquisitions.
The Company expects that depreciation expense will continue to increase in
subsequent periods as the Company continues to activate additional segments of
its network.
During the year ended December 31, 1998, the Company recorded $86.5 million in
merger-related costs related to the merger with LCI, including $31.0 million of
duplicate facilities, $49.0 million of channel consolidation and duplicate
commitments and $6.5 million of other miscellaneous merger costs. Of these
merger costs, approximately $6.0 million remain accrued as of December 31, 1998.
In connection with the acquisition of LCI, the Company allocated $682.0 million
of the purchase price to in-process R&D projects, $318.0 million to developed
technology, $65.0 million to other intangible assets and $3,071.0 million to
goodwill. The allocation to the in-process R&D represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. At
the date of the merger,
20
the development of these projects had not yet reached technological feasibility
and the in-process R&D had no alternative future uses. Accordingly, these costs
were expensed as of the merger date. The developed technology, other intangible
assets and goodwill are being amortized on a straight-line basis from 10 to 40
years.
Through the use of third-party appraisal consultants, the Company assessed and
allocated values to the in-process R&D. The values assigned to these assets were
determined by identifying significant research projects for which technological
feasibility had not been established. These assets consisted of a significant
number of R&D projects grouped into three categories: (1) next-generation
network systems automation tools; (2) advanced data services, including frame
relay and Internet Protocol technologies; and (3) new operational systems and
tools. Taken together, these projects, if successful, will enable the Company to
provide advanced voice and data services as well as sophisticated network
management and administration functions. A brief description of the three
categories of in-process projects is presented below:
R&D Related to Network Systems Automation. These R&D projects are intended to
create a new method of automating LCI's service provisioning and network
management systems, and were valued at approximately $218.0 million. These
proprietary projects include the development of data warehousing and new
interface technologies to enable the interchange of data across disparate
networks. As of the transaction date, the Company believes that the overall
project was 60% complete. Development efforts through December 31, 1998 have
proceeded according to expectations. The expected costs to complete the projects
are approximately $10.0 million in 1999. While material progress has been made
with these projects, significant risk still is associated with their completion.
If these projects are unsuccessful, their expected contribution to revenues and
profits will not materialize.
R&D Related to Frame Relay and IP Services. These projects involve R&D related
to the deployment of frame relay and IP technologies within the LCI network, and
were valued at approximately $155.0 million. With the completion of this next-
generation network, the Company will be able to address emerging new demand
trends for data services. Management considers this a complex project due to the
customized work required. As of the transaction date, the Company believes the
overall project was approximately 60% to 70% complete. Development efforts
through December 31, 1998 have proceeded according to expectations. The expected
costs to complete the projects are approximately $7.0 million in 1999. While
material progress has been made with these projects, significant risk still is
associated with their completion. If these projects are unsuccessful, their
expected contribution to revenues and profits will not materialize.
R&D Related to Operational Systems and Tools. These projects involve R&D related
to the development of new service and network management tools and engineering
functions, and were valued at approximately $309.0 million. These proprietary
projects are closely associated with LCI's deployment of advanced data services.
Applications enabled by these new technologies include the ability to offer new
products and service packages. As of the acquisition date, the Company believes
the projects were 60% to 70% complete. Development efforts through December 31,
1998 have proceeded according to expectations. The expected costs to complete
the projects are approximately $24.0 million in 1999. While material progress
has been made with the R&D projects, these are unique technologies and
significant risk is associated with their completion. If these projects are
unsuccessful, their expected contribution to revenues and profits will not
materialize.
<PAGE>
Remaining R&D efforts for these projects include various phases of technology
design, development and testing. Anticipated completion dates for the projects
in progress will occur in phases through 1999, at which point the Company
expects to begin generating the economic benefits from the technologies. At the
time of valuation, the costs incurred and the expected costs to complete all
such projects were approximately $50.0 million and $60.0 million, respectively.
The value assigned to purchased in-process technology was determined by
estimating the contribution of the purchased in-process technology to developing
commercially viable products, estimating the resulting net cash flows from the
expected product sales of such products, and discounting the net cash flows from
the expected product sales of such products to their present value using a
risk-adjusted discount rate.
The Company estimates total revenues from the specific acquired in-process
technology will peak in 2003 and will steadily decline from 2004 through 2009 as
other new product and service technologies are expected to be introduced by the
Company. These projections are based on management's estimates of market size
and growth, expected trends in technology, and the expected timing of new
product introductions. Discounting the net cash flows back to their present
values is based on the weighted average cost of capital ("WACC"). The business
enterprise comprises various types of assets, each possessing different degrees
of investment risk contributing to LCI's overall WACC. Intangible assets are
assessed higher risk factors due to their lack of liquidity and poor versatility
for redeployment elsewhere in the business. Reasonable returns on monetary
21
and fixed assets were estimated based on prevailing interest rates. The process
for quantifying intangible asset investment risk involved consideration of the
uncertainty associated with realizing discernible cash flows over the life of
the asset. A discount rate of 19% was used for valuing the in-process R&D. This
discount rate is higher than the implied WACC due to the inherent uncertainties
surrounding the successful development, the useful life and the profitability
levels of the purchased in-process technology, and the uncertainty of
technological advances that are unknown at this time. As is standard in the
appraisal of high-growth markets, projected revenues, expenses and discount
rates reflect the probability of technical and marketing successes.
The value of the in-process projects was adjusted to reflect value and
contribution of the acquired R&D. In doing so, consideration was given to the
R&D's stage of completion, the complexity of the work completed to date, the
difficulty of completing the remaining development, costs already incurred, and
the projected cost to complete projects.
The Company believes that the foregoing assumptions used in the forecasts were
reasonable at the time of the merger. The Company cannot assure, however, that
the underlying assumptions used to estimate expected project sales, development
costs or profitability, or the events associated with such projects, will
transpire as estimated. For these reasons, actual results may vary from the
projected results.
The Company expects to continue its support of these efforts and believes the
Company has a reasonable chance of successfully completing the R&D programs.
However, risk is associated with the completion of the projects, and the Company
cannot assure that the projects will meet with either technological or
commercial success.
If none of these projects is successfully developed, the sales and profitability
of the Company may be adversely affected in future periods. The failure of any
particular individual in-process project would not materially impact the
Company's financial condition, results of operations or the attractiveness of
the overall LCI acquisition. Operating results are subject to uncertain market
events and risks, which are beyond the Company's control, such as trends in
technology, government regulations, market size and growth, and product
introduction or other actions by competitors.
In connection with the acquisition of EUnet, the Company allocated $68.0 million
of the purchase price to in-process R&D projects. These projects include the
design and development of several new value-added Internet services as well as
the development of the necessary customer care and network management systems.
Remaining development efforts for these projects include various phases of
design, development and testing efforts that are expected to be completed in
stages over the next 18 months. Since these projects had not yet reached
technological feasibility and have no alternative future uses, there can be no
guarantee as to the achievability of the projects or their ascribed values.
Accordingly, these costs were expensed as of the acquisition date.
<PAGE>
In connection with the acquisition of Icon, the Company allocated $10.0 million
of the purchase price to in-process R&D projects. These projects include the
design and development of several new value-added Internet services, including
end-to-end solutions methodology designed to provide system-wide solutions for
high-end corporate customers, a next-generation high-speed network system, and
an improved network management system with added features. Remaining development
efforts for these projects include various phases of design, development and
testing efforts that are expected to be completed in stages over the next 15
months. Since these projects had not yet reached technological feasibility and
have no alternative future uses, there can be no guarantee as to the
achievability of the projects or their ascribed values. Accordingly, these costs
were expensed as of the acquisition date.
Other Expense (Income). Components of other expense (income) for the years ended
December 31, 1998 and 1997, were as follows:
Year Ended December 31,
-----------------------------------------
(in millions) 1998 1997 Change
- --------------------------------------------------------------------------------
Interest expense, net $ 97.3 $ 18.8 $ 78.5
Other income, net (1.2) (18.9) 17.7
---------------------------------------
Total other expense (income) $ 96.1 $ (0.1) $ 96.2
- --------------------------------------------------------------------------------
The increase in interest expense, net during the year ended December 31, 1998,
as compared to the prior year, resulted from an increase in long-term
indebtedness, (see "Liquidity and Capital Resources" below), partially offset by
an increase in capitalized interest resulting from construction of the Company's
network. As the network is completed, interest expense will increase as the
amount of capitalized interest decreases. Other income, net, decreased due
primarily to decreases in interest income, resulting from lower average cash
balances, and a charge of $12.9 million for the redemption of a total of $87.5
million in principal amount of its 107/8% Senior Notes, due 2007 (the "10 7/8%
Notes"). Additionally, in 1997, the Company recorded a $9.3 million gain on sale
of contract rights.
Income Taxes. Effective with the LCI merger, the Company is no longer included
in the consolidated federal income tax return of Anschutz Company ("Anschutz").
As a result, the tax-sharing agreement with Anschutz is no longer effective for
activity after June 5, 1998. The Company is
22
still subject to the provisions of the tax-sharing agreement for activity
through June 5, 1998. The Company previously recognized a deferred tax asset
attributable to its net operating loss carry forwards under the tax-sharing
agreement. The Company currently believes the tax benefits previously recognized
under the tax-sharing agreement may be realized through tax planning strategies.
Any in-substance dividend resulting from the de-consolidation from Anschutz is
not expected to be material to the Company`s consolidated balance sheet.
The Company's effective tax rate for the year ended December 31, 1998 differed
from the statutory income tax rate primarily as a result of the
non-deductibility of R&D write-offs and acquisition-related goodwill. The
effective tax rate for the year ended December 31, 1997 differed from the
statutory rate primarily as a result of the non-deductibility of a portion of
growth share expense and acquisition-related goodwill. After giving effect to
non-deductible charges, the Company expects that its combined provision for
federal and state income tax will be approximately 40%.
YEAR ENDED DECEMBER 31, 1997
COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company reported net earnings of $14.5 million in the year ended December
31, 1997, compared to a net loss of $7.0 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 earnings would have
been approximately $61.6 million and $1.5 million for the years ended December
31, 1997 and 1996, respectively.
Revenue. Components of revenue for the years ended December 31, 1997 and 1996
were as follows:
Year Ended December 31,
-------------------------------------------------
(in millions) 1997 1996 Increase
- --------------------------------------------------------------------------------
Communications services $ 115.3 $ 91.8 $ 23.5
Construction services 581.4 139.2 442.2
-------------------------------------------------
Total revenue $ 696.7 $ 231.0 $ 465.7
- --------------------------------------------------------------------------------
<PAGE>
During the year ended December 31, 1997, as compared to 1996, Communications
Services revenue increased primarily due to increases in revenue from wholesale
switched and dedicated line services provided on the Company's network and to
growth in retail switched services provided to small and medium-sized businesses
and to consumers as a result of continued expansion of the Company's direct
sales, direct mail, agent and telemarketing sales channels. On July 1, 1996, the
Company sold its resale dedicated line services on leased capacity. The sold
business had generated revenue of $18.8 million for the year ended December 31,
1996. Exclusive of this revenue, Communications Services revenue increased $42.3
million during the year ended December 31, 1997, as compared to 1996. Revenue
from Construction Services increased during the year ended December 31, 1997, as
compared to 1996 due primarily to revenue from dark fiber sales to WorldCom, GTE
and Frontier and continued completion of the network.
Operating Expenses. Components of operating expenses for the years ended
December 31, 1997 and 1996 were as follows:
Year Ended December 31,
-------------------------------------------
(in millions) 1997 1996 Increase
- ------------------------------------------------------------------------------
Access and network operations $ 86.0 $ 79.1 $ 6.9
Construction services 408.3 90.8 317.5
Selling, general and administrative 158.7 56.9 101.8
Depreciation and amortization 20.2 16.2 4.0
-------------------------------------------
Total operating expenses $ 673.2 $ 243.0 $ 430.2
- ------------------------------------------------------------------------------
The increase in access and network operations expenses was primarily
attributable to the continued growth in switched services and network
engineering and operations, partially offset by the reduction in expenses
resulting from the sale on July 1, 1996 of the Company's resale dedicated line
services on leased capacity and an increase in on-net traffic over the Company's
network.
Expenses for Construction Services increased in the year ended December 31,
1997, as compared to 1996, due to costs of construction contracts relating to
increased dark fiber sales revenue.
SG&A increased in the year ended December 31, 1997, as compared to 1996 due
primarily to expansion of 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 the recruiting and hiring of
additional personnel.
The Company has a Growth Share Plan for certain of its employees and directors.
Growth Share Plan expense 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. The Company estimated an increase in the value of
Growth Shares, coincident with the June 1997 initial public offering, and
recorded $73.5 million of additional compensation expense in the year ended
December 31, 1997, and $13.1 million in the year ended December 31, 1996.
The Company's depreciation and amortization expense increased during the year
ended December 31, 1997 as compared to 1996, resulting primarily from activating
segments of the Company's network during 1997, purchases of additional equipment
used in constructing the network and
23
purchases of other fixed assets to accommodate the Company's growth.
Other Expense (Income). Components of other expense (income) for the years ended
December 31, 1997 and 1996, were as follows:
Year Ended December 31,
---------------------------------------------
(in millions) 1997 1996 Change
- -------------------------------------------------------------------------------
Interest expense, net $ 18.8 $ 6.8 $ 12.0
Other income, net (18.9) (8.7) (10.2)
---------------------------------------------
Total other expense (income) $ (0.1) $ (1.9) $ 1.8
- -------------------------------------------------------------------------------
The Company's 1997 net interest expense increased as compared to 1996, resulting
from an increase in interest on long-term indebtedness, related primarily to the
10 7/8% Notes and the 9.47% Notes, partially offset by increases in capitalized
interest resulting from construction of the Company's network.
<PAGE>
Pursuant to a capacity sale in 1993, 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, which the Company received
in 1997 and has recorded as gain on sale of contract rights of $9.3 million
included in other income, net. Other income, net, increased also from interest
income attributable to the increase in cash equivalent balances.
Income Taxes. The Company's effective tax rate for the year ended December 31,
1997 differed from the statutory income tax rate primarily as a result of the
non-deductibility of Growth Share Plan expense and acquisition-related goodwill.
The Company's effective tax rate in the year ended December 31, 1996
approximated the statutory federal rate.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended December 31, 1998, cash provided by operations was $44.5
million; cash used in investing activities was $1,438.8 million, including
$1,413.2 million of capital expenditures; and cash provided by financing
activities was $1,477.3 million, including proceeds from long-term debt
borrowings of $1,403.5 million.
The Company estimates the total cost to construct and activate its network and
complete construction of dark fiber sold to third parties will be approximately
$2.3 billion, of which the Company had already expended approximately $1.9
billion as of December 31, 1998.
The Company is participating in a consortium of communications companies that is
building a submarine cable system connecting the United States to Japan. In
connection with this transaction, the Company is committed to purchase
approximately $56.0 million of fiber optic cable and other network assets of the
13,125-route-mile, four-fiber pair cable system to the Pacific Rim. The total
remaining commitment through January 2001 was approximately $50.0 million as of
December 31, 1998.
The Company has obtained the funds available to complete these build-outs from
construction contracts for sales of dark fiber and from various debt and equity
financings. The Company believes that its available cash and cash equivalent
balances at December 31, 1998, cash flow from operations, and its proposed bank
financing (described below) will satisfy its currently anticipated cash
requirements at least for the next 12 months. The Company anticipates future
capital expenditures during 1999 to fund its growth in Communications Services
and to complete construction and activate additional capacity along the
Company's network to be approximately $1.4 billion.
In November 1998, the Company issued and sold $750.0 million in principal amount
of 7.50% Senior Notes, due 2008 (the "7.50% Notes ") and $300.0 million in
principal amount of 7.25% Senior Notes, due 2008 (the "7.25% Notes due 2008"),
which together generated net proceeds of approximately $1,038.5 million, after
deducting offering costs. Interest on the 7.50% Notes and the 7.25% Notes due
2008 is payable semiannually in arrears on May 1 and November 1 of each year,
commencing May 1, 1999. The 7.50% Notes and the 7.25% Notes due 2008 are both
subject to redemption at the option of the Company, in whole or in part, at
specified redemption prices.
In February 1999, the Company received commitments from several banks to
syndicate an unsecured credit facility in the amount of approximately $1.0
billion. Consummation of the new credit facility is conditioned, among other
things, on the execution of a mutually satisfactory credit agreement, which is
expected to occur by the end of the first quarter of 1999.
On December 31, 1998, the Company exercised its option to redeem 35%, or $87.5
million in principal amount, of the 10 7/8% Notes at a redemption price of
110.875%.
In connection with the LCI merger, the Company assumed LCI's existing debt
instruments, including $350.0 million of 7.25% Senior Notes, due 2007 (the
"7.25% Notes Due 2007"); a $250.0 million revolving credit facility ("Credit
Facility") from a syndicate of banks; and three separate discretionary
line-of-credit agreements (the "Lines of Credit")
24
with three commercial banks for up to a total of $75.0 million. In November
1998, the outstanding balances under the Credit Facility and the Lines of Credit
were repaid. The Credit Facility and two of the Lines of Credit expired December
31, 1998. As of December 31, 1998, the Company had no amount outstanding and had
available credit of $25.0 million under the remaining Line of Credit.
<PAGE>
YEAR 2000
Many existing computer systems, including hardware and software, use only the
last two digits to identify a year. Consequently, as the year 2000 approaches,
such systems will not recognize the difference in a year that begins with "20"
rather than "19." As a result of the date change in the year 2000, if any of the
Company's computer systems use only two digits to define the year, these
defective systems may cause disruptions in its network operations through which
the Company provides communications services to its customers and in its
internal operations. Additionally, the Company is dependent upon outside sources
to provide communications services to its customers and to bill its customers
for such services. The greatest risk to the Company's ability to provide
communications services is the failure of third-party service providers to be
year 2000 compliant, especially those third-party service providers that provide
local access and certain of the billing systems upon which the provision of long
distance telecommunications service relies.
The Company has established a year 2000 compliance group. The objective of the
year 2000 compliance group is to eliminate disruptions as a result of the date
change in the year 2000. The compliance group has developed a five-step plan to
identify and repair year 2000 affected systems: (i) identify potentially
date-sensitive systems, including third-party products; (ii) assess such systems
for year 2000 compliance; (iii) modify, upgrade or replace non-compliant
systems; (iv) test the corrected systems; and (v) deploy the corrected systems.
The year 2000 compliance group has focused mainly on the Company's domestic
operations and, to a lesser extent, on its international operations.
In addition to reviewing its own systems, the year 2000 compliance group is
submitting requests to third-party service providers to obtain information as to
their compliance efforts.
Inventory, assessment and remediation of software applications is substantially
complete. Testing and deployment of corrected software systems is scheduled for
completion by June 30, 1999.
Inventory and assessment of hardware systems, including network computing and
network systems engineering, is near completion. Testing and deployment of
upgrades necessary to complete remediation of these systems is expected to be
complete by June 30, 1999. Inventory and assessment of corporate facilities is
scheduled for completion by April 30, 1999, with necessary upgrades and
contingency plans in place by June 30, 1999.
The Company's overall efforts to integrate the operations of recently acquired
businesses, including LCI, and various other factors, including the compliance
efforts of third parties, over which the Company has no control, may affect
these target dates.
The Company will develop contingency plans as needed. The contingency plans are
expected to be completed by June 1999 and tested through the third quarter of
1999.
During the year ended December 31, 1998, the Company incurred approximately $4.0
million for year 2000 compliance costs, included in SG&A expense. The Company
expects to incur approximately $10.0 million to $15.0 million in additional SG&A
expense during 1999 to implement its year 2000 plan. The Company currently
estimates capital expenditures for new systems to replace non-year 2000
compliant systems will total approximately $20.0 million (having incurred
approximately $3.0 million as of December 31, 1998).
EURO CONVERSION
On January 1, 1999, 11 of the 15 member countries of the European Union (the
"Participating Countries") established fixed conversion rates between their
existing sovereign currencies and established the euro as their common legal
currency. Revenues and operating income of the Company's operations in
Participating Countries are less than 2% of the Company's consolidated results.
The Company intends to address operational and information systems issues
related to the euro conversion. The Company does not expect the euro conversion
to have a material adverse impact on the Company's operations or financial
condition.
INFLATION
Inflation has not significantly affected the Company's operations during the
past three years.
25
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
<PAGE>
During 1997 and 1998, the Company issued $250.0 million of 10 7/8% Senior Notes,
due 2007, $555.9 million of 9.47% Senior Discount Notes, due 2007, $450.5
million of 8.29% Senior Discount Notes, due 2008, $750.0 million of 7.50% Senior
Notes, due 2008, and $300.0 million of 7.25% Senior Notes, due 2008
(collectively "the Notes"). In connection with its acquisition of LCI in June
1998, the Company assumed LCI's existing debt instruments, including $350.0
million of 7.25% Notes Due 2007.
The Company's long-term debt obligations are principally fixed interest rate and
non-trading in nature, and as a result, the Company is less sensitive to market
rate fluctuations. The Company does not use derivative financial instruments to
manage its interest rate risk and has no cash flow exposure due to general
interest rate changes for its fixed interest rate long-term debt. The table
below provides information about the Company's market risk exposure associated
with changing interest rates on its fixed rate debt and capital lease and other
obligations.
Collectively, the fixed rate debt, capital lease and other obligations, with a
carrying value of $2,309.9 million, had an estimated fair value of $2,402.3
million at December 31, 1998, based on current interest rates offered for debt
of similar terms and maturity.
The Company's European-country operations were not material to the Company's
consolidated financial position as of December 31, 1998, and results of
operations or cash flows for the year ended December 31, 1998. In addition,
foreign currency transaction gains and losses were not material to the Company's
results of operations for the year ended December 31 1998, and the Company was
not subject to material foreign currency exchange rate risk from the effects of
exchange rate movements of foreign currencies on the costs or cash flows the
Company would receive from its European subsidiary, EUnet. To date, the Company
has not entered into any significant foreign currency forward exchange contracts
or other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates.
<TABLE>
<CAPTION>
Expected Maturity (dollars in millions)
---------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Long-term fixed rate debt $ -- $ -- $ -- $ -- $ -- $ 2,568.9 $ 2,568.9
Capital lease and other obligations $ 2.8 $ 2.1 $ 2.2 $ 2.6 $ 3.2 $ 17.5 $ 30.4
Average interest rate 8.1% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
</TABLE>
26
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, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998. 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 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 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, 1998 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1998 in conformity with generally accepted
accounting principles.
KPMG LLP
<PAGE>
Denver, Colorado
February 2, 1999
27
<TABLE>
<CAPTION>
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In Millions, Except Per Share Information)
- ---------------------------------------------------------------------------------------------------------------
1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue:
Communications services $ 1,554.3 $ 115.3 $ 91.8
Construction services 688.4 581.4 139.2
------------------------------
Total revenue 2,242.7 696.7 231.0
- ---------------------------------------------------------------------------------------------------------------
Operating expenses:
Access and network operations 961.8 86.0 79.1
Construction services 446.8 408.3 90.8
Selling, general and administrative 539.6 158.7 56.9
Depreciation and amortization 201.7 20.2 16.2
Merger costs 86.5 -- --
Provision for in-process research and development 760.0 -- --
------------------------------
Total operating expenses 2,996.4 673.2 243.0
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) from operations (753.7) 23.5 (12.0)
Other expense (income):
Interest expense, net 97.3 18.8 6.8
Other income, net (1.2) (18.9) (8.7)
- ---------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes (849.8) 23.6 (10.1)
Income tax expense (benefit) (5.8) 9.1 (3.2)
------------------------------
Net earnings (loss) $ (844.0) $ 14.5 $ (6.9)
===============================
Net earnings (loss) per share - basic $ (3.02) $ 0.08 $ (0.04)
===============================
Net earnings (loss) per share - diluted $ (3.02) $ 0.07 $ (0.04)
===============================
Weighted average shares outstanding - basic 279.1 190.5 173.0
===============================
Weighted average shares outstanding - diluted 279.1 194.1 173.0
===============================
- ---------------------------------------------------------------------------------------------------------------
28
<CAPTION>
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1997
(In Millions, Except Share Information)
- ---------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 462.8 $ 379.8
Accounts receivable (net of allowance of $56.2 million and
$4.6 million) 591.0 58.3
Prepaid expenses and other current assets 385.3 285.9
------------------------
Total current assets 1,439.1 724.0
- ---------------------------------------------------------------------------------------------------------------
Property and equipment:
Fiber optic network and office equipment 1,477.7 240.2
Accumulated depreciation (155.2) (42.6)
- ---------------------------------------------------------------------------------------------------------------
1,322.5 197.6
Network construction in progress 1,332.9 417.0
- ---------------------------------------------------------------------------------------------------------------
Property and equipment, net 2,655.4 614.6
Excess of cost over net assets acquired
(net of accumulated amortization of $59.8 million and $1.0 million) 3,402.0 21.2
Intangible and other assets, net 571.1 38.3
------------------------
Total assets $ 8,067.6 $1,398.1
========================
- ---------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 205.1 $ 55.9
Facility costs accrued and payable 300.2 8.3
Construction costs accrued and payable 145.9 94.3
Accrued expenses and other 586.3 156.8
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 1,237.5 315.3
Debt and capital lease obligations, net of current portion 2,307.1 630.5
Other long-term liabilities 284.8 70.5
----------------------------------------
Total liabilities 3,829.4 1,016.3
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.01 par value; authorized
25.0 million shares; no shares issued and outstanding -- --
Common stock - $.01 par value; authorized
600.0 million shares; 347.0 million shares and
206.6 million shares issued and outstanding 3.5 2.1
Paid-in capital 5,110.6 411.6
Accumulated deficit (875.9) (31.9)
----------------------------------------
Total stockholders' equity 4,238.2 381.8
----------------------------------------
Total liabilities and stockholders' equity $ 8,067.6 $ 1,398.1
========================================
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE>
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
Common Stock
- --------------------------------------------------------------------------------------------------------------------------
Additional Total
Number of Paid-in Accumulated Stockholders'
Shares Amount Capital Deficit Equity
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES, JANUARY 1, 1996 173.0 $ 1.7 $ 64.2 $ (39.5) $ 26.4
Anschutz dividends and
contributions, net -- -- (10.0) -- (10.0)
Net loss -- -- -- (6.9) (6.9)
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1996 173.0 1.7 54.2 (46.4) 9.5
Issuance of common stock in
initial public offering, net 31.0 0.4 319.2 -- 319.6
Issuance of common stock
in employee stock transactions 2.6 -- 38.2 -- 38.2
Net earnings -- -- -- 14.5 14.5
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1997 206.6 2.1 411.6 (31.9) 381.8
Issuance of common stock
in employee stock transactions 11.8 -- 167.9 -- 167.9
Issuance of common stock, warrants and
options in acquisitions 124.2 1.4 4,328.9 -- 4,330.3
Issuance of common stock
to Microsoft Corporation 4.4 -- 200.0 -- 200.0
Comprehensive income:
Currency translation
adjustments -- -- 2.2 -- 2.2
Net loss -- -- -- (844.0) (844.0)
-------------------------------------------------------------------------
Total comprehensive income -- -- 2.2 (844.0) (841.8)
- --------------------------------------------------------------------------------------------------------------------------
BALANCES, DECEMBER 31, 1998 347.0 $ 3.5 $5,110.6 $(875.9) $4,238.2
=========================================================================
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
QWEST COMMUNICATIONS INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In Millions)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (844.0) $ 14.5 $ (6.9)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 201.7 20.3 16.2
Restructuring and merger non-cash charges 846.5 -- --
Gain on sale of certain assets -- (9.3) (6.1)
Deferred income tax expense (benefit) (7.8) 8.9 (1.1)
Changes in operating assets and liabilities:
Accounts receivable, net (234.2) (31.9) (11.7)
Net securitization payment (100.7) -- --
Accounts payable (33.2) 53.1 (32.0)
Facility costs accrued and payable 128.9 4.6 (0.1)
Accrued expenses and other 210.7 88.0 56.4
Other long-term liabilities (71.4) (0.1) 44.9
Other changes (52.0) (184.5) (27.1)
-------------------------------------
Net cash provided by (used in) operating activities 44.5 (36.4) 32.5
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property and equipment (1,413.2) (345.8) (57.1)
Acquisitions and other (25.6) (11.0) 4.5
-------------------------------------
Net cash used in investing activities (1,438.8) (356.8) (52.6)
- ---------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 1,403.5 678.0 65.0
Repayments of long-term debt (164.3) (200.2) (21.3)
Net short-term debt activity (105.6) -- --
Proceeds from issuance of common stock, net 200.0 319.5 --
Proceeds from employee stock transactions and issuance of
stock warrants and other 143.7 (31.2) (18.2)
-------------------------------------
Net cash provided by financing activities 1,477.3 766.1 25.5
- ---------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 83.0 372.9 5.4
Cash and cash equivalents, beginning of period 379.8 6.9 1.5
-------------------------------------
Cash and cash equivalents, end of period $ 462.8 $ 379.8 $ 6.9
=====================================
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net $ 70.7 $ 16.7 $ 8.8
=====================================
- ---------------------------------------------------------------------------------------------------------------
Detail of acquisitions:
Fair value of assets acquired $(5,847.8) $ (20.4) $ --
Liabilities assumed 1,490.4 0.4 --
Equity issued 4,332.7 -- --
-------------------------------------
Net cash paid for acquisitions $ (24.7) $ (20.0) $ --
=====================================
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE>
QWEST COMMUNCIATIONS INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE YEARS ENDED DECEMBER 31, 1998
NOTE 1 > BUSINESS AND BACKGROUND
Qwest Communications International Inc. and subsidiaries ("Qwest" or the
"Company") is a facilities-based multimedia communications services provider
engaged in two core business segments: Communications Services and Construction
Services.
Communications Services provides a full range of voice, data, video and related
services to business customers, governmental agencies and consumers. In
addition, it provides high-volume voice and conventional private line services
to other communications providers, as well as to Internet service providers
("ISPs"), and other data service companies.
<PAGE>
Construction Services constructs and installs fiber optic systems for other
communications 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. The
Company has entered into major construction contracts for the sale of dark fiber
to Frontier, MCI WorldCom and GTE whereby the Company has agreed to install and
provide dark fiber to each along portions of the Company's network. In addition
to these contracts, the Company has signed agreements with other communications
providers and government agencies for the sale of dark fiber along the Company's
network. Revenue from Construction Services generally is recognized under the
percentage of completion method as performance milestones relating to the
contract are satisfactorily completed.
Qwest was wholly-owned by Anschutz Company("Anschutz") until June 27, 1997, when
the Company issued common stock in an initial public offering (the "IPO"). As of
December 31, 1998, Anschutz owned approximately 46.2% of the outstanding common
stock of the Company.
NOTE 2 > SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
[A] PRINCIPLES OF CONSOLIDATION
The accompanying audited consolidated financial statements as of December 31,
1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 include
the accounts of the Company and all majority-owned subsidiaries. Intercompany
balances and transactions have been eliminated in consolidation.
[B] COMMUNICATIONS SERVICES REVENUE
Revenue from communications services is generally recognized monthly as the
services are provided. Amounts billed in advance of the service month are
recorded as deferred revenue.
32
[C] LONG-TERM CONSTRUCTION CONTRACTS
The Company accounts for long-term construction contracts relating to the
development of communications 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, estimated losses on
uncompleted contracts are expensed in the period in which they are identified.
Contract costs are estimated using allocations of the total cost of constructing
the network. Revisions to estimated profits on contracts are recognized in the
period they become known.
[D] RESEARCH AND DEVELOPMENT
In connection with the acquisitions of LCI International, Inc. and subsidiaries
("LCI"), EUnet International Limited ("EUnet") and Icon CMT Corp. ("Icon") in
1998, the Company expensed $760.0 million for in-process R&D projects since the
development of these projects had not yet reached technological feasibility and
the in-process R&D had no alternative future uses as of the acquisition date.
These projects relate to the development of advanced voice and data services as
well as sophisticated network management and administration functions. (See Note
3 - Acquisitions and Other Transactions.) R&D costs incurred in the normal
course of business are expensed as incurred. The Company incurred approximately
$27.7 million of such costs in 1998.
[E] CASH AND CASH EQUIVALENTS
The Company classifies cash on hand and deposits in banks, including commercial
paper, money market accounts, and any other investments with a maturity of three
months or less from the date of purchase, that the Company may hold from time to
time, as cash and cash equivalents.
<PAGE>
[F] PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation of buildings and
equipment is computed on a straight-line basis over the estimated useful lives
of these assets. The cost of equipment retired in the ordinary course of
business, less proceeds, is charged to accumulated depreciation. 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 years ended December 31, 1998, 1997
and 1996 was approximately $41.6 million, $17.7 million and $2.4 million,
respectively.
The useful lives of property and equipment are as follows:
- --------------------------------------------------------------------------------
Facility and leasehold improvements 5 - 30 years or lease term
Communications and construction equipment 3 - 10 years
Fiber optic network 10 - 25 years
Office equipment 3 - 7 years
Capital leases lease term
[G] IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews its long-lived assets, including the excess of cost over net
assets acquired, 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 or
the acquired business's expected future undiscounted cash flows without interest
costs. 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. No impairment expense
was recognized in 1998, 1997 or 1996.
[H] INTANGIBLE AND OTHER LONG-TERM ASSETS
Intangible and other long-term assets include debt issuance costs, deferred
compensation, goodwill and acquired intangibles such as customer lists, work
force and developed technology. Such costs are amortized on a straight-line
basis over periods ranging from 3 to 40 years. Amortization is included in
depreciation and amortization expense in the accompanying consolidated
statements of operations.
[I] FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, cash equivalents, 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 long-term right-of-way obligations
approximated fair value at December 31, 1998 and 1997, since they were based on
the current interest rates of obligations with similar maturities. The fair
value of fixed rate debt is discussed in Note 5 - Debt and Capital Lease
Obligations.
[J] STOCK-BASED COMPENSATION
As permitted by Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock-Based Compensation, the Company accounts for compensation
expense under its stock-based compensation plans in accordance with Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees.
33
[K] 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 and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
[L] RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the 1998
presentation.
[M] COMPREHENSIVE INCOME
Comprehensive income consists of currency translation adjustments and net
earnings (loss).
<PAGE>
NOTE 3 > ACQUISITIONS AND OTHER TRANSACTIONS
Each of the acquisitions discussed below was accounted for as a purchase. The
results of operations of each of these acquisitions have been included in the
accompanying consolidated statements of operations of the Company from the date
of acquisition. The Company will complete final allocation of purchase price of
each acquisition within one year from the acquisition date. The accompanying
consolidated financial statements reflect the preliminary allocation of purchase
price of each acquisition, which is subject to adjustment. Items awaiting final
allocation of the LCI purchase price include LCI network asset valuation and
final determination of the costs to sell these assets. It is anticipated that
final allocation of purchase price will not differ materially from the
preliminary allocation.
During the year ended December 31, 1998, the Company recorded $86.5 million in
merger-related costs due to the merger with LCI, including $31.0 million of
duplicate facilities, $49.0 million of channel consolidation and duplicate
commitments and $6.5 million of other miscellaneous merger costs. Of these
merger costs, approximately $6.0 million remain accrued as of December 31, 1998.
[A] ICON ACQUISITION
In December 1998, the Company acquired Icon, a provider of integrated Internet
solutions associated with web hosting and IP integration, for approximately
$254.1 million in Company common stock, including approximately $3.5 million of
direct acquisition costs. At the close of the acquisition, the Company issued
approximately 5.9 million shares of the Company's common stock (including
outstanding Icon stock options and warrants assumed by the Company).
In connection with the acquisition of Icon, the Company allocated $10.0 million
of the purchase price to in-process R&D projects. These projects include the
design and development of several new value-added Internet services, including
end-to-end solutions methodology designed to provide system-wide solutions for
high-end corporate customers, a next-generation high-speed network system, and
an improved network management system with added features. Remaining development
efforts for these projects include various phases of design, development and
testing efforts that are expected to be completed in stages over the next
fifteen months. Since these projects had not yet reached technological
feasibility and have no alternative future uses, there can be no guarantee as to
the achievability of the projects or their ascribed values. Accordingly, these
costs were expensed as of the acquisition date.
The Company allocated $2.3 million of the purchase price to developed
technology, $71.8 million to other intangible assets and $194.0 million to
goodwill. The developed technology, other intangible assets and goodwill will be
amortized on a straight-line basis from 4 to 15 years.
[B] LCI ACQUISITION
In June 1998, the Company acquired LCI, a communications services provider, for
approximately $3.9 billion in Company common stock, including approximately
$13.5 million in direct acquisition costs. At the close of the acquisition, the
Company issued approximately 129.9 million shares of the Company's common stock
(including outstanding LCI stock options assumed by the Company).
In connection with the acquisition of LCI, the Company allocated $682.0 million
of the purchase price to in-process R&D projects, $318.0 million to developed
technology, $65.0 million to other intangible assets and $3,071.0 million to
goodwill. This allocation to the in-process R&D represents the estimated fair
value based on risk-adjusted cash flows related to the incomplete projects. The
developed technology, other intangibles and goodwill are being amortized on a
straight-line basis from 10 to 40 years.
The acquired R&D represents engineering and test activities associated with the
introduction of new services and information systems. Specifically, LCI had been
working on a variety of projects that are essential to delivering data services,
which are a significant departure in terms of technological complexity from the
Company's traditional voice products. These efforts are related to redesigning
and scaling the network infrastructure as well as developing the requisite
network management systems. These projects are time-consuming and difficult to
complete. If the R&D projects are not completed as planned, they will neither
satisfy the technical requirements of a changing market nor be cost effective.
Since these projects had not yet reached
34
technological feasibility and have no alternative future uses, there can be no
guarantee as to the achievability of the projects or their ascribed values.
Accordingly, these costs were expensed as of the acquisition date.
<PAGE>
[C] EUNET ACQUISITION
In April 1998, the Company acquired EUnet, a European ISP with subsidiaries in
14 countries, for approximately $154.0 million in Company common stock,
including approximately $3.5 million in direct acquisition costs, and $4.2
million in cash. At the close of the acquisition, the Company issued
approximately 4.0 million shares of Company common stock. Approximately 0.6
million shares were placed in escrow for two years and may be recovered by the
Company to satisfy any indemnification claims. At the expiration of the escrow
period, these shares revert to the EUnet stockholders.
The Company allocated $68.0 million of the purchase price to in-process R&D
projects. These projects include the design and development of several new
value-added Internet services as well as the development of the necessary
customer care and network management systems. Remaining development efforts for
these projects include various phases of design, development and testing efforts
that are expected to be completed in stages over the next 18 months. Since these
projects had not yet reached technological feasibility and have no alternative
future uses, there can be no guarantee as to the achievability of the projects
or their ascribed values. Accordingly, these costs were expensed as of the
acquisition date. The remaining intangibles from the purchase relate to
developed technology and goodwill and are being amortized on a straight-line
basis over 5 and 10 years, respectively.
[D] PHOENIX ACQUISITION
In March 1998, the Company acquired Phoenix Network, Inc. ("Phoenix"), a
non-facilities-based reseller of long distance services, for approximately $27.2
million. At the close of the acquisition, the Company issued approximately 0.8
million shares of Company common stock. Goodwill is being amortized on a
straight-line basis over 15 years.
[E] SUPERNET ACQUISITION
In October 1997, the Company acquired SuperNet, Inc. ("SNI"), a regional ISP,
for approximately $20.0 million in cash. Goodwill is being amortized on a
straight-line basis over 10 years.
[F] PRO FORMA RESULTS AND SUMMARY INFORMATION
The following pro forma operating results of the Company for the years ended
December 31, 1998 and 1997 have been prepared assuming the acquisitions of LCI,
Icon, Phoenix, EUnet and SNI occurred on January 1, 1998 and 1997, respectively.
On a pro forma basis, for the year ended December 31, 1998, revenue was $3,105.5
million and net loss was ($885.8) million, or ($2.65) per basic and diluted
share, and for the year ended December 31, 1997, revenue was $2,528.3 million
and net loss was ($861.7) million, or ($2.62) per basic and diluted share. The
pro forma results do not purport to represent what the Company's results of
operations would have actually been had the above transactions occurred on the
dates indicated and are not indicative of future results.
[G] KPN JOINT VENTURE
On November 19, 1998, the Company and KPN Telecom B.V. ("KPN") entered into a
letter of intent to form a joint venture company to create a pan-European
IP-based fiber optic network, linked to the Company's network in North America,
for data, video and voice services. The venture is expected to be formed in the
first quarter of 1999, subject to definitive documentation and customary
regulatory approvals.
The Company and KPN will each own 50 percent of the venture. The venture will be
governed by a six-person supervisory board, to which the Company and KPN each
will name three members. KPN will contribute to the venture two bi-directional,
self-healing fiber optic rings (EuroRings(TM) 1 and 2), covering approximately
2,100 miles. The Company and KPN will also contribute transatlantic cable
capacity to the venture that will connect EuroRings(TM) with the Company's
network in North America, as well as approximately $78.0 million and $20.0
million, respectively. The Company will contribute EUnet, which has net assets
of approximately $80.0 million, to the venture.
<PAGE>
NOTE 4 > CONSTRUCTION SERVICES
Costs and billings on uncompleted contracts included in the accompanying
consolidated balance sheets were as follows:
December 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Costs incurred on uncompleted contracts $ 898.8 $ 473.8
Estimated earnings 499.4 238.2
- --------------------------------------------------------------------------------
1,398.2 712.0
Less: billings to date 1,176.1 476.8
------------------
Costs and estimated earnings in excess
of billings, net $ 222.1 $ 235.2
- --------------------------------------------------------------------------------
The Company has entered into various agreements to provide indefeasible rights
of use of multiple fibers along the network. Such agreements include contracts
with three major customers for an aggregate purchase price of approximately $1.0
billion. Construction Services revenue relating to the
35
contracts with these major customers was approximately $356.6 million, $513.0
million and $121.0 million for the years ended December 31, 1998, 1997 and 1996,
respectively. Progress billings are made upon customers' acceptance of
performance milestones. The Company expects to bill and collect in 1999 all
costs and estimated earnings in excess of billings outstanding as of December
31, 1998.
Although these construction agreements provide for certain penalties if the
Company does not complete construction within the time frames specified within
the agreements, management does not anticipate that the Company will incur any
substantial penalties under these provisions.
NOTE 5 > DEBT AND CAPITAL LEASE OBLIGATIONS
Debt and capital lease obligations consisted of the following:
December 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Fixed rate debt at interest rates ranging
from 7.25% to 10 7/8% $ 2,279.5 $ 606.9
Capital lease and other obligations 30.4 35.6
- --------------------------------------------------------------------------------
Total debt and capital lease obligations 2,309.9 642.5
Less current portion (2.8) (12.0)
-------------------
Debt and capital lease obligations $ 2,307.1 $ 630.5
- --------------------------------------------------------------------------------
Current portion of long-term debt is included in accrued expenses and other in
the accompanying consolidated balance sheets.
The Company issued the following senior and senior discount notes during the
years ended December 31, 1998 and 1997: the 7.25% Senior Notes, due 2008 (the
7.25% Notes Due 2008"), the 7.50% Senior Notes, due 2008 (the "7.50% Notes"),
the 8.29% Senior Discount Notes, due 2008 (the "8.29% Notes"), the 9.47% Senior
Discount Notes, due 2007 (the "9.47% Notes") and the 107/8% Senior Notes, due
2007 (the "107/8% Notes") (each described below, collectively "the Notes").
In November 1998, the Company issued and sold $750.0 million in principal amount
of its 7.50% Notes and $300.0 million in principal amount of its 7.25% Notes Due
2008, which together generated net proceeds of approximately $1,038.5 million,
after deducting offering costs. Interest on the 7.50% Notes and the 7.25% Notes
Due 2008 is payable semiannually in arrears on May 1 and November 1 of each
year, commencing May 1, 1999. The 7.50% Notes and the 7.25% Notes Due 2008 are
both subject to redemption at the option of the Company, in whole or in part, at
specified redemption prices.
<PAGE>
In January 1998, the Company issued $450.5 million in principal amount at
maturity of its 8.29% Notes, generating net proceeds of approximately $299.2
million, after deducting offering costs. Interest on the 8.29% Notes is
compounded semiannually. The principal amount of the 8.29% Notes is due and
payable in full on February 1, 2008. The 8.29% Notes are redeemable at the
Company's option, in whole or in part, at any time on or after February 1, 2003
at specified redemption prices. In addition, prior to February 1, 2001, the
Company may use the net cash proceeds from certain equity transactions to redeem
up to 35% of the 8.29% Notes at specified redemption prices. Cash interest on
the 8.29% Notes will not accrue until February 1, 2003, and thereafter will
accrue at a rate of 8.29% per annum, and will be payable semiannually in arrears
commencing on August 1, 2003, and thereafter on February 1 and August 1 of each
year. The Company has the option of commencing cash interest on an interest
payment date on or after February 1, 2001, in which case the outstanding
principal amount at maturity of the 8.29% 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.
In October 1997, the Company issued its 9.47% Notes, having an aggregate
principal amount at maturity of $555.9 million, which mature on October 15,
2007. The 9.47% Notes will accrete at a rate of 9.47% per annum, compounded
semiannually, to an aggregate principal amount of $555.9 million by October 15,
2002. In March 1997, the Company issued its 107/8% Notes, having an aggregate
principal amount at maturity of $250.0 million, which mature on April 1, 2007.
On December 31, 1998, the Company exercised its option to redeem 35%, or $87.5
million in principal amount, of the 107/8% Notes at a redemption price of
110.875%. As a result, the Company recorded a charge of $12.9 million, included
in other income, net, primarily for the redemption premium incurred and
write-off of previously deferred debt issue costs.
In connection with the LCI merger, the Company assumed LCI's existing debt
instruments, including $350.0 million of 7.25% Senior Notes (the "7.25% Notes
Due 2007"). As of December 31, 1998, the Company had no amount outstanding and
had available credit of $25.0 million under one discretionary line of credit
with a commercial bank.
In February 1999, the Company received commitments from several banks to
syndicate an unsecured credit facility in the amount of approximately $1.0
billion. Consummation of the new credit facility is conditioned, among other
things, on the execution of a mutually satisfactory credit agreement, which is
expected to occur by the end of the first quarter of 1999.
36
The Company had a $90.0 million credit agreement (the "Equipment Credit
Facility") with an unrelated third party supplier of transmission electronics
equipment to fund a portion of certain capital expenditures required to equip
the network currently under construction. The Equipment Credit Facility was
terminated, and the balance of $71.0 million under the Equipment Credit Facility
was repaid in December 1998.
The indentures for the Notes (defined above) and the 7.25% Notes Due 2007
contain certain covenants that, among other things, limit the ability of the
Company and certain of its subsidiaries (the "Restricted Subsidiaries") to 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.
The Company leases certain network construction equipment and buildings under
capital lease agreements. The amortization charge applicable to capital leases
is included in depreciation and amortization expense. Future minimum payments
under capital lease obligations is included in contractual maturities of
long-term debt, as summarized below.
<PAGE>
Contractual maturities of debt and capital lease obligations as of December 31,
1998 were as follows:
Year ended December 31: (in millions)
- --------------------------------------------------------------------------------
1999 $ 2.8
2000 2.1
2001 2.2
2002 2.6
2003 3.2
Thereafter 2,297.0
--------------
$ 2,309.9
- --------------------------------------------------------------------------------
Collectively, the fixed rate debt, capital lease obligations and other debt had
a total carrying value of $2,309.9 million and $642.5 million and an estimated
fair value of $2,402.3 million and $666.0 million at December 31, 1998 and 1997,
respectively, based on current interest rates offered for debt of similar terms
and maturity.
NOTE 6 > INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 was as follows:
- --------------------------------------------------------------------------------
(in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal................................. $ 2.0 $ -- $ (1.7)
State................................... -- 0.1 (0.4)
-----------------------------------
Total current income tax
expense (benefit).................... 2.0 0.1 (2.1)
- --------------------------------------------------------------------------------
Deferred:
Federal................................. (7.8) 9.0 (1.1)
State................................... -- -- --
-----------------------------------
Total deferred income
tax expense (benefit)............... (7.8) 9.0 (1.1)
-----------------------------------
Total income tax
expense (benefit)................... $ (5.8) $ 9.1 $ (3.2)
- --------------------------------------------------------------------------------
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1998, 1997 and 1996:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Statutory income
tax expense (benefit).................. (35.0)% 35.0% (35.0)%
State income taxes, net of
federal income tax expense (benefit) -- 0.3 (2.7)
Goodwill amortization.................. 2.0 1.3 5.6
In-process R&D......................... 31.3 -- --
Compensation and
growth share expenses................. -- 1.5 --
Other, net............................. 1.0 0.5 0.4
-------------------------------------
Total income tax
expense (benefit).................. (0.7)% 38.6% (31.7)%
=====================================
37
<PAGE>
The tax effects of temporary differences that gave rise to significant portions
of the deferred tax assets and liabilities at December 31, 1998 and 1997 were as
follows:
- --------------------------------------------------------------------------------
December 31,
(in millions) 1998 1997
- --------------------------------------------------------------------------------
Current deferred tax assets (liabilities):
Allowance for doubtful accounts $ 13.6 $ 1.1
Accrued liabilities 27.4 1.2
Deferred compensation 35.8 0.5
Network construction contracts (9.2) (25.2)
Other, net 7.4 0.5
----------------------
Current deferred tax asset (liability), net 75.0 (21.9)
- --------------------------------------------------------------------------------
Long-term deferred tax assets (liabilities):
Property and equipment 53.3 4.3
Deferred compensation -- 6.5
Net operating loss carryforwards 261.3 34.8
Other 22.8 1.2
Intangible assets (246.1) (0.1)
Property and equipment (127.1) (28.8)
----------------------
Non-current deferred tax
assets (liabilities), net (35.8) 17.9
----------------------
Net deferred tax asset (liability) $ 39.2 $ (4.0)
- --------------------------------------------------------------------------------
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.
At December 31, 1998, the Company had net operating loss carryforwards for
income tax purposes of approximately $700.3 million. These net operating loss
carryforwards, if not utilized to reduce taxable income in future periods, will
expire in various amounts beginning in 2003 and ending in 2018.
Effective with the LCI merger, the Company is no longer included in the
consolidated federal income tax return of Anschutz. As a result, the tax-sharing
agreement with Anschutz is no longer effective for activity after June 5, 1998.
The Company is still subject to the provisions of the tax-sharing agreement for
activity through June 5, 1998. The Company previously recognized a deferred tax
asset attributable to its net operating loss carryforwards under the tax-sharing
agreement. The Company currently believes the tax benefits previously recognized
under the tax-sharing agreement may be realized through tax planning strategies.
Any in-substance dividend resulting from the de-consolidation from Anschutz is
not expected to be material to the Company's consolidated balance sheet.
NOTE 7 > COMMITMENTS AND CONTINGENCIES
[A] NETWORK CONSTRUCTION PROJECT AND
CAPITAL REQUIREMENTS
In 1996, the Company commenced construction of its network. The Company
estimates the total cost to construct and activate the network and to complete
construction of the dark fiber sold to customers will be approximately $2.3
billion. The Company projected its total remaining cost as of December 31, 1998
for completing the construction of the network to be approximately $400.0
million.
[B] NETWORK AND COMMUNICATIONS CAPACITY EXCHANGES
From time to time, the Company enters into agreements to acquire long-term
telecommunications capacity rights from unrelated third parties in exchange for
long-term telecommunications capacity rights along segments of the network under
construction. The exchange agreements provide for liquidated damages to be
levied against the Company in the event the Company fails to deliver the
telecommunications capacity, in accordance with the agreed-upon timetables.
<PAGE>
[C] VENDOR AGREEMENTS
The Company has agreements with certain telecommunications inter-exchange
carriers and third party vendors that require the Company to maintain minimum
monthly and/or annual billings based on usage. The Company has historically met
all minimum billing requirements and believes the minimum usage commitments will
continue to be met.
[D] LEASES AND COMMUNICATIONS SERVICES COMMITMENTS
The Company leases certain terminal locations and office space under operating
lease agreements. The Company has easement agreements with railroads and public
transportation authorities. Future minimum payments under non-cancelable
operating leases and right-of-way agreements, together with the present value of
the net minimum payments as of December 31, 1998, were as follows:
- --------------------------------------------------------------------------------
Year ended December 31: (in millions) Operating Right-of-Way Total
- --------------------------------------------------------------------------------
1999 .................................... $ 91.5 $ 12.5 $ 104.0
2000 .................................... 79.9 5.4 85.3
2001 .................................... 136.2 5.4 141.6
2002 .................................... 64.4 7.2 71.6
2003 .................................... 56.0 5.4 61.4
Thereafter............................... 410.8 100.0 510.8
- --------------------------------------------------------------------------------
838.8 135.9 974.7
Less amount representing interest -- (71.2) (71.2)
-------------------------------------
Total minimum payments................ $ 838.8 $ 64.7 $ 903.5
- --------------------------------------------------------------------------------
Amounts expensed in the years ended December 31, 1998, 1997 and 1996 related to
operating leases were approximately $22.7 million, $6.2 million and $5.0
million, respectively. The present value of net minimum payments of the
38
right-of-way agreements is included in accrued expenses and other and in other
long-term liabilities.
[E] PACIFIC RIM CABLE CONSORTIUM COMMITMENT
The Company is participating in a consortium of communications companies that is
building a submarine cable system connecting the United States to Japan. In
connection with this transaction, the Company is committed to purchase
approximately $56.0 million of fiber optic cable and other network assets of the
13,125-route-mile, four-fiber pair cable system to the Pacific Rim. The total
remaining commitment through January 2001 was approximately $50.0 million as of
December 31, 1998.
[F] LEGAL MATTERS
The Company has been named as a defendant in various litigation matters.
Management intends to vigorously defend these outstanding claims. The Company
believes it has adequate accrued loss contingencies and that, although the
ultimate outcome of these claims cannot be ascertained at this time, current
pending or threatened litigation matters are not expected to have a material
adverse impact on the Company's results of operations or financial position.
NOTE 8 > BENEFIT PLANS
[A] 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 a specified measurement period. All Growth Share
grants have 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 presently available for grant
under the Plan is 850,000. All participants, except those granted Growth Shares
under the October 1996 Plan, vested fully upon completion of the Company's IPO
and settlement was made with 2,591,532 common shares, net of amounts relating to
tax withholdings of approximately $21.9 million.
<PAGE>
Growth Shares granted under the October 1996 Plan vest at the rate of 20% for
each full year of service completed after the grant date subject to risk of
forfeiture and are to be settled with the Company's Common Stock. The future
compensation expense associated with the remaining shares has been capped at
$11.00 per share, or approximately $13.7 million, and is amortized as expense
over the remaining approximately three-year vesting period. At December 31,
1998, approximately $23.0 million is included in other long-term liabilities
related to outstanding Growth Shares. The Company does not presently intend to
make any additional Growth Share grants under this plan. Certain triggering
events, such as a change in control of the Company, cause immediate vesting of
the remaining Growth Shares and would result in accelerated expense recognition
of all unamortized compensation. Participants receive their vested portion of
the increase in value of the Growth Shares upon a triggering event, which
includes the end of a Growth Share performance cycle.
The Company estimated an increase in value of the Growth Shares during 1997 and
1996 and recorded approximately $73.5 million and $13.1 million of compensation
expense for this plan in the years ended December 31, 1997 and 1996,
respectively. In the year ended December 31, 1998, the Company recorded
approximately $9.3 million of expense for this plan. Had the Company accounted
for compensation under the Growth Share Plan pursuant to the fair value method
in SFAS No. 123, Accounting for Stock-Based Compensation, the amount of
compensation would not have been different from what has been reflected in the
accompanying consolidated financial statements.
The following table summarizes Growth Share grants, settlements, forfeitures and
Growth Shares outstanding:
- -----------------------------------------------------------------------------
Outstanding
Growth Shares
- -----------------------------------------------------------------------------
December 31, 1995 644,500
1996 grants 67,500
1996 settlements (436,600)
- -----------------------------------------------------------------------------
December 31, 1996 275,400
1997 grants 358,050
1997 settlements (253,950)
- -----------------------------------------------------------------------------
December 31, 1997 379,500
1998 forfeitures (4,500)
1998 settlements (12,000)
------------
December 31, 1998 363,000
- -----------------------------------------------------------------------------
[B] 401(K) PLAN
The Company sponsors defined contribution 401(k) Plans (the "Plans") which
permit employees to make contributions to the Plans on a pre-tax salary
reduction basis in accordance with the provisions of Section 401(k) of the
Internal Revenue Code. After one year of service, the Company matches a portion
of the employee's voluntary contributions. Company contributions to the 401(k)
plans were $2.1 million and $0.9 million for the years ended December 31, 1998
and 1997, respectively, and was not material for the year ended December 31,
1996.
39
NOTE 9 > STOCKHOLDERS' EQUITY
[A] CAPITAL STOCK
In January 1998, the Board of Directors declared a stock dividend of one share
for every share outstanding to stockholders of record as of February 2, 1998,
which was distributed on February 24, 1998. This dividend was accounted for as a
two-for-one stock split. All share and per share information included in the
consolidated financial statements and the notes hereto have been adjusted to
give retroactive effect to the change in capitalization.
<PAGE>
In June 1998 the shareholders approved a change in the Company's capital stock
to authorize 600 million shares of $.01 par value Common Stock (of which 2.7
million shares are reserved for issuance under the Company's 401(k) Plan and the
former LCI 401(k) plans, 1.2 million are reserved for issuance under employee
and non-employee director stock option and incentive plans, 35.0 million shares
are reserved for issuance under the Equity Incentive Plan, 0.9 million shares
are reserved for issuance under the Growth Share Plan, and 8.6 million shares
are reserved for issuance upon exercise of warrants, as described below, and
25.0 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
approximately 173.0 million shares of Common Stock, which was paid immediately
prior to the effectiveness of the registration statement on June 23, 1997. This
dividend was accounted for as a stock split. The Company completed the IPO of
approximately 31.1 million shares of Common Stock on June 27, 1997, raising net
proceeds of approximately $319.5 million.
Effective May 23, 1997, the Company sold to an affiliate of Anschutz for $2.3
million in cash, a warrant to acquire 8.6 million shares of Common Stock at an
exercise price of $14.00 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. In connection
with the acquisition of Icon, the Company issued approximately 0.3 million
warrants to acquire 0.3 million shares of Common Stock at an average exercise
price of $17.81 per share, exercisable in 2007. The warrants are not
transferable.
[B] COMMON STOCK OPTIONS
Effective June 23, 1997, the Company adopted the Equity Incentive Plan, which
was amended and restated on June 1, 1998. 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 35.0 million shares of Common Stock may be subject
to awards under the Equity Incentive Plan.
The Company's Compensation Committee determines the exercise price for each
option; however, 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 stock option
is granted, subject to certain restrictions. Stock option awards generally vest
in equal increments over a five-year period, and 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 Compensation Committee at the time
of grant. Options granted in 1997 and 1998 have terms ranging from six to ten
years.
Stock option transactions during 1997 and 1998 were as follows:
- --------------------------------------------------------------------------------
Number of Weighted
Options average
(in thousands) exercise price
- --------------------------------------------------------------------------------
Outstanding January 1,1997 -- $ --
Granted 13,958 $ 15.88
Exercised (12) $ 11.00
- ---------------------------------------------
Outstanding December 31,1997 13,946 $ 15.89
Granted 13,139 $ 33.69
Assumed 15,770 $ 16.64
Exercised (11,657) $ 13.66
Cancelled (1,047) $ 26.59
--------
Outstanding December 31,1998 30,151 $ 24.05
--------
Exercisable December 31,1997 1,340 $ 11.00
--------
Exercisable December 31,1998 7,741 $ 17.43
- --------------------------------------------------------------------------------
In connection with the acquisitions of LCI and Icon the Company assumed the
outstanding options on the date of acquisition for each of the acquired
companies. Pursuant to the terms of the LCI stock option plans, the acquisition
of LCI by the Company triggered a change in control of LCI. As such, all of the
outstanding options vested immediately.
For 1998, the weighted-average fair value of each option grant is estimated as
of the date of grant to be $15.18, using the Black-Scholes option pricing model,
with the following weighted average assumptions: risk-free interest rate of
4.6%, no expected dividend yields, expected option lives of 5.5 years, and
expected volatility of 41.2%.
<PAGE>
For 1997, the weighted-average fair value of each option grant is estimated as
of the date of grant to be $7.94, using the Black-Scholes option pricing model,
with the following weighted average assumptions: risk-free interest rate of
5.8%, no expected dividend yields, expected option lives of 7.6 years, and
expected volatility of 31%.
40
The following table summarizes certain information about the Company's stock
options at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- -------------------------------------------------- ------------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number of Average
Options Contractual Exercise Options Exercise
Range of Exercise Outstanding Life Price Exercisable Price
Prices
(In thousands) (in years) (in thousands)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$0.88 - $5.91 521 3.1 $ 3.93 521 $ 3.93
$5.92 - $11.84 7,922 4.9 $10.75 2,463 $ 10.66
$11.85 - $17.75 1,348 7.9 $16.21 952 $ 16.44
$17.76 - $23.67 3,326 8.2 $21.66 1,365 $ 20.18
$23.68 - $29.59 4,605 8.7 $26.08 1,982 $ 24.78
$29.60 - $35.51 8,692 8.9 $31.06 401 $ 30.06
$35.52 - $41.43 2,465 9.1 $37.34 42 $ 37.50
$41.44 - $47.35 258 9.8 $43.21 15 $ 44.60
$47.36 - $50.06 1,014 10.0 $49.99 -- $ 0.00
--------------------------------------------------------------------------
30,151 7.7 $24.05 7,741 17.43
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Compensation expense recognized for grants under the Equity Incentive Plan was
not material in 1998 and 1997. If compensation expense for the Equity Incentive
Plan had been determined using the fair value method described in SFAS No. 123,
the Company's net earnings (loss) and net earnings (loss) per share for 1998 and
1997 would have been reduced to the pro forma amounts shown in the following
table:
- --------------------------------------------------------------------------------
(in millions, except per share information) 1998 1997
- --------------------------------------------------------------------------------
Net earnings (loss)
As reported $ (844.0) $ 14.5
Pro forma (866.6) 0.9
Net earnings (loss) per share - basic:
As reported (3.02) 0.08
Pro forma (3.10) --
Net earnings (loss) per share - diluted:
As reported (3.02) 0.07
Pro forma (3.10) --
(C) EMPLOYEE STOCK PURCHASE PLAN
In October 1998, the Company instituted an Employee Stock Purchase Plan
("ESPP"). The Company is authorized to issue approximately 0.8 million shares of
Common Stock to eligible employees. Under the terms of the ESPP, eligible
employees may authorize payroll deductions of up to 15% of their base
compensation, as defined, to purchase Common Stock at a price of 85% of the fair
market value of the Company's Common Stock on the last trading day of the month
in which the Common Stock is purchased.
(D) ALLIANCE WITH MICROSOFT
In December 1998, the Company entered into a strategic alliance with Microsoft.
Microsoft will license a broad range of its software to the Company. In
addition, Microsoft purchased approximately 4.4 million shares of Qwest for
$200.0 million.
<PAGE>
Pursuant to the Common Stock Purchase Agreement, Microsoft has agreed not to
transfer the Common Stock it purchased for a period of two years except to
persons approved by the Company or to certain Microsoft controlled corporations.
Further, unless approved by the Company's board of directors, (i) Microsoft is
prohibited from acquiring more than 5% of the Company's Common Stock and from
becoming a member (with third parties) of a group that owns more than 5% and;
(ii) Microsoft may not take certain actions with respect to acquisition
proposals or contested proxy solicitations until the earlier of (A) such time as
the Company's officers, directors and affiliates own less than 33% of the voting
power of the Company, (B) Microsoft otherwise disposes of the Common Stock, (C)
the parties terminate the business relationship or (D) December 14, 2003.
Pursuant to the terms of the Registration Rights Agreement, Microsoft has one
demand registration right from March 14, 1999 up to December 14, 2001 for all or
any of the shares of Common Stock purchased.
NOTE 10 > WEIGHTED AVERAGE SHARES OUTSTANDING
The weighted average number of shares used for computing basic and diluted loss
per share for the years ended December 31, 1998 and 1996, was 279.1 million and
173.0 million, respectively. Because the Company had a net loss in 1998 and
1996, the effect of all options and warrants on loss per share was
anti-dilutive. For the year ended December 31, 1997, the weighted average number
of shares used for computing basic earnings per share was 190.5 million, and the
weighted average number of shares used for computing diluted earnings per share
was 194.1 million (including 3.5 million incremental common shares attributable
to dilutive securities related to warrants, options and growth shares).
The weighted average number of options to purchase common stock that was
excluded from the computation of diluted earnings per share because the exercise
price of the option was greater than the average market price of the Common
Stock was 348,000 for 1998 and 800,000 for 1997.
NOTE 11 > BUSINESS SEGMENT INFORMATION
In 1998, the Company adopted SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information, which requires the Company to report certain
information about its business segments. The information for 1997 and 1996 has
been restated to conform with the 1998
41
presentation. The Company's two business segments are Communications Services
and Construction Services, each having a separate management team and
infrastructure, offering different products and services, and utilizing
different marketing strategies to target different types of customers.
Communications Services provides multimedia communications services to retail
and wholesale customers. Construction Services constructs and installs fiber
optic systems for other communications entities, as well as for the Company's
own use.
<PAGE>
The accounting policies of the business segments are the same as those described
in Note 2 - Summary of Significant Accounting Policies. The Company evaluates
the performance of its business segments based on their respective earnings
(loss) from operations, before other (income) expense and income taxes. The
following table presents summarized financial information related to the
business segments for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Year Ended December 31,
(in millions) 1998 1997 1996
- ---------------------------------------------------------------------------------
Revenue:
<S> <C> <C> <C>
Communications services.......... $ 1,554.3 $ 115.3 $ 91.8
Construction services.... 688.4 581.4 139.2
-------------------------------
Total revenue................... $ 2,242.7 $ 696.7 $ 231.0
- ---------------------------------------------------------------------------------
Earning (loss) from operations:
Communications services.......... (902.1) (105.8) (44.5)
Construction services............ 184.4 140.3 33.4
Depreciation and amortization -
Corporate....................... (36.0) (11.0) (0.9)
-------------------------------
Total earnings (loss)
from operations............... (753.7) 23.5 (12.0)
- ---------------------------------------------------------------------------------
Unallocated other (income) expense:
Interest expense, net............ 97.3 18.8 6.8
Other (income) expense, net...... (1.2) (18.9) (8.7)
-------------------------------
Earnings (loss) before
income taxes.................. $ (849.8) $ 23.6 $ (10.1)
- ---------------------------------------------------------------------------------
Assets:
Communications services.......... $ 5,901.2 $ 201.3 $ 141.0
Construction services............ 729.6 437.7 106.6
Corporate........................ 1,436.8 759.1 15.0
-------------------------------
Total assets.................... $ 8,067.6 $1,398.1 $ 262.6
- ---------------------------------------------------------------------------------
Capital expenditures:
Communication services........... $ 1,382.2 $ 337.7 $ 53.6
Construction services............ 2.2 2.0 0.9
Corporate........................ 28.8 6.1 2.6
-------------------------------
Capital expenditures............ $ 1,413.2 $ 345.8 $ 57.1
- ---------------------------------------------------------------------------------
</TABLE>
The Company's areas of operations are principally in the United States and
Europe, and the Company is developing network assets in Mexico. No single
European country or geographic area is significant to the Company's consolidated
operations. Revenue and loss from operations from European-country operations
were approximately $60.0 million and $17.7 million, respectively, in 1998. The
Company had no European operations in 1997.
During the years ended December 31, 1998, 1997 and 1996, two or more customers,
in the aggregate, within the Construction Services segment accounted for 10% or
more of the Company's total revenue in one or more periods, as follows:
- --------------------------------------------------------------------------------
Customer A Customer B Customer C
- --------------------------------------------------------------------------------
1998 ..................... 1% 7% 8%
1997 ..................... 6% 31% 37%
1996 ..................... 32% 26% --
NOTE 12 > SELECTED CONSOLIDATED QUARTERLY
FINANCIAL DATA.
(In Millions, Except Per Share Information - Unaudited)
<PAGE>
1998
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $ 177.1 $ 393.7 $ 806.8 $ 865.1
Gross Profit 48.9 132.0 307.0 346.2
Earnings (loss)
from operations (3.5) (820.4) 37.7 32.5
Net loss $ (6.6) $(808.9) $ (6.9) $ (21.6)
Net loss per
share - basic $ (0.03) $ (3.34) $ (0.02) $ (0.06)
Net loss per
share - diluted $ (0.03) $ (3.34) $ (0.02) $ (0.06)
1997
- --------------------------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------
Revenue $ 72.7 $228.7 $ 188.9 $206.4
Gross profit 16.3 65.7 54.5 65.9
Earnings (loss)
from operations (12.7) (7.1) 19.9 23.4
Net earnings (loss) $ (4.8) $ (5.6) $ 12.6 $ 12.3
Net earnings (loss) per
share - basic $ (0.03) $(0.03) $ 0.06 $ 0.06
Net earnings (loss) per
share - diluted $ (0.03) $(0.03) $ 0.06 $ 0.06
In connection with the acquisitions of LCI and EUnet in the second quarter of
1998 and the acquisition of Icon in the fourth quarter of 1998, the Company
expensed $750.0 million and $10.0 million, respectively, for in-process R&D
projects.
42
<PAGE>
MARKET FOR THE REGISTRANT'S COMMON STOCK
AND RELATED SHAREHOLDER MATTERS
[A] The Company's Common Stock is listed on the Nasdaq National Market under the
trading symbol "QWST." As of March 5, 1999, there were approximately 350 million
shares of Common Stock issued and outstanding held by 4,213 stockholders of
record.
The following table sets forth, for the periods indicated, the high and low
sales prices per share of Common Stock as reported on the Nasdaq National Market
(as adjusted to reflect the two-for-one stock split effected on February 24,
1998 as a dividend):
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal 1997:
First Quarter...................... N/A N/A
Second Quarter..................... $ 15.0625 $ 13.1875
Third Quarter...................... $ 26.5000 $ 13.6250
Fourth Quarter..................... $ 34.4375 $ 22.9375
- --------------------------------------------------------------------------------
High Low
- --------------------------------------------------------------------------------
Fiscal 1998:
First Quarter...................... $ 41.0625 $ 29.6250
Second Quarter..................... $ 40.0625 $ 27.8750
Third Quarter...................... $ 47.5000 $ 22.0000
Fourth Quarter..................... $ 51.3125 $ 26.7500
<PAGE>
The Company completed its initial public offering on June 27,1997. The
Registrant has not paid cash dividends on its Common Stock since becoming a
public company and does not anticipate paying cash dividends in the foreseeable
future. The terms of the Indentures governing its outstanding notes restrict the
Company's ability to pay dividends. Any payment of future dividends will be at
the discretion of the Company's Board of Directors and will depend upon, among
other things, the Company's earnings, operations, capital requirements, level of
indebtedness, financial condition, contractual restrictions and other relevant
factors. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations.")
On December 14, 1998, the Company and Microsoft Corporation, a Washington
corporation ("Microsoft"), announced that they had agreed to enter into a
business relationship to offer data and Internet services. In addition,
Microsoft purchased from the Company approximately 4.4 million shares of the
Company's common stock, at a price of $45.00 per share, for an aggregate
purchase price of $200.0 million.
Pursuant to the Common Stock Purchase Agreement, Microsoft has agreed not to
transfer the shares for a period of two years except to persons approved by the
Company or to certain Microsoft controlled corporations. Further, unless
approved by the Company's board of directors, (i) Microsoft is prohibited from
acquiring more than 5% of the Company's common stock and from becoming a member
(with third parties) of a group that owns more than 5% and (ii) Microsoft may
not take certain actions with respect to acquisition proposals or contested
proxy solicitations until the earlier of (A) such time as the Company's
officers, directors and affiliates own less than 33% of the voting power of the
Company, (B) Microsoft otherwise disposes of the shares, (C) the parties
terminate the business relationship or (D) December 14, 2003. Pursuant to the
terms of the Registration Rights Agreement, Microsoft has one demand
registration right at any time from March 14, 1999 up to December 14, 2001 for
all or any of the shares of Common Stock purchased.
[B] The Company has used approximately $274.6 million of the $319.5 million net
proceeds from its initial public offering for construction of its fiber optic
telecommunications network and to redeem a total of $87.5 million in principal
amount of its 107/8% Notes due 2007. The remaining net proceeds are temporarily
invested in certain short-term investment grade securities.
43
<PAGE>
EXHIBIT 23
Consent of Independent Auditors
The Board of Directors
Qwest Communications International Inc.:
We consent to incorporation by reference in the Registration Statements on Form
S-8 (No. 333-47349, No. 333-50061, No. 333-56323, No. 333-60133, No. 333-61725,
No. 333-65345 and No. 333-68267), and the Registration Statement on Form S-3
(No. 333-58617), of Qwest Communications International Inc. of our report dated
February 2, 1999, relating to the consolidated balance sheets of Qwest
Communications International Inc. and subsidiaries as of December 31, 1998 and
1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the three-year period ended
December 31, 1998, and our report dated February 2, 1999, pertaining to the
related consolidated financial statement schedule, which reports appear in the
December 31, 1998 annual report on Form 10-K of Qwest Communications
International Inc.
KPMG LLP
Denver, Colorado
March 19, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM *THE
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998 AND CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 INCLUDED IN THE COMPANY'S FORM
10-K, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 463
<SECURITIES> 0
<RECEIVABLES> 647
<ALLOWANCES> 56
<INVENTORY> 0
<CURRENT-ASSETS> 1,439
<PP&E> 2,810
<DEPRECIATION> 155
<TOTAL-ASSETS> 8,068
<CURRENT-LIABILITIES> 1,238
<BONDS> 2,280
0
0
<COMMON> 3
<OTHER-SE> 4,235
<TOTAL-LIABILITY-AND-EQUITY> 8,068
<SALES> 2,243
<TOTAL-REVENUES> 2,243
<CGS> 1,409
<TOTAL-COSTS> 1,588
<OTHER-EXPENSES> (1)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 97
<INCOME-PRETAX> (850)
<INCOME-TAX> (6)
<INCOME-CONTINUING> (844)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (844)
<EPS-PRIMARY> (3.02)
<EPS-DILUTED> (3.02)
</TABLE>
