<PAGE>
As filed with the Securities and Exchange Commission on April 7, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
----------------
GENUITY INC.
(Exact Name of Registrant as Specified in its Charter)
----------------
Delaware 7370 74-2864824
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification No.)
Incorporation or
Organization)
----------------
3 Van de Graaff Drive
Burlington, Massachusetts 01803
(781) 262-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
----------------
PAUL R. GUDONIS
Chairman and Chief Executive Officer
3 Van de Graaff Drive
Burlington, Massachusetts 01803
Telephone: (781) 262-3000
Telecopy: (781) 262-3408
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
<TABLE>
<S> <C> <C>
KEITH F. HIGGINS, ESQ. IRA H. PARKER, ESQ. JOHN T. BOSTELMAN, ESQ.
PATRICK O'BRIEN, ESQ. General Counsel Sullivan & Cromwell
Ropes & Gray 3 Van de Graaff Drive 125 Broad Street
One International Place Burlington, Massachusetts 01803 New York, New York 10004
Boston, Massachusetts 02110 Telephone: (781) 262-3000 Telephone: (212) 558-4000
Telephone: (617) 951-7000 Telecopy: (781) 262-3408 Telecopy: (212) 558-3588
Telecopy: (617) 951-7050
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
Proposed Maximum
Title of Each Class Aggregate Offering Amount of
of Securities to be Registered Price(1) Registration Fee
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<S> <C> <C>
Class A common stock, par value
$0.01 per share................ $10,000,000 $2,640
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</TABLE>
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(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated , 2000.
PROSPECTUS
Shares
LOGO OF GENUITY
Class A Common Stock
------------
We are offering shares of our Class A common stock. This is our initial
public offering and no public market currently exists for our shares. We
anticipate that the initial public offering price will be between $ and $
per share.
------------
We intend to apply for quotation of our Class A common stock on the
under the symbol " ".
------------
Investing in our Class A common stock involves risks. See "Risk Factors"
beginning on page 7.
------------
PRICE $ PER SHARE
------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discounts Genuity
-------- ------------ -----------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have granted the underwriters the right to purchase up to an additional
shares to cover over-allotments. Morgan Stanley & Co. Incorporated and Salomon
Smith Barney Inc. expect to deliver the shares to purchasers on , 2000.
------------
Joint Book-Running Managers
Morgan Stanley Dean Witter Salomon Smith Barney
, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Special Note Regarding Forward-Looking Statements........................ 19
Use of Proceeds.......................................................... 20
Dividend Policy.......................................................... 20
Capitalization........................................................... 21
Dilution................................................................. 22
Selected Combined Financial Data......................................... 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management............................................................... 56
Related Party Transactions............................................... 66
Sole Stockholder......................................................... 70
Description of Capital Stock............................................. 71
Certain United States Tax Consequences to Non-U.S. Holders of Class A
Common Stock............................................................ 76
Shares Eligible for Future Sale.......................................... 79
Underwriting............................................................. 80
Validity of Class A Common Stock......................................... 82
Experts.................................................................. 82
Where You Can Find More Information...................................... 83
Index To Combined Financial Statements................................... F-1
</TABLE>
----------------
Until , 2000, which is the 25th day after the date of this
prospectus, all dealers that buy, sell or trade our Class A common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with information that is different from that contained in this prospectus.
We are offering to sell and seeking offers to buy these securities only in
jurisdictions where offers and sales are permitted. The information contained
in this prospectus is accurate only as of the date on the front cover of this
prospectus, regardless of the time of delivery of the prospectus or of any sale
of the Class A common stock.
For investors outside the United States, neither we nor any of the
underwriters have done anything that would permit this offering or possession
or distribution of this prospectus in any jurisdiction where action for that
purpose is required, other than in the United States. You are required to
inform yourselves about and to observe any restrictions relating to this
offering and the distribution of this prospectus.
Genuity is our registered trademark in the United States and the Genuity
logo is subject to our pending application for registration as a trademark in
the United States. The titles and logos associated with our products and
services appearing in this prospectus are either federally registered
trademarks and service marks or are subject to pending applications for
registration as trademarks and service marks. Our trademarks and service marks
may also be registered in other jurisdictions. All other trademarks or trade
names appearing elsewhere in this prospectus are the property of their
respective owners.
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information about Genuity and the Class A common stock being offered in this
offering and our combined financial statements and accompanying notes appearing
elsewhere in this prospectus. In this prospectus, "GTE" refers to GTE
Corporation and its subsidiaries other than Genuity, "Bell Atlantic" refers to
Bell Atlantic Corporation and its subsidiaries prior to the merger with GTE and
"Verizon" refers to Bell Atlantic doing business as Verizon Communications, the
name under which Bell Atlantic will operate after the merger with GTE, and its
subsidiaries, including GTE. "Genuity", "we", "us" and "our" each refers to
Genuity Inc. and its subsidiaries and not to the underwriters, GTE, Bell
Atlantic or Verizon. Except as otherwise indicated, all information in this
prospectus assumes no exercise of the underwriters' option to purchase
additional shares of Class A common stock to cover over-allotments and also
assumes that the merger between Bell Atlantic and GTE closes concurrently with,
or immediately following, the completion of this offering.
GENUITY
We are a leading facilities-based provider of high quality, managed Internet
infrastructure services to enterprises and service providers. We offer a
comprehensive suite of managed Internet infrastructure services, including:
Internet access through dial-up, dedicated and digital subscriber lines; web
hosting and content delivery; and value-added e-business services, such as
virtual private networks for secure data transmission, security services and
voice-over-Internet Protocol. We operate a state-of-the-art global network that
consists of recently deployed broadband fiber optic cable in the United States,
points of presence, secure and fault-tolerant data centers and undersea and
international fiber optic cable capacity. Our large base of on-network users
and content, combined with our extensive network, positions us as one of the
leading Internet backbone providers in the world, a status commonly referred to
as a Tier 1 Internet backbone provider. We believe that service providers are
increasingly connecting to networks with substantial on-network content to
improve the quality of their customers' experience, which in turn drives demand
by enterprises seeking to connect to networks with large numbers of users. We
believe that by taking advantage of this demand cycle, which we call the
"network effect", we will continue to drive significant demand for our services
from both enterprises and service providers and differentiate ourselves from
non-Tier 1 Internet backbone providers. As of March 31, 2000, we provided
services to approximately 6,500 enterprises, such as Cabletron Systems, Yahoo!
and ZDNet, and to approximately 500 service providers, such as America Online,
NetZero and WebTV in the United States and I.NET and Tiscali in Italy. In 1999,
our revenues were approximately $750 million, and we incurred net losses of
approximately $627 million.
Unlike many recent entrants into the Internet industry, we have more than
three decades of experience in designing and implementing the architecture of
the Internet and with solving computer networking problems. In 1969, our
predecessor, BBN Corporation, designed and helped to implement ARPAnet, which
is widely recognized as the basis for the Internet today. Our network is
recognized as the first Internet backbone and, accordingly, was designated AS-
1. We also developed the first Internet router, delivered the world's first e-
mail message and pioneered the use of the "@" symbol as a universal addressing
standard for electronic mail. More recently, we were one of the first to offer
commercially managed web hosting services and managed security services through
outsourced firewall monitoring.
THE OPPORTUNITY
The Internet has experienced tremendous growth in the past decade and has
emerged as an important global medium for communications and commerce. As the
Internet and data traffic have grown, the cost and complexity for enterprises
and service providers to manage their own network infrastructure demands in-
house
1
<PAGE>
has increased. As a result, enterprises and service providers seek to outsource
their infrastructure needs to Internet infrastructure service providers that
can speed their time-to-market, improve performance, scalability and security,
provide continuous operation of their web sites and reduce the costs and risks
associated with developing an in-house solution. As enterprises and service
providers continue to outsource these requirements, they demand that Internet
infrastructure service providers deliver a high quality Internet experience for
their users. We believe leading Internet infrastructure service providers must
offer a comprehensive suite of managed Internet infrastructure services, a
large base of on-network users and content, reliable and scalable network
facilities, Tier 1 Internet connectivity and the experience and expertise
necessary to provide a complete Internet infrastructure solution.
OUR SOLUTION
Our solution enables our customers to outsource their Internet
infrastructure requirements to a single provider and to scale their Internet
operations in a cost-effective and reliable manner. The key elements of our
solution include:
. Comprehensive Suite of Managed Internet Infrastructure Services. We offer
a broad range of managed Internet infrastructure services, including:
Internet access; web hosting and content delivery; and value-added e-
business services.
. Large Base of On-Network Users and Content. We carry a significant amount
of traffic over our Tier 1 Internet backbone, allowing enterprises and
service providers to directly route traffic to, or receive content from,
a significant number of other customers without the need to pass through
private peering connections or overloaded public peering points.
. State-of-the-Art Network. We operate a state-of-the-art, high capacity
global fiber optic network that is highly reliable and scalable and has
been equipped with advanced optical electronic equipment. Our network
includes over 17,500 route miles of fiber optic cable in the United
States, undersea and international fiber optic cable capacity and 10 data
centers for web hosting services.
. High Performance, Tier 1 Internet Connectivity. We provide high
performance connectivity to the Internet through our Tier 1 Internet
backbone and extensive high speed private peering relationships with
other major Internet backbone providers.
. Significant Internet Protocol Engineering and Architectural Expertise.
Drawing upon the breadth and depth of our IP and networking experience
and expertise, including our 756 engineers and 1,119 technicians, we are
able to quickly and cost-effectively identify the Internet infrastructure
requirements of our customers and design and implement appropriate
solutions.
OUR STRATEGY
Our objective is to be the leader in architecting, building and operating
the infrastructure for the Internet economy. The principal elements of our
strategy for pursuing this objective include:
. leveraging the network effect;
. expanding our capacity and state-of-the-art network;
. continuing to build and own our network facilities;
. expanding our distribution capabilities;
. pursuing strategic transactions and alliances;
. using our extensive IP and networking expertise to develop new services;
and
. establishing Genuity as a leading brand for managed Internet
infrastructure services.
2
<PAGE>
OUR RELATIONSHIP WITH VERIZON
We are currently a wholly owned subsidiary of GTE Corporation. In July 1998,
Bell Atlantic Corporation and GTE agreed to enter into a merger of equals
transaction. We anticipate that the merger between Bell Atlantic and GTE will
close concurrently with, or immediately following, the completion of this
offering. In April 2000, Bell Atlantic and GTE announced that following their
merger, they will operate under the name Verizon Communications.
Under the Telecommunications Act of 1996, the Regional Bell Operating
Companies, including the Bell Atlantic local telephone operating companies, and
their respective affiliates are generally prohibited from providing long
distance services that originate in any state in which they operate an
incumbent local telephone company. These provisions restrict the operations of
these companies until they have satisfied a 14-point competitive checklist
under Section 271 of the Telecommunications Act and obtained authority from the
Federal Communications Commission to provide long distance services in the
states in which they operate an incumbent local telephone company.
Bell Atlantic is an incumbent local telephone company in 13 states, from
Maine to Virginia, and the District of Columbia. Bell Atlantic has obtained the
necessary authorization to provide long distance service originating in New
York. Because we provide services in Bell Atlantic's region that could be
characterized as long distance services, Bell Atlantic and GTE cannot complete
their merger until they either (1) receive relief from the Telecommunications
Act restrictions for the remaining states in which Bell Atlantic provides local
telephone services or (2) implement a structure that complies with the
requirements of the Telecommunications Act.
To ensure compliance with the requirements of the Telecommunications Act and
to receive Federal Communications Commission approval of their merger, Bell
Atlantic and GTE have proposed a structure to the Federal Communications
Commission under which (1) GTE will exchange all of the currently outstanding
shares of our common stock for shares of our Class B common stock and (2) we
will make this offering of our Class A common stock. As a result, immediately
after completion of this offering, the investors purchasing shares in this
offering will own shares of our Class A common stock possessing 90% of the
total voting power of our capital stock and GTE will own shares of our Class B
common stock possessing 10% of the total voting power of our capital stock. As
described in the section entitled "Description of Capital Stock", our Class B
common stock is convertible at any time into shares of our Class C common stock
that represent approximately 82% of our total capital stock and possess
approximately 96% of the total voting power of our capital stock, in each case
before giving effect to any outstanding options to purchase shares of our
common stock, the exercise of the underwriters' over-allotment option or other
additional issuances of our common stock. If the underwriters fully exercise
their over-allotment option, our Class B common stock would be convertible into
shares of Class C common stock representing 80% of our total capital stock.
Under the terms of the proposal to the Federal Communications Commission,
the shares of Class B common stock held by Verizon must be converted on or
prior to , 2005, subject to extension under the circumstances described in
the section in "Description of Capital Stock" entitled "Conversion". Assuming
no additional issuances of our common stock after completion of this offering,
Verizon will control us if and when it converts its Class B common stock into
Class C common stock. Subject to limited exceptions, if Verizon is unable to
convert its shares of Class B common stock within this time period, it would be
required to dispose of those shares.
Bell Atlantic and GTE are required to receive the formal approval of the
Federal Communications Commission to the proposed structure.
OUR CORPORATE INFORMATION
We have recently changed our name from GTE Internetworking Incorporated to
Genuity Inc. Our principal executive offices are located at 3 Van de Graaff
Drive, Burlington, Massachusetts 01803 and our telephone number is (781) 262-
3000.
3
<PAGE>
THE OFFERING
Class A common stock
offered................... shares
Common stock to be
outstanding after this
offering.................
<TABLE>
<CAPTION>
Assuming Full Conversion of
Immediately After Offering Class B Common Stock
---------------------------- ----------------------------
Total Total Total Total
Equity Voting Equity Voting
Shares Percentage Percentage Shares Percentage Percentage
------ ---------- ---------- ------ ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Class A common stock.... 90% 90% 18% 4%
Class B common stock.... 10% 10% -- --
Class C common stock.... -- -- 82% 96%
</TABLE>
If the underwriters fully exercise their over-
allotment option, after conversion of the Class B
common stock into Class C common stock, the Class A
common stock would represent 20% of our total
common stock and the Class C common stock would
represent 80% of our total common stock.
The above information is before giving effect to
options outstanding under our long-term incentive
plans and before additional issuances of shares of
our common stock.
Voting rights............. Except as required by law or as described below,
the holders of our Class A common stock, Class B
common stock and Class C common stock vote together
as a single class on all matters submitted to a
vote of our stockholders.
Each share of Class A common stock entitles the
holder to one vote per share. Until less than 50%
of the shares of Class B common stock outstanding
at the completion of this offering remain
outstanding, no holder or group of holders of Class
A common stock may vote any of those shares in
excess of 15% of the aggregate number of the then
outstanding number of shares of Class A common
stock.
Each share of Class B common stock entitles the
holder to one vote per share. We are required to
obtain the consent of the holders of Class B common
stock before taking specific actions, including
making significant acquisitions, entering into
major business combinations, incurring indebtedness
in excess of specified limits and issuing
additional equity securities. At the completion of
this offering, all outstanding shares of Class B
common stock will be indirectly owned by Verizon.
Each share of Class C common stock entitles the
holder to five votes per share. Only Verizon and
its affiliates may own Class C common stock.
4
<PAGE>
Conversion................ Our Class B common stock held by Verizon and its
affiliates is convertible into shares of Class C
common stock. If the underwriters fully exercise
their over-allotment option and assuming no
additional issuances of our common stock and before
giving effect to any options outstanding under our
long-term incentive plans, when our shares of Class
B common stock are converted into shares of Class C
common stock, they will represent 80% of the shares
of our outstanding common stock.
Class B common stock held by persons other than
Verizon and its affiliates is convertible into
Class A common stock. The number of shares of Class
A common stock into which those shares of Class B
common stock are convertible is equal to the number
of shares of Class C common stock into which those
shares would be convertible if they were held by
Verizon and its affiliates.
Our Class C common stock is convertible into Class
A common stock at any time. Each share of Class C
common stock will automatically convert into one
share of Class A common stock if at any time the
aggregate number of outstanding shares of Class C
common stock, together with any shares of Class C
common stock issuable upon conversion of Class B
common stock, and the number of shares of Class A
common stock controlled by Verizon and its
affiliates, constitute less than 10% of our then
outstanding common stock.
Verizon may acquire
additional shares........ If Verizon holds shares of Class A common stock and
Class C common stock that in the aggregate exceed
70% of the total number of shares of our common
stock, Verizon may acquire from us a number of
shares of Class A common stock so that it will own
shares of common stock equal to 80% of the total
number of our shares of common stock.
Use of proceeds........... For capital expenditures in connection with the
expansion of our network infrastructure, increased
sales and marketing activities, funding our
operating losses and general corporate purposes,
including working capital and possible acquisitions
of and investments in other businesses and
technologies.
Proposed stock symbol.....
5
<PAGE>
SUMMARY COMBINED FINANCIAL DATA
The following tables present our summary combined financial data. The
financial data presented in these tables are from "Selected Combined Financial
Data" and our combined financial statements and accompanying notes included
elsewhere in this prospectus. You should read those sections for a further
explanation of the financial data summarized here.
Our combined financial statements have been carved out from the consolidated
financial statements of GTE using the historical results of operations and
historical bases of the assets and liabilities of Genuity. Accordingly, the
historical financial information we have included in this prospectus does not
necessarily reflect what our financial position, results of operations and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented.
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------
1998 1999
--------- ---------
(in thousands,
except per share
data)
<S> <C> <C>
Results of Operations Data:
Revenues............................................. $ 471,538 $ 750,424
Cost of goods sold................................... 512,967 786,965
Selling, general and administrative.................. 316,491 399,529
Operating loss....................................... (462,443) (624,737)
Net loss............................................. (467,040) (626,689)
Basic and diluted loss per common share.............. ( ) ( )
Basic and diluted weighted-average common shares
outstanding.........................................
</TABLE>
The as adjusted column in the combined balance sheet data below reflects our
recapitalization and the sale of shares of Class A common stock in this
offering at an assumed initial public offering price of $ per share and the
application of the net proceeds, after deducting estimated underwriting
discounts and offering expenses payable by us.
<TABLE>
<CAPTION>
As of December 31,
1999
-----------------------
Actual As Adjusted
---------- -----------
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................ $ 6,044 $
Working capital...................................... (258,480)
Property, plant and equipment, net................... 1,524,390
Total assets......................................... 2,373,159
Total long-term liabilities.......................... 133,553
Total liabilities.................................... 669,815
Stockholders' equity................................. 1,703,344
</TABLE>
6
<PAGE>
RISK FACTORS
Investing in our Class A common stock involves a high degree of risk. You
should carefully consider the following factors, as well as other information
contained in this prospectus, before deciding to invest in shares of our Class
A common stock. If any of the following risks actually occurs, our business,
financial condition and results of operations could suffer, in which case the
trading price of our Class A common stock could decline and you may lose all or
part of your investment.
Risks Related to Our Business
We have a history of significant operating losses and expect these losses to
continue for at least the next several years.
We have experienced operating losses in each quarterly and annual period
since 1996. Given the level of our planned operating and capital expenditures,
we expect to continue to incur significant operating losses for the foreseeable
future. We incurred operating losses of approximately $462 million in 1998 and
approximately $625 million in 1999. As of December 31, 1999, we had an
accumulated deficit of approximately $1.3 billion. We plan to continue to make
significant investments to expand our capacity and network infrastructure,
develop brand recognition, broaden the range of our service offerings and
expand our sales, marketing, technical and customer support personnel. Our
capital expenditures program, as currently contemplated, will require between
$11 billion and $13 billion during the five-year period ending December 31,
2004, the majority of which will be for the expansion of our network
infrastructure. A substantial portion of these expenditures will be made long
before any significant revenue related to these expenditures may be realized.
In addition, our operating expenses are based largely on anticipated revenue
trends and a significant portion of our expenses, such as personnel, the leased
portion of our network and our real estate facilities and depreciation of our
network infrastructure, is fixed. If our revenues fall below our expectations,
we would probably not be able to reduce our fixed or variable expenses in
sufficient time to respond to the shortfall. If we fail to achieve significant
increases in our revenues as a result of our investments, the size of our
operating losses may be larger than expected. We may never achieve
profitability or generate positive cash flows from operations, and if we do
achieve profitability or positive cash flows from operations in any period, we
may not be able to sustain or increase profitability or positive cash flows on
a quarterly or annual basis.
If we do not maintain or increase our market share and therefore are no
longer considered a Tier 1 Internet backbone provider, we may lose customers
and our free peering relationships with other Tier 1 Internet backbone
providers. If this occurs, our revenues and operating results may decline
significantly.
We rely significantly on our status as a Tier 1 Internet backbone provider
to maintain and grow our market share and compete with other Tier 1 Internet
backbone providers, several of which have a larger market share than we do. Any
significant loss of market share for our services could cause the loss of our
status as a Tier 1 Internet backbone provider, which would make our services
significantly less attractive to existing and potential customers and would
likely result in a significant loss of revenues. In addition, the loss of
market share or our status as a Tier 1 Internet backbone provider would
adversely affect our ability to maintain our free private peering relationships
with other Tier 1 Internet backbone providers. Currently, these relationships
permit us to have direct, cost-free exchange of traffic with other Tier 1
Internet backbone providers and allow us to avoid the congestion of public
peering points when directing traffic to users connected to those other
Internet backbones. If we are unable to maintain these free peering
relationships, our operating costs will increase and our results of operations
will suffer. To increase or at least maintain our market share and maintain our
status as a Tier 1 Internet backbone provider, it is critical that a
significant amount of worldwide Internet traffic be carried on our Internet
backbone. To generate significant Internet traffic, we must:
. continue to increase the amount of content available on our network
infrastructure by successfully marketing our web hosting and high speed
dedicated Internet access services to enterprises, particularly
enterprises that operate high traffic web sites; and
7
<PAGE>
. continue to increase the number of users that access the Internet through
our Internet backbone by successfully marketing our Internet access
services to service providers.
We may not be successful in marketing our services to enterprises and
service providers if we fail to expand our capacity and network infrastructure
to meet increasing demand or to competitively price or expand our services or
if we experience network performance and reliability problems.
If we were to lose a significant portion of our revenues from America
Online, we would not be able to replace those revenues in the short term and
our operating losses would increase significantly.
America Online accounted for approximately 53% of our revenues in 1998 and
52% of our revenues in 1999. We expect that revenues from America Online will
continue to represent a significant portion of our revenues for the next
several years. America Online also uses the services of some of our
competitors. America Online has the right to terminate its agreement with us on
short notice if we materially breach the agreement, including our failure to
meet specific performance targets. America Online also has the right to reduce
its purchase commitments if we, among other things, fail to meet specific
delivery and performance targets or fail to meet our obligation to provide most
favored customer pricing. The termination of, or a significant adverse change
in, our relationship with America Online would have a material adverse effect
on our business and results of operations. In addition, upon a change in
control of Genuity, America Online has the right to terminate the agreement. A
transfer of Verizon's interest in Genuity to an unrelated party may constitute
a change in control of us. You should refer to the section in "Business"
entitled "Our Relationship With America Online" for additional information
about our relationship with America Online.
If we cannot obtain the additional capital we will require to fund our
operations and finance the expansion of our capacity and network
infrastructure, we will have to delay or abandon our development and expansion
plans.
We will need significant additional capital to fund our business plan and
achieve profitability. We currently intend to spend $11 billion to $13 billion
over the five-year period ending December 31, 2004, of which approximately $1.8
billion to $2.0 billion is expected to be spent during 2000, on the continued
expansion of our network infrastructure and other capital expenditures. During
the past three years, our capital needs have been satisfied with permanent
capital contributions from GTE or financing from its affiliates. However,
following this offering, Verizon is not obligated to provide funds to finance
our capital expenditures, working capital or other cash requirements. We
currently intend to obtain additional capital through public offerings or
private placements of debt or equity securities and through borrowings under
future credit facilities. However, we are required to obtain the consent of the
holders of our Class B common stock before issuing any shares of our capital
stock and our agreement with Verizon limits our ability to incur debt in excess
of specified amounts without its consent. You should refer to the risks
described below under "Risks Related to Our Relationship with Verizon", the
section in "Related Party Transactions" entitled "Subscription Agreement" and
the section entitled "Description of Capital Stock" for a more detailed
discussion of the rights of our Class B common stock. The issuance of
additional equity would be dilutive to the holders of our common stock. We may
be unsuccessful in raising sufficient capital on terms that we consider
acceptable, when needed or at all. If this happens, we would have to delay or
abandon our development and expansion plans, which would adversely affect our
competitive position.
If we do not compete effectively, particularly against established
participants with greater financial and other resources than ours, we will lose
market share, which will make our services less attractive to our existing and
prospective customers.
The market for managed Internet infrastructure services is extremely
competitive and subject to rapid change. We expect to encounter increased
competition in the future as a result of increased consolidation and strategic
alliances in the industry. In addition, we will increasingly compete with
foreign service providers as we expand internationally and as these service
providers increasingly compete in the United States. Our principal competitors
in the managed Internet infrastructure services market include:
. Internet infrastructure service providers with a global presence such as
UUNET Technologies, a subsidiary of MCI WorldCom, AT&T, Sprint and Cable
& Wireless, each of which offers similar
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services and possesses the network scale and on-network users and content
to offer their customers connectivity to virtually all addresses on the
Internet, either directly through their Internet backbone or through
cost-free, high speed private peering relationships;
. Internet service providers that have a significant regional, national or
international presence but do not offer as broad a range of services or
possess fewer users and less on-network content, such as Level 3
Communications, Qwest Communications, KPNQwest, Deutsche Telekom, PSINet
and Verio Communications; and
. companies that service generally only one or a few specific Internet
infrastructure needs of enterprise customers, including web hosting
companies such as Digex and Exodus Communications; broadband Internet
access providers, such as Covad Communications and Rhythms
NetConnections; providers of security and virtual private networks, such
as Pilot Network Services; and transport service providers, such as Level
3 Communications, Qwest Communications and Williams Communications Group.
Numerous other companies from a variety of industries have also focused on
our target market. For example, many of the major cable companies have begun
offering, or are exploring the possibility of offering, Internet access by
engineering their current networks to include Internet access capabilities.
Direct broadcast satellite and wireless communications providers have also
entered the Internet access market with various wireless and satellite-based
service technologies. We have no patented technology that would preclude or
inhibit competitors from entering our market.
Many of these existing competitors have and potential competitors may have
greater financial and other resources, more customers, a larger installed
network infrastructure, greater market recognition and more established
relationships and alliances in the industry. As a result, these competitors may
be able to develop and expand their network infrastructure and service
offerings more quickly, adapt more swiftly to new or emerging technologies and
changes in customer demands, devote greater resources to the marketing and sale
of their offerings, pursue acquisitions and other opportunities more readily
and adopt more aggressive pricing policies. UUNET has substantially greater
market share and resources than we do. In addition, MCI WorldCom and Sprint
have announced a proposed merger. We believe this proposed merger would
substantially increase the market share and competitive position of UUNET, even
if it were required to divest itself of portions of its Internet backbone as a
condition of the merger. Some of our competitors are able to bundle their
Internet service offerings with other complementary services, such as local and
long distance voice, data transmission and video services, thereby reducing the
overall cost of their services compared with ours. We may not be able to offset
the effects of any of these actions. If we are unable to compete successfully,
we would experience a loss in customers and the revenues that accompany that
business.
We expect that the rates we charge for our services will decline over time,
and we may not be successful in reducing our operating expenses or introducing
new services that will compensate for these lost revenues.
We expect to continue to experience decreasing prices for our services as we
and our competitors increase transmission capacity on existing and new
networks, as a result of our current agreements with customers, through
technological advances or otherwise, and as volume-based pricing becomes more
prevalent. For example, at specified times during the course of our agreement
with America Online, America Online has the right to seek a reduction in the
fees paid to us for access ports and digital subscriber line and other
broadband services. Accordingly, our historical revenues are not indicative of
future revenues based on comparable traffic volumes. If the prices for our
services decrease for whatever reason and we are unable to offer additional
services from which we can derive additional revenues or otherwise reduce our
operating expenses, our operating results will decline and our business and
financial results will suffer.
Our strategy contemplates future international expansion but there are
significant operational and financial risks associated with international
operations.
Although we have not derived significant revenues from our international
operations in the past, an important component of our strategy is to expand
significantly our presence in international markets. We
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currently have points of presence in Amsterdam, The Netherlands; Dublin,
Ireland; Frankfurt, Germany; London, England (2); Milan, Italy; Paris, France;
Sydney, Australia; and Tokyo, Japan. We also have data centers in Leeds,
England and Tokyo, Japan that are operated by third parties. Accordingly, we
are and will continue to be exposed to risks inherent in international
operations, including, among others, the following:
. general economic, social and political conditions;
. unexpected changes in legal or regulatory requirements resulting in
unanticipated costs and delays;
. differences in technology standards;
. tariffs, export and exchange controls and other trade barriers;
. fluctuations in foreign currency exchange rates;
. difficulty of enforcing agreements and collecting accounts receivables;
. adverse tax consequences;
. changes in United States laws and regulations relating to foreign trade
and investment; and
. inability to offer some services in some countries due to regulatory and
other barriers.
Further, to expand our international operations, we may enter into joint
ventures or outsourcing agreements with third parties, acquire rights to high
bandwidth transmission capability, acquire complementary businesses or
operations or establish and maintain new operations outside the United States.
We may be heavily dependent on third parties to be successful in our
international operations. We may not be able to successfully sell our services
or adequately establish or maintain operations outside the United States.
If we are unable to manage our planned expansion effectively, we may incur
increased costs, experience capacity constraints and place too many demands
upon our management team.
We are currently experiencing a period of rapid expansion and, if our
business plan is successfully implemented, we expect our expansion to continue
for the foreseeable future. This expansion will increase our operating
complexity significantly and require significant time commitments from our
management team and severely restrict their ability to manage our existing
business. Our success depends on our ability to effectively manage this
expansion and the demands it will impose on our management. We will, among many
other things, need to:
. successfully expand our capacity and network infrastructure;
. improve our business development capabilities;
. hire, train and manage an increasing number of highly skilled employees;
and
. continually enhance our information, management and operational and
financial systems.
Our failure to manage our expansion effectively could increase our costs,
adversely affect our relations with customers and suppliers, result in
insufficient capacity over extended periods of time and adversely affect our
revenues and operating margins.
If we are not successful in achieving brand recognition for the Genuity
name, our competitive position will be weakened and we could lose market share.
There are a growing number of companies that offer Internet infrastructure
services. We believe that brand recognition is an important competitive
advantage in our industry. Establishing and maintaining our brand is necessary
for expanding our customer base, solidifying business relationships and
successfully implementing our business strategy. We only recently changed our
name to Genuity and, to be successful, we must establish and strengthen our
brand recognition. Because our brand is new, it currently has very limited
recognition in the market. Our brand may not be viewed positively or be
accepted by the market. We intend to incur significant
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expenses to promote our brand. The expenses we incur toward building our brand,
however, may not result in immediate returns and it may be a long time before
enterprises, service providers and business partners recognize and make
positive connections with our brand. If we fail to promote our brand
successfully in domestic and international markets, our business may suffer. In
addition, our brand may be diluted if customers do not perceive our services to
be of high quality or if we fail to provide a satisfactory customer service
experience. We may not be successful in achieving these goals.
Our ability to develop, market and support our managed Internet
infrastructure services depends on retaining our management team and attracting
and retaining highly qualified individuals in the Internet industry.
Our future success depends to a significant extent on the continued services
of our management team, which has significant experience with data
communications, telecommunications and managed Internet infrastructure
services, as well as relationships with many of the enterprises, service
providers and business partners that we currently or may in the future rely on
in implementing our business plan. The loss of the services of our management
team or any significant portion of it could have a substantial detrimental
effect on our ability to execute our business strategy.
Our future success also depends on our continuing ability to identify, hire,
train, assimilate and retain large numbers of highly qualified technical,
sales, marketing and managerial personnel. The demand for qualified personnel
is high and competition for their services is intense. The competition for
qualified employees in the Internet industry is particularly intense in the
Boston, Massachusetts area where our principal operations are located. We have
from time to time experienced, and we expect to continue to experience in the
future, difficulty in hiring and retaining highly skilled employees with
appropriate qualifications. If we do not succeed in attracting new personnel or
retaining our current personnel, our business will suffer.
Our historical financial information may not be representative of our
results of operations as a separate entity.
Our combined financial statements have been carved out from the consolidated
financial statements of GTE using the historical results of operations and
historical bases of the assets and liabilities of our business. Accordingly,
the historical financial information we have included in this prospectus does
not necessarily reflect what our financial position, results of operations and
cash flows would have been had we been a separate, stand-alone entity during
the periods presented. GTE did not account for us, and we were not operated, as
a separate, stand-alone entity for the periods presented. Our costs and
expenses include allocations from GTE for centralized corporate services and
infrastructure costs, including legal, accounting, treasury, real estate,
information technology, distribution, customer service, sales, marketing and
engineering. These allocations have been determined on bases that we and GTE
considered to be reasonable reflections of the utilization of services provided
to or the benefit received by us. The historical financial information is not
necessarily indicative of what our financial position, results of operations
and cash flows will be in the future.
If we do not respond effectively and on a timely basis to rapid
technological changes and evolving industry standards, our services may become
obsolete and we would probably lose customers and be unable to attract new
ones.
The managed Internet infrastructure services and networking industries are
characterized by rapid technological developments, evolving industry standards
and customer demands and frequent new product and service introductions and
enhancements. The introduction of new products or technologies could render our
network or service offerings obsolete or otherwise reduce the cost or increase
the supply of services similar to those that we provide or plan to provide.
Accordingly, we may be required to make significant and ongoing investments in
future periods in order to remain competitive. We may not be able to:
. anticipate or adapt to these new products or technologies on a timely and
cost-effective basis;
. obtain the necessary funds to develop or acquire new technologies or
products needed to compete; or
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. address the increasingly sophisticated and varied needs of our current
and prospective customers.
We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our network and service
offerings with products, services and architectures offered by others. Although
we often work with vendors in testing newly developed products, these products
may not be compatible with our infrastructure or be adequate to address
changing customer needs. In addition, although we currently intend to support
emerging standards, there can be no assurance industry standards will be
established or, if they become established, that we will be able to conform to
these new standards in a timely fashion and maintain a competitive position in
the market. Our business would be harmed if we fail to conform to the
prevailing standards, or if common standards fail to emerge.
We may lose customers if we experience system failures that significantly
disrupt the availability and quality of the services that we provide.
Our operations depend on our ability to avoid and mitigate any damages,
physical or otherwise, from natural disasters, power losses, capacity
limitations, physical or electronic breaches of security, software defects,
telecommunications failures and intentional acts of vandalism, including
computer viruses. The failure of any equipment or facility on our network could
result in interruptions in service or reduced capacity for our enterprise and
service provider customers until we make the necessary repairs or install
replacement equipment. In addition, our customers may experience interruptions
in service if carriers or other service providers fail to provide the
communications capacity that we have leased in order to provide service to our
customers or if our peering arrangements suffer significant disruption. For
example, in 1999 a third party provider from whom we lease capacity experienced
a significant disruption. Further, as of December 31, 1999, over 50% of our
traffic was transmitted over capacity that we lease from third parties. The
failure of any one of these connections also could result in reduced
performance. These interruptions in service or performance problems could
undermine confidence in our services and cause us to lose customers or make it
more difficult to attract new ones. For example, America Online has the right
to reduce its purchase commitments and terminate its agreement with us if we
fail to meet agreed upon performance levels. In addition, because many of our
services are critical to the businesses of many of our customers, any
significant interruption in our service could result in lost profits or other
loss to our customers. Although we attempt to disclaim liability in our service
agreements, a court might not enforce a limitation on our liability, which
could expose us to financial loss. In addition, we often provide our customers
with guaranteed service level commitments. If we do not meet the required
service levels as a result of service interruptions, we may be obligated to
provide credits, generally in the form of free service for a short period of
time, to our customers, which could significantly reduce our revenues.
If we do not safeguard the security and privacy of our network
infrastructure, our reputation could be damaged and we could lose existing and
prospective customers and the potential revenues they represent.
The secure transmission of confidential information over networks, including
our network, is critical to the acceptance of the Internet. Internet usage
could decline if any well-publicized compromise of security occurs. Our
customers often maintain confidential information on our servers, such as
credit card and bank account numbers. We provide managed security services that
are intended to provide a high level of protection for our customers' networks.
Our managed security services include monitoring the network perimeters of our
enterprise customers and using firewall management, maintenance and proactive
response techniques to help ensure the security of access points into our
customers' computing infrastructure. We rely on encryption and authentication
technology to provide secure transmission of confidential information. Despite
our efforts, we may not be successful in maintaining information as
confidential or adequately safeguarding our customers' networks. Someone who is
able to circumvent our security measures could misappropriate proprietary
information or cause disruptions in our operations and those of our customers.
Any compromise of security in our network could damage our reputation and cause
us to lose existing and prospective customers. We may be required to expend
significant capital and other resources to protect against, or to alleviate
problems caused by, security breaches. In addition, a compromise of security
may result in claims against us, which could be successful. These claims,
regardless of their ultimate outcome, could result in costly litigation and
could have a material adverse effect on our business and reputation and on our
ability to attract and retain customers.
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We rely on limited sources for supplying critical components of our network
infrastructure. If we are unable to obtain sufficient quantities of critical
equipment from these sources when needed, we may be forced to delay our
development and expansion plans, which would negatively affect our competitive
position.
We depend on vendors to supply the critical components of our network
infrastructure as we expand our network both domestically and internationally.
Some of our networking equipment is available only from one or a small number
of sources. For instance, we rely on Cisco Systems for our network routers and
Nortel Networks for our optical electronic equipment. We typically purchase or
lease all of our components under purchase orders placed from time to time. We
do not carry significant inventories of components and have no guaranteed
supply arrangements with vendors. Our vendors also sell products to our
competitors and we cannot assure you that they will not enter into exclusive
arrangements with our competitors. In addition, we expect to depend for a time
on others to deliver and manage our services for some of our international
operations. If we are unable to obtain required products or services on a
timely basis and at an acceptable cost, we may have to abandon or delay our
expansion plans.
We need to obtain additional capacity for our network from other providers
in order to serve our customers and keep our costs down.
We lease telecommunications capacity and obtain rights to use dark fiber
from both long distance and local telecommunications carriers in order to
extend the range of our network. Our inability to obtain this additional
capacity on acceptable terms, or at all, could adversely affect our ability to
quickly expand our network, attract new customers and serve our existing
customers or could increase our costs of doing so.
We must obtain permits and rights-of-way to develop our network
infrastructure. If we do not obtain them in a timely fashion, we may have to
delay our expansion plans.
The expansion of our network infrastructure will require that we obtain
licenses, permits and other rights, including rights-of-way and encroachment
agreements and other permits to install conduit and related network equipment,
from private landowners, utilities, railroads, local exchange carriers, state
highway authorities, local governments and transit authorities. The process of
obtaining these licenses, permits and rights can be time consuming and
burdensome. In addition, if we are unable to obtain these licenses and permits
on acceptable terms and on a timely basis, our ability to expand and operate
our network would be severely limited and our business will not grow as we have
planned.
Risks Related to Our Relationship With Verizon
We need the consent of Verizon before taking the actions described below.
Verizon is not required to grant its consent and may have interests that are
different from ours. If Verizon does not grant its consent, we may not be able
to make significant acquisitions or enter into major business combinations,
incur indebtedness in excess of specified limits or issue equity securities.
We are contractually obligated to obtain the consent of Verizon before we
take any of the following actions:
. making acquisitions or entering into joint ventures involving cash,
stock, stock equivalents or assets in excess of $100 million individually
or $500 million in the aggregate during any 12-month period;
. making any dispositions of assets outside the ordinary course of business
within the first two years after this offering and, thereafter, making
dispositions of assets in excess of $50 million individually or $250
million in the aggregate in any 12-month period;
. incurring, during any 12-month period, indebtedness that exceeds a level
of permitted indebtedness for that period to be jointly agreed upon by
Genuity and Verizon prior to the completion of this offering;
. entering into agreements or arrangements that contain provisions that
trigger a default or require a material payment if and when Verizon
exercises its conversion right; and
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. declaring extraordinary dividends or making other distributions to the
holders of our common stock, including our Class A common stock.
In addition, our certificate of incorporation requires us to obtain the
approval of the holders of our Class B common stock before we take any of the
following actions:
. amending our certificate of incorporation or by-laws in a manner that
adversely affects the rights of the holders of our Class B common stock;
. issuing capital stock, securities convertible into our capital stock or
share equivalents, other than shares of our Class A common stock reserved
at the time of this offering for issuance to employees and directors
pursuant to our long-term incentive plans;
. agreeing to enter into a merger, consolidation or sale of all or
substantially all of our assets or any similar transactions;
. filing or declaring of bankruptcy or any full or partial liquidation;
. authorizing additional capital stock;
. materially changing the nature or scope of our business; and
. taking an action that would make it unlawful for Verizon to exercise its
conversion rights.
Verizon could prevent us from taking the actions described above. Verizon's
interests and objectives, which may diverge from ours, may influence whether
Verizon is willing to grant us any consents we may request. We may not be able
to resolve potential conflicts between Verizon and us to our satisfaction, and
if we cannot, our business may be harmed. Verizon's ability to prevent us from
taking these actions will terminate under the circumstances described in
"Related Party Transactions" in the section entitled "Subscription Agreement"
and in "Description of Capital Stock" in the section entitled "Common Stock".
Verizon has the right to transfer some or all of its shares of Class B
common stock to one or more persons. Verizon also may assign its contractual
rights to transferees of the Class B common stock. In that event, these persons
would be able to prevent us from taking the actions described above.
If and when Verizon converts its Class B common stock into Class C common
stock, Verizon will have the ability to exert significant control over our
business.
Upon completion of this offering, Verizon will hold through GTE, its wholly
owned subsidiary, all of the outstanding shares of our Class B common stock,
which will represent 10% of our outstanding voting capital stock at that time,
before giving effect to any outstanding options to purchase shares of our
common stock under our long-term incentive plans. If and when Verizon is
permitted to own more than a 10% voting interest in our company under
applicable federal law, Verizon will be able to convert its shares of Class B
common stock into shares of Class C common stock that represent approximately
82%, or 80% if the underwriters fully exercise their over-allotment option, of
our outstanding capital stock and possess approximately 96% of the total voting
power of our capital stock, before giving effect to any outstanding options to
purchase shares of our common stock or additional issuances of our common
stock. After conversion of its Class B common stock, and if Verizon continues
to beneficially own shares of capital stock representing more than 50% of
voting power of our outstanding voting capital stock, Verizon will be able to
exercise a controlling influence over us, including with respect to the
election of our directors and the outcome of any corporate transaction or other
matter submitted to our stockholders for approval. The voting power of Verizon
could have the effect of delaying or preventing a change in control. The
interests of Verizon may differ from the interests of our other stockholders.
Verizon may transfer some or all of its shares of Class B common stock
without our consent or the consent of the holders of our Class A common stock.
In that event, the transferee would be able to convert those shares into Class
A common stock and, depending on the number of shares of Class B common stock
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transferred by Verizon, might be able to exercise a controlling influence over
us after converting its shares of Class B common stock.
We have contracted with Verizon to provide us with a variety of transitional
services for a limited period of time. We may experience transitional problems
if we are unable to replace these services in a timely manner or on similar
terms.
We have not been operating as a stand-alone company. Affiliates of Verizon
are contractually obligated to provide us with office and operating facilities
and specified transitional services upon completion of this offering. If
Verizon does not perform its contractual obligations under these agreements, we
may not receive these services at the same level or obtain the same benefits as
when we were part of GTE. The agreements for those transitional services
generally terminate one-year after this offering. After the termination of
these various arrangements, we may not be able to replace these transitional
services or enter into appropriate leases in a timely manner or on terms and
conditions, including cost, similar to those we will receive from Verizon or
are otherwise acceptable to us. You should refer to the section entitled
"Related Party Transactions" for more information about these arrangements.
Risks Related to Legal Uncertainty
Our intellectual property protection may be inadequate to protect our
proprietary rights, and we may be subject to infringement claims that could
subject us to significant liability and divert the time and attention of our
management.
We regard our services and technology as proprietary. We attempt to protect
them through a combination of patents, copyrights, trademarks, trade secret
laws, contractual restrictions on disclosure and other methods. These methods
may not be sufficient to protect our proprietary rights. We also generally
enter into confidentiality agreements with our employees, consultants and
customers, and generally control access to and distribution of our
documentation and other proprietary information. Despite these precautions, it
may be possible for a third party to copy or otherwise misappropriate and use
our technology without authorization, particularly in foreign countries where
the laws may not protect our proprietary rights to the same extent as do the
laws of the United States, or to develop similar technology independently. We
may need to resort to litigation in the future to enforce our intellectual
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. This litigation could result in
substantial costs and diversion of resources and could harm our business.
In addition to licensing technologies from third parties, we are continuing
to develop and acquire additional intellectual property. We expect that
participants in our markets will be increasingly subject to infringement
claims. Third parties may try to claim our services infringe their intellectual
property. Any claim, whether meritorious or not, could be time consuming,
result in costly litigation or require us to enter into royalty or licensing
agreements. These royalty or licensing agreements might not be available on
terms acceptable to us or at all, in which case we would have to cease selling,
incorporating or using those services that incorporate the challenged
intellectual property and expend substantial amounts of resources to redesign
our services. If we are forced to enter into unacceptable royalty or licensing
agreements or to redesign our services, our business and prospects would
suffer.
The regulation of the Internet is unsettled and future regulations could
adversely affect our operating costs and business.
The laws and regulations that apply to commerce and communication over the
Internet are becoming more prevalent. Legislation could dampen the growth in
Internet usage generally and decrease the acceptance of the Internet as a
commercial medium. The United States Congress has recently considered or
enacted Internet laws regarding children's privacy, copyrights, taxation and
the transmission of sexually explicit material and other types of information.
The European Union also recently enacted its own privacy regulations. The legal
framework governing the Internet, however, remains largely unsettled, even in
areas where there has been some legislative action. It may take years to
determine whether and how existing laws, including those governing
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intellectual property, telecommunications, privacy, libel and taxation, apply
to the Internet. In addition, the growth and development of the market for
electronic commerce may prompt calls for more stringent consumer protection
laws, both in the United States and abroad, which may impose additional burdens
on companies conducting business over the Internet. If the Federal Trade
Commission, Federal Communications Commission, local authorities or other
governmental authorities adopt or modify laws or regulations relating to the
Internet, our business could suffer.
We face potential liability for the information disseminated through our
network.
The laws relating to the liability of Internet access providers for
information carried on or disseminated through their networks is currently
unsettled, both in the United States and abroad. In the United States, the
Children's Online Protection Act of 1998 imposes criminal penalties and civil
liability on anyone engaged in the business of selling or transferring material
that is harmful to minors by means of the Internet without restricting access
to this type of material by underage persons. In addition, similar legislation
has been passed or is being considered in many states and foreign
jurisdictions. The imposition upon us and other Internet access providers of
potential liability for information carried on or disseminated through our
networks could require us to implement measures to reduce exposure to
liability, which may require the expenditure of substantial resources or the
discontinuation of various service offerings. Further, the costs of defending
against any claims and the potential adverse outcomes of these claims could
have a material adverse effect on our business.
We may be subject to regulation, taxation, enforcement or other liabilities
in unexpected jurisdictions.
We provide our managed Internet infrastructure services to customers located
throughout the United States and internationally. As a result, we may be
required to qualify to do business, or be subject to tax or other laws and
regulations, in these jurisdictions even if we do not have a physical presence
or employees or property in these jurisdictions. The application of these
multiple sets of laws and regulations is uncertain, but we could become subject
to regulation, taxation, enforcement or other liability in unexpected ways,
which could materially adversely affect our business, financial condition and
results of operations.
Some of the services we provide may in the future be regulated by the
Federal Communications Commission, states or foreign governments, which would
significantly increase our operating complexity and operating expenses.
Currently, our existing and planned managed Internet infrastructure services
are not directly regulated by the Federal Communications Commission or any
other government agency of the United States, except for those regulations that
apply to businesses generally and those that apply to services provided by our
subsidiary, GTE Telecom, which is classified as an "interexchange carrier" and
provides primarily private line data services. Our Internet infrastructure
services are generally classified as "information services" which are exempt
from the regulations of the Federal Communications Commission. However, the way
in which regulators view Internet infrastructure services is currently
unsettled, and some private parties and regulators have raised questions about
the current regulatory status of Internet service offerings. As a result, we,
along with the rest of the Internet infrastructure service industry, may become
subject to greater regulation in the future. The Federal Communications
Commission may choose to impose a new set of regulations on providers of
"information services" or it may reclassify Internet infrastructure services,
such as those that we provide, as either private carrier services or
telecommunications services. State and foreign governments may take similar
actions. Although we believe that any regulation that applies to our business
will likewise apply to our competitors offering similar services, some of our
competitors are already regulated as telecommunications carriers due to their
other services. As a result, these companies may be better able to operate in a
regulated environment than we are. There is no way to predict the future
regulatory framework of our industry. If existing telecommunications
regulations are extended to the Internet, or if new regulations are imposed, it
may restrict the way in which we offer our services, increase our cost of doing
business or require us to exit some or all of our businesses. You should refer
to the section in "Business" entitled "Regulatory Matters" for a more detailed
description of the federal, state and international regulations applicable to
businesses with services classified as either private carrier services or
telecommunications services.
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If Verizon is unable to convert its Class B common stock to Class C common
stock, we will not be able to realize the benefits of being a majority-owned
subsidiary of Verizon.
If Verizon is unable to convert its Class B common stock into Class C common
stock, we may not realize the full benefits of our relationship with Verizon.
These benefits include the ability to:
. offer combined packages of Internet infrastructure services and
telephony services;
. obtain financing on more favorable terms than we otherwise could;
. integrate network infrastructure and reduce overhead costs; and
. take further advantage of the purchasing power of Verizon.
Risks Related to the Securities Markets and this Offering
The trading price of the Class A common stock will anticipate the dilution
that will result from future conversion of the Class B common stock.
After this offering, the Class A common stock will represent 90% of our
outstanding common stock and the Class B common stock will represent 10% of our
outstanding common stock. Because we provide services in Bell Atlantic's local
exchange region that could be characterized as long distance services pursuant
to Section 271 of the Telecommunications Act of 1996, Verizon cannot own more
than 10% of our outstanding common stock until permitted by law. If and when
Verizon obtains sufficient relief from the long distance restrictions, Verizon
may without additional payment convert its shares of Class B common stock into
Class C common stock representing approximately 82% of our outstanding capital
stock, based on the total number of shares of common stock outstanding upon
completion of this offering. Regardless of whether Verizon obtains that
approval, Verizon may also transfer its shares of Class B common stock to a
party that could convert these shares into Class A common stock representing
approximately 82% of our outstanding capital stock. Therefore, we anticipate
that the Class B common stock will be converted into approximately 82% of our
outstanding capital stock, leaving the Class A common stock as representing
approximately 18% of our outstanding capital stock. The above figures would be
80% and 20%, respectively, if the underwriters' over-allotment option is
exercised in full. We expect that upon completion of this offering, the trading
price of the Class A common stock will reflect the dilution that will result
from this future conversion of Class B common stock.
The Class A common stock has limited voting rights in certain circumstances.
Our charter provides that so long as 50% of the shares of Class B common
stock outstanding on the date of this offering remain outstanding, including
additional shares of Class B common stock issued to Verizon in connection with
the exercise of the underwriters' over-allotment option, no person or group of
persons acting together may vote more than 15% of our outstanding shares of
Class A common stock.
You may not be able to resell your shares at or above the price you paid.
There has not been a public market for our Class A common stock. As a
result, the initial public offering price will be determined by negotiations
among the underwriters and us, and may not be indicative of prices that will
prevail in the public trading markets. We also cannot predict the extent to
which a trading market for our Class A common stock will develop or how liquid
that market will be.
The market price of our Class A common stock may be adversely affected by
fluctuations in our quarterly and annual financial results.
We may experience significant fluctuations in our future results of
operations on a quarterly and annual basis due to a variety of factors, many of
which are outside of our control. These factors include many of those described
above. If our operating results fall below the expectations of securities
analysts or investors in some future quarter or quarters, the market price of
our Class A common stock could be negatively affected.
17
<PAGE>
The market price of our Class A common stock may be materially adversely
affected by market volatility.
The price at which our Class A common stock will trade following this
offering is likely to be highly volatile and may fluctuate substantially. The
price of the Class A common stock that will prevail in the market after this
offering may be higher or lower than the price you pay, depending on many
factors, including:
. our actual or anticipated quarterly results of operations, which may
experience significant fluctuations;
. changes in financial estimates of our revenues and operating results by
securities analysts;
. increased capital expenditures or delays in the expansion of our capacity
and network infrastructure;
. actual or perceived difficulties in our ability to obtain sufficient
financing on acceptable terms to fund our capital expenditures;
. announcements by us or our competitors of new services, significant
acquisitions or strategic partnerships;
. a loss of or decrease in sales of services to major customers or a
failure to complete significant transactions;
. additions or departures of key personnel;
. future sales of our common stock, particularly by our directors and
officers; and
. commencement of, or involvement in, litigation.
In addition, the stock market has from time to time experienced significant
price and volume fluctuations that have affected the market prices for the
securities of technology companies. As a result, investors in our Class A
common stock may experience a decrease in the value of their Class A common
stock regardless of our operating performance or prospects. The fluctuations in
the price of our Class A common stock may affect our visibility and credibility
in the Internet infrastructure services market and may affect our ability to
secure additional financing on acceptable terms, if at all.
Our business could be harmed by class action litigation relating to stock
price volatility.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. Those companies, like us, that are involved in rapidly changing
technology markets are particularly subject to this risk. We may be the target
of litigation of this kind in the future. This securities litigation, if any,
could result in substantial costs and divert management's attention and
resources, which could cause serious harm to our business. We could also incur
significant costs of damages as a result of such litigation.
You will suffer immediate and substantial dilution in the book value of your
investment.
Assuming the full conversion of the Class B common stock outstanding on the
date of this offering, the initial public offering price per share will
significantly exceed the net tangible book value per share. Accordingly,
investors purchasing shares in this offering will suffer immediate and
substantial dilution of $ per share in their investment, assuming an initial
public offering price of $ per share. You should refer to the information in
the section entitled "Dilution" for more information.
18
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
We have made statements under the captions "Prospectus Summary", "Risk
Factors", "Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business" and in other sections of this prospectus
that are forward-looking statements. In some cases, you can identify these
statements by forward-looking words such as "may", "might", "will", "should",
"expects", "plans", "anticipates", "believes", "estimates", "intends",
"future", "potential" or "continue", the negative of these terms and other
comparable terminology. These forward-looking statements, which are subject to
risks, uncertainties, and assumptions about us, may include, among other
things, projections of our future financial performance, our anticipated growth
strategies and anticipated trends in our business as well as projections
relating to our capital expenditure requirements, our network expansion plans,
our plans for transitioning customer traffic from leased capacity to our
network, research and development initiatives and increases in sales and
marketing personnel. These statements are only predictions based on our current
expectations and projections about future events. Because these forward-looking
statements involve risks and uncertainties, there are important factors that
could cause our actual results, level of activity, performance or achievements
to differ materially from the results, level of activity, performance or
achievements expressed or implied by the forward-looking statements, including
those factors discussed under the caption entitled "Risk Factors". You should
specifically consider the numerous risks outlined under "Risk Factors".
Although we believe the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of any of these
forward-looking statements. When this prospectus is no longer required to be
delivered, we are under no duty to update any of these forward-looking
statements after the date of this prospectus to conform our prior statements to
actual results or revised expectations.
19
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of the shares of Class A
common stock we are offering will be approximately $ million, assuming an
initial public offering price of $ per share and after deducting estimated
underwriting discounts and offering expenses payable by us. If the
underwriters' over-allotment option is exercised in full, we estimate that our
net proceeds will be approximately $ .
We intend to use the net proceeds of this offering for capital expenditures
in connection with the expansion of our network infrastructure, increased sales
and marketing activities, funding our operating losses and general corporate
purposes, including working capital. We may also use a portion of the net
proceeds to acquire or invest in businesses or products or to obtain the right
to use complementary technologies. We have no current commitments or agreements
with respect to any acquisition or investment. Pending these uses, we intend to
invest the net proceeds in short-term, investment-grade, interest-bearing
securities.
DIVIDEND POLICY
We have never declared or paid cash dividends on our capital stock. We
currently expect to retain earnings, if any, to finance the growth and
development of our business. Therefore, we do not anticipate declaring or
paying cash dividends on our common stock in the foreseeable future. The
decision whether to pay dividends will be made by our board of directors from
time to time in light of conditions then existing including, among other
things, our results of operations, financial condition and capital expenditure
requirements. We must also obtain the consent of Verizon to declare
extraordinary dividends or make other distributions on our Class A common
stock. You should refer to the section in "Related Party Transactions" entitled
"Subscription Agreement" for more information on this limitation.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1999:
. on an actual basis;
. on a pro forma basis to give effect to our recapitalization on ,
2000; and
. on a pro forma as adjusted basis to give effect to the sale of the shares
of Class A common stock offered by us in this offering at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and offering expenses payable by us.
This table should be read in conjunction with "Selected Combined Financial
Data", "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and our combined financial statements and accompanying notes
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of December 31, 1999
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- --------- -----------
(in thousands)
<S> <C> <C> <C>
Note payable-affiliate...................... $ 126,503 $ $
----------- ----- -----
Current and noncurrent employee benefit
obligations................................ 70,103
----------- ----- -----
Long-term obligations....................... 112,717
----------- ----- -----
Stockholders' equity :
Class A common stock, par value $ per
share, no shares authorized or issued and
outstanding, actual; shares authorized
and issued and outstanding, pro forma;
and shares authorized and issued
and outstanding, pro forma as adjusted...
Class B common stock, par value $ per
share, shares authorized or issued and
outstanding, actual, shares authorized
and issued and outstanding, pro forma;
and pro forma as adjusted................
Class C common stock, par value $ per
share, no shares authorized or issued and
outstanding, actual, pro forma and pro
forma as adjusted........................
Additional paid-in-capital.................. 2,983,426
Other comprehensive income.................. 2,696
Accumulated deficit......................... (1,282,778)
----------- ----- -----
Total stockholders' equity................ 1,703,344
----------- ----- -----
Total capitalization.................... $ 2,012,667 $ $
=========== ===== =====
</TABLE>
21
<PAGE>
DILUTION
After this offering, the Class A common stock will represent 90% of our
outstanding common stock and the Class B common stock will represent 10% of our
outstanding common stock. Because we provide services in Bell Atlantic's local
exchange region that could be characterized as long distance services pursuant
to Section 271 of the Telecommunications Act of 1996, Verizon cannot own more
than 10% of our outstanding common stock until permitted by law. If and when
Verizon obtains sufficient relief from the long distance restrictions, Verizon
may without additional payment convert its shares of Class B common stock into
Class C common stock representing 82% of our outstanding capital stock, based
on the total number of shares of common stock outstanding upon completion of
this offering. Regardless of whether Verizon obtains that approval, Verizon may
also transfer its shares of Class B common stock to a party that could convert
these shares into Class A common stock representing 82% of our outstanding
capital stock. Therefore, we have presented the following information on the
basis of the conversion of the Class B common stock into Class A common stock
or Class C common stock.
Our pro forma net tangible book value as of December 31, 1999 was
approximately $1.2 billion, or $ per share of common stock. Our pro forma
net tangible book value per share represents our total tangible assets less
total liabilities divided by the pro forma total number of shares of common
stock outstanding at that date, assuming conversion of the Class B common stock
into Class A common stock or Class C common stock. The dilution in pro forma
net tangible book value per share represents the difference between the amount
per share paid by purchasers of shares of our Class A common stock in this
offering and the net tangible book value per share of our common stock
immediately following this offering.
Without taking into account any changes in net tangible book value after
December 31, 1999, other than to give effect to the sale of the shares of Class
A common stock offered by us at an assumed initial public offering price of
$ per share, after deducting estimated underwriting discounts and offering
expenses payable by us, our pro forma net tangible book value as of December
31, 1999 would have been approximately $ million, or $ per share of
common stock. This amount represents an immediate increase in pro forma net
tangible book value of $ per share to GTE, our sole stockholder, and an
immediate dilution in pro forma net tangible book value of $ per share to
new investors purchasing shares of Class A common stock in this offering. If
the initial public offering price is higher or lower, the dilution to new
investors will be greater or less. The following table illustrates the dilution
in pro forma net tangible book value per share to new investors.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $
Pro forma net tangible book value per share as of December 31,
1999............................................................ $
Increase per share attributable to new investors.................
-----
Pro forma net tangible book value per share after this offering....
-----
Dilution per share to new investors................................ $
=====
</TABLE>
The following tables summarize on a pro forma basis after giving effect to
the recapitalization, as of December 31, 1999, the number of shares of common
stock purchased from us, the total consideration paid to us and the average
price per share paid by GTE as our sole stockholder, assuming conversion of its
Class B common stock into Class C common stock or Class A common stock, and to
be paid by new investors purchasing shares of Class A common stock in this
offering at an assumed initial public offering price of $ per share, before
deducting estimated underwriting discounts and offering expenses payable by us.
Post-Conversion Consideration Per Share
<TABLE>
<CAPTION>
Post-
Conversion Total
Shares Consideration
-------------- -------------- Average Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Post-conversion stockholder........ % $ % $
New investors......................
--- --- ----- ---
Total............................
=== === ===== ===
</TABLE>
22
<PAGE>
SELECTED COMBINED FINANCIAL DATA
The selected combined financial data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the combined financial statements and
accompanying notes included elsewhere in this prospectus. The selected combined
balance sheet data as of December 31, 1998 and December 31, 1999 and the
selected combined results of operations for each of the years in the three-year
period ended December 31, 1999 have been derived from our combined financial
statements, which have been audited by Arthur Andersen LLP, independent public
accountants, and are included elsewhere in this prospectus. The results of
operations of the predecessor to Genuity for the six months ended June 30,
1997, have also been derived from financial statements which have been audited
by Arthur Andersen LLP and are included elsewhere in this prospectus. Our
selected combined balance sheet data as of December 31, 1995, 1996 and 1997 and
the selected combined statement of operations data for each of the years in the
two year period ending December 31, 1996 were derived from unaudited financial
statements that are not included in this prospectus. The selected combined
balance sheet data of the predecessor to Genuity as of December 31, 1995 and
1996 and June 30, 1997 and the selected combined results of operations data of
the predecessor for each of the years in the two year period ended December 31,
1996 were derived from unaudited financial statements that are not included in
this prospectus. The unaudited financial statements include all adjustments,
consisting of normal recurring accruals, which we consider necessary for a fair
presentation of the results of operations for these periods.
Our selected combined financial data set forth below includes the financial
position of some of the operations of Genuity as of December 31, 1995, 1996,
1997, 1998 and 1999 and our results of operations for each of the five years in
the period ended December 31, 1999. The selected combined financial data as of
December 31, 1995 and 1996 and the results of operations for each of the years
in the two-year period ended December 31, 1996 do not include the financial
data of BBN Corporation. GTE acquired BBN Corporation effective June 30, 1997.
This acquisition was accounted for as a purchase business combination and,
consequently, the results of operations of BBN Corporation, excluding the
operations of BBN Technologies, which are being retained by GTE, are only
included in our results of operations for periods after June 30, 1997. The
results of operations of our predecessor represent the results of operations of
BBN Corporation, excluding the operations of BBN Technologies. The operations
of BBN Technologies are not included in the financial results of either the
predecessor or Genuity.
We have prepared the accompanying table to reflect our historical combined
financial information in a manner consistent with stand-alone operations by
reflecting transactions of GTE and balances attributable to us in our financial
statements for all periods presented. The historical financial information may
not be indicative of our future performance and does not necessarily reflect
what our financial position and results of operations would have been had we
operated as a separate, stand-alone entity during the periods covered.
23
<PAGE>
<TABLE>
<CAPTION>
Predecessor Genuity
------------------------------ ---------------------------------------------------
Year Ended Six Months
December 31, Ended Year Ended December 31,
------------------ June 30, ---------------------------------------------------
1995 1996 1997 1995 1996 1997 1998 1999
-------- -------- ---------- ------- ------- ---------- ---------- ----------
(in thousands, (in thousands,
except per share data) except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Results of Operations
Data:
Revenues
Access................. $ 24,323 $112,109 $ 94,126 $ -- $ -- $ 128,838 $ 350,777 $ 574,503
Hosting................ 1,045 7,769 9,601 -- -- 9,690 33,469 48,811
Transport.............. -- -- -- 50,151 57,597 65,221 72,412 89,541
Other.................. 300 2,452 2,591 -- -- 3,035 14,880 37,569
-------- -------- -------- ------- ------- ---------- ---------- ----------
Total revenues....... 25,668 122,330 106,318 50,151 57,597 206,784 471,538 750,424
Operating expenses
Cost of goods sold..... 17,778 85,287 92,670 31,470 32,854 184,914 512,967 786,965
Selling, general and
administrative........ 28,341 68,602 38,801 1,361 6,856 144,360 316,491 399,529
Depreciation and
amortization.......... 6,786 13,160 10,536 6,061 6,696 49,483 104,523 188,667
Operating income
(loss)................. (27,237) (44,719) (35,689) 11,259 11,191 (171,973) (462,443) (624,737)
Net income (loss)....... (35,404) (41,600) (37,663) 7,194 7,844 (172,040) (467,040) (626,689)
Basic and diluted income
(loss) per common
share..................
Basic and diluted
weighted-average common
shares outstanding.....
Other Data:
Cash flow provided by
(used in) operating
activities............. $(60,200) $(32,717) $ 2,496 $15,028 $ 8,349 $ (79,572) $ (501,568) $ (399,289)
Capital expenditures.... 13,190 42,945 2,830 616 3,360 299,491 587,831 749,988
<CAPTION>
As of December
31, As of As of December 31,
------------------ June 30, ---------------------------------------------------
1995 1996 1997 1995 1996 1997 1998 1999
-------- -------- ---------- ------- ------- ---------- ---------- ----------
(in thousands) (in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash
equivalents............ $ 36,082 $102,870 $ 78,773 $ 222 $ 303 $ 3,063 $ 13,883 $ 6,044
Working capital......... 96,332 98,950 62,041 13,414 (24) 368,458 60,670 (258,480)
Property, plant and
equipment, net......... 25,671 56,865 72,179 26,292 33,951 366,826 908,039 1,524,390
Total assets............ 157,432 216,589 218,102 61,663 59,379 1,095,989 1,703,461 2,373,159
Total long-term
liabilities............ 82,840 80,495 83,334 6,165 1,964 131,255 176,649 133,553
Total liabilities....... 105,132 110,478 140,876 25,995 28,624 608,354 351,242 669,815
Stockholders' equity.... 52,300 106,111 77,226 35,668 30,755 487,635 1,352,219 1,703,344
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with our combined
financial statements and the accompanying notes and other financial information
appearing elsewhere in this prospectus.
Overview
We are a leading facilities-based provider of high quality, managed Internet
infrastructure services to enterprises and service providers. We offer a
comprehensive suite of managed Internet infrastructure services including:
Internet access through dial-up, dedicated and digital subscriber lines; web
hosting and content delivery; and value-added e-business services, such as
virtual private networks for secure data transmission, security services and
voice-over-IP. We operate a state-of-the-art global network that consists of
broadband fiber optic cable, points of presence, secure and fault-tolerant data
centers and undersea and international fiber optic cable capacity.
Revenues
We derive our revenues from three operating segments: access, hosting and
transport. Our other revenues include international and value-added e-business
services.
Access. Our Internet access services include dial-up, dedicated and digital
subscriber lines. Our access revenues, which are derived from service providers
and enterprise customers, are the largest component of our total revenues.
Internet access customers typically sign one or two-year contracts providing
for monthly-recurring service fees that are either fixed or based on capacity
utilization. We also include in our access segment those revenues relating to
the development, operation and maintenance of a nationwide dial-up network for
America Online. We derived approximately 42% of our total revenues from America
Online in 1997, approximately 53% in 1998 and approximately 52% in 1999.
Although we expect our revenues from America Online to increase in absolute
dollar amounts, we also expect these revenues to decline as a percentage of our
total revenues as we expand and broaden our revenue base. In December 1999, we
extended our strategic relationship with America Online to provide it with
additional dial-up as well as broadband backbone Internet services. In December
1999, we agreed to operate the existing dial-up network for AOL Japan, Inc.,
and we will be responsible for a significant portion of the continued expansion
of that network. Our expanded contractual relationship with America Online
extends through 2006. You should refer to the section in "Business" entitled
"Our Relationship With America Online".
We also include in access revenues those revenues derived from our provision
of dedicated Internet access to AT&T for resale to customers of its Business
Communications Services Division in the United States. We derived approximately
18.9% of our total revenues from AT&T in 1997. That percentage decreased to
approximately 6.2% in 1998 and approximately 1.5% in 1999 because our strategic
relationship with AT&T, under which BBN Corporation acted as the exclusive
provider for these services, was terminated in September 1997.
Hosting. Our web hosting services provide reliable hosting and a high speed
network infrastructure as well as flexible, fast and secure hosting platforms
and an experienced technical support staff. Our web hosting services include
managed hosting, collocation, content delivery and high availability services.
Our hosting revenues are based primarily on monthly fees for server management,
physical facilities and bandwidth utilization. Our web hosting services
contracts typically range from one to two years.
Transport. We provide a broad range of transport services, such as
asynchronous transfer mode, or ATM, and private line services. These services
are generally purchased by telecommunications carriers and Internet service
providers requiring additional capacity and do not include Internet access
services. Our transport revenues are typically based on available bandwidth.
Our transport services contracts typically range from one to two years.
25
<PAGE>
Other. Other revenues include the results of our international business,
which consist primarily of Internet access, and domestic value-added e-business
services, such as managed security services, virtual private networks for
secure data transmission and voice-over-IP. We charge for international access
and hosting revenues on a basis consistent with our domestic services. We
charge for our security and virtual private network services on a fixed,
monthly recurring fee basis and we charge for our voice-over-IP services based
on usage. The terms of our value-added e-business service contracts typically
range from one to two years.
We believe that our hosting and other revenues will increase substantially
as a percentage of our total revenues. We also expect to continue to experience
declining prices in our access and transport services in the foreseeable
future.
Operating Expenses
Cost of Goods Sold. Cost of goods sold consists primarily of the costs of
leasing telecommunications circuits and labor and expenses of operating our
network infrastructure. We also include in cost of goods sold the salaries and
benefits of our technical, operations and customer service personnel as well as
facilities administration, including rent, maintenance and utilities to support
our data centers.
We expect our network infrastructure requirements to grow in conjunction
with the growth of our overall business and, accordingly, expect our cost of
goods sold to increase significantly in the future. We believe our investments
in network infrastructure will cause our total data transmission costs to
increase substantially in the near term because of higher network operating and
maintenance expenses associated with this expansion. Although we expect our
total data transmission costs to increase significantly in absolute dollar
amounts as we expand, we also expect them to decline as a percentage of
revenues in the future as we add and utilize additional capacity and migrate
customers from our leased facilities to our own network.
Selling, General and Administrative. Selling, general and administrative
expenses consist primarily of salaries and benefits for our marketing, sales
and support personnel, advertising, trade shows, professional fees and legal
and accounting services and other miscellaneous expenses. We expect selling,
general and administrative expenses in the future to increase in absolute
dollar amounts as we hire additional personnel, expand our operations, invest
in new support systems and incur additional costs related to the growth of our
business. More specifically, we expect that advertising expenses will increase
substantially in the near term as we launch our advertising and branding
campaign and substantially increase our sales force. However, we expect
selling, general and administrative expenses to decline as a percentage of
revenues.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of depreciation of our network infrastructure, including data
center equipment and related assets, and amortization of our goodwill and other
intangible assets. We expect these expenses to increase in the future as we
invest significant capital to expand our network infrastructure and data center
capacity.
In 1999, we completed the initial build-out of our high speed fiber network
infrastructure in the United States and have started adding additional layers
of capacity to meet existing and anticipated market demand. Our network
infrastructure has over 17,500 route miles of optical fiber connecting over 100
of the largest metropolitan areas in the United States. Through our recent
investments in undersea fiber optic cable capacity, we have expanded the reach
of our network into Europe and Asia.
Basis of Presentation
Our selected combined financial data include the financial position of some
of the operations of Genuity as of December 31, 1995, 1996, 1997, 1998 and 1999
and their results of operations for each of the five years in the period ended
December 31, 1999. Some of the operations and assets included in these combined
financial statements were transferred to Genuity on , 2000. Our combined
financial data as of December 31, 1995 and December 31, 1996 and our results of
operations for each of the two years in the period ended December 31, 1996 do
not include the financial data of BBN Corporation. GTE acquired BBN Corporation
effective
26
<PAGE>
June 30, 1997. This acquisition was accounted for as a purchase business
combination and, consequently, the results of operations of BBN Corporation,
excluding the operations of BBN Technologies, which are being retained by GTE,
are only included in our results of operations for periods after June 30, 1997.
The results of operations of our predecessor represent the results of
operations of BBN Corporation, excluding the operations of BBNT.
The following table sets forth results of operations data derived from our
audited financial statements. For the purposes of the following discussion and
analysis, the pro forma results of operations for the year ended December 31,
1997 combine the results of operations of our predecessor for the six months
ended June 30, 1997 with the results of operations of Genuity for the year
ended December 31, 1997, which includes the post-acquisition results of our
predecessor effective July 1, 1997. This presentation was included to permit
useful and complete year-to-year comparisons between the results of operations
for the years ended December 31, 1997, 1998 and 1999. However, this pro forma
restated information is not necessarily indicative of the operating results we
would have achieved if we had acquired our predecessor on January 1, 1997 and
some operating expenses, including amortization expense and allocations from
GTE for centralized corporate services and infrastructure costs, were included
for the first six months of the year.
Results of Operations
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
Pro Forma
1997 1998 1999
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
Revenues...................................... $ 313,102 $ 471,538 $ 750,424
Operating expenses:
Cost of goods sold.......................... 277,584 512,967 786,965
Selling, general and administrative......... 183,161 316,491 399,529
Depreciation and amortization............... 60,019 104,523 188,667
--------- --------- ---------
Total operating expenses.................. 520,764 933,981 1,375,161
Operating loss................................ (207,662) (462,443) (624,737)
Other income (expense)
Interest expense, net....................... (1,824) (20) (183)
Other, net.................................. 318 (2,924) (32)
--------- --------- ---------
Loss before income taxes...................... (209,168) (465,387) (624,952)
Income taxes.................................. 535 1,653 1,737
--------- --------- ---------
Net loss...................................... $(209,703) $(467,040) $(626,689)
========= ========= =========
</TABLE>
27
<PAGE>
The following table sets forth results of operations data, expressed as a
percentage of total revenues, for the periods indicated.
<TABLE>
<CAPTION>
Year Ended
December 31,
------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Revenues................................................... 100% 100% 100%
Operating expenses:
Cost of goods sold....................................... 89 109 105
Selling, general and administrative...................... 58 67 54
Depreciation and amortization............................ 19 22 25
--- --- ---
Total operating expenses............................... 166 198 184
Operating loss............................................. (66) (98) (84)
Other income (expense)
Interest expense, net.................................... (1) -- --
Other, net............................................... -- (1) --
--- --- ---
Loss before income taxes................................... (67) (99) (84)
Income taxes............................................... -- -- --
--- --- ---
Net loss................................................... (67)% (99)% (84)%
=== === ===
</TABLE>
1999 Compared to 1998 and 1998 Compared to 1997
Revenues
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
Pro Forma
1997 1998 1999
------------ ------------ ------------
Amount % Amount % Amount %
-------- --- -------- --- -------- ---
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Access................................ $222,964 71% $350,777 74% $574,503 77%
Hosting............................... 19,291 6 33,469 7 48,811 7
Transport............................. 65,221 21 72,412 15 89,541 12
Other................................. 5,626 2 14,880 4 37,569 4
-------- --- -------- --- -------- ---
Total............................... $313,102 100% $471,538 100% $750,424 100%
======== === ======== === ======== ===
</TABLE>
Our revenues for 1999 increased $279 million, or 59%, over 1998. Our
revenues for 1998 increased $158 million, or 51%, over 1997.
Access. Our access revenues in 1999 increased $224 million, or 64%, over
1998. Our access revenues in 1998 increased $128 million, or 57%, over 1997.
These increases were due primarily to an 87% increase in 1999 and a 76%
increase in 1998 in the number of dial-up access modems deployed, primarily
resulting from our expanded relationship with America Online, and to a lesser
extent, an increase in the number of dedicated access customers. These
increases were, in each year, offset in part by lower prices.
Hosting. Our hosting revenues in 1999 increased $15 million, or 46%, over
1998, due primarily to a 23% increase in the number of our managed hosting
customers. Our hosting revenues in 1998 increased $14 million, or 73%, over
1997 due in large part to our acquisition of a web hosting company in December
1997.
Transport. Our transport revenues in 1999 increased $17 million, or 24%,
over 1998, due primarily to the sale of excess capacity on our network as we
brought new network segments on line. Our transport revenues in 1998 increased
$7 million, or 11%, due primarily to the increased sale of private line
services.
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Other. Other revenues in 1999 increased $23 million, or 152%, over 1998 due
primarily to the increased sales of Internet access services in international
markets. Other revenues in 1998 increased $9 million, or 164%, due primarily to
higher international revenues and increased sales of managed security services.
Operating Expenses
Cost of Goods Sold. Our cost of goods sold in 1999 increased $274 million,
or 53%, over 1998, and our cost of goods sold in 1998 increased $235 million,
or 85%, over 1997. Our cost of goods sold, in each case, increased as a result
of the build-out of our network infrastructure to provide access to a broader
base of customers, support a growing customer base and provide increased scope
to service customers of our Internet access services. Our continued expansion
of the dial-up network operated for America Online also contributed to the
increase in cost of goods sold in 1999. Our cost of goods sold, as a percentage
of total revenues, were 89% in 1997, 109% in 1998 and 105% in 1999. To the
extent we are able to increase our base of customers and correspondingly
increase our revenues, we expect cost of goods sold to decrease as a percentage
of our total revenues. Our telecommunications circuit costs represent a
substantial percentage of cost of goods sold. These costs, which largely relate
to long haul circuits, are expected to decrease as a percentage of our revenues
as we migrate customers from our leased facilities to our own network.
Selling, General and Administrative Expenses. Our selling, general and
administrative expenses in 1999 increased $83 million, or 26%, over 1998. This
increase was due primarily to increased selling expenses that were directly
attributable to an increase in the number of sales and sales-related employees,
both domestically and internationally. The growth in our sales force resulted
in higher training expenses and additional costs for expansion of field
offices. Also contributing to this increase were the hiring of additional
management staff and related operating expenses, increased facilities costs and
increased information technology expenses.
Our selling, general and administrative expenses in 1998 increased $133
million, or 73%, over 1997. The increase was primarily due to customer growth,
higher new product development costs and investment in our sales and marketing
infrastructure, including expansion of sales channels, advertising costs and
other promotional activities related primarily to Internet-based services for
enterprise and service providers. Selling, general and administrative expenses
also increased due to increases in management staff and related operating
expenses across the organization, as well as increased cost of Year 2000
renovation and system testing.
Depreciation and Amortization. Our depreciation and amortization expenses in
1999 increased $84 million, or 81%, over 1998. This increase reflects our
continuing investment in our network infrastructure in order to support our
growth in customers and services. At December 31, 1999, over 17,500 miles of
our fiber optic network were operational and, therefore, being depreciated.
Our depreciation and amortization increased $44 million, or 74%, in 1998
over 1997. The increase reflects the continuing investment in our network
infrastructure, which had over 5,900 miles of fiber deployed and operational
and, therefore, being depreciated. We also had a full year of amortization of
goodwill related to our acquisitions of BBN Corporation and Genuity
Incorporated in 1997, compared to a half year of amortization expense in 1997.
Income Taxes
Our tax provision was computed on a stand-alone basis. Our federal income
tax returns were filed on a consolidated basis with GTE for 1998 and 1999 and
the six-month period ended December 31, 1997. We generated pre-tax book losses
of $209 million in 1997, $465 million in 1998, and $625 million in 1999 which
were benefited by GTE in its consolidated income tax return. We received
reimbursements for these tax benefits of $39 million, $185 million and $223
million for the years ended December 31, 1997, 1998 and 1999, respectively. To
reflect our income tax provision on a basis that will be comparable to future
periods, these reimbursements have been accounted for as capital contributions.
Our tax provision represents amounts owed for state taxes. Our ability to use
net operating losses may be subject to annual limitations. We may also pay
29
<PAGE>
income taxes in the future due to operating income in some states and foreign
countries. In the future, if we achieve operating profits and the net operating
losses have been exhausted or have expired, we may experience significant tax
expense.
Net Loss
Our net losses increased to $627 million in 1999 compared to $467 million in
1998 and $210 million in 1997. Given our planned operating and capital
expenditures, we expect to continue to incur significant net losses over the
next several years.
Quarterly Results of Operations
The following table sets forth our unaudited quarterly results of operations
data for each of the eight quarters in the two-year period ended December 31,
1999. This data has been derived from our unaudited combined financial
statements. We believe that this information has been prepared on the same
basis as our audited combined financial statements and that all necessary
adjustments, consisting only of normal recurring adjustments, have been
included to present fairly the selected quarterly information when read in
conjunction with our audited combined financial statements and accompanying
notes included elsewhere in the prospectus. The operating results for any
particular quarter are not necessarily indicative of the operating results for
any future period.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------------------------------
Mar. 31, June 30, Sep. 30, Dec. 31, Mar. 31, Jun. 30, Sep. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
--------- --------- --------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 103,111 $ 116,321 $ 121,424 $ 130,682 $ 163,279 $ 171,383 $ 188,085 $ 227,677
Operating expenses:
Cost of goods sold..... 106,333 123,379 132,674 150,581 176,122 172,306 211,412 227,125
Selling, general and
administrative........ 78,928 78,460 76,480 82,623 74,003 95,087 103,235 127,204
Depreciation and
amortization.......... 21,091 23,292 28,091 32,049 40,336 43,390 49,074 55,867
--------- --------- --------- --------- --------- --------- --------- ---------
Total operating
expenses............. 206,352 225,131 237,245 265,253 290,461 310,783 363,721 410,196
Operating loss.......... (103,241) (108,810) (115,821) (134,571) (127,182) (139,400) (175,636) (182,519)
Other income (expense):
Interest income
(expense), net........ (333) 200 2,115 (2,002) (432) 391 948 (1,090)
Other, net............. (146) (377) (219) (2,182) (341) (1,714) (336) 2,359
--------- --------- --------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (103,720) (108,987) (113,925) (138,755) (127,955) (140,723) (175,024) (181,250)
Income taxes............ 368 387 405 493 356 391 486 504
--------- --------- --------- --------- --------- --------- --------- ---------
Net loss................ $(104,088) $(109,374) $(114,330) $(139,248) $(128,311) $(141,114) $(175,510) $(181,754)
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
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<PAGE>
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods. We have funded these cash requirements principally through permanent
contributions to capital from GTE and borrowings from its affiliates. Capital
contributions amounted to $611 million in 1997, $1,327 million in 1998 and $972
million in 1999. We expect to continue to fund all of our cash requirements
prior to this offering through permanent contributions of capital from GTE.
Net cash used in operating activities was $80 million in 1997, $502 million
in 1998 and $399 million in 1999. Net cash used in operating activities for
these years was primarily the result of operating losses.
Net cash used in investing activities was $774 million in 1997, $505 million
in 1998 and $708 million in 1999. Net cash used in investing activities in each
of these years was primarily the result of capital expenditures for
construction of our network infrastructure, as well as leasehold improvements,
furniture, fixtures, computers and other equipment. Our capital expenditures
for the three-year period ended December 31, 1999 totaled over $1.5 billion.
Our net cash for investing activities in 1997 included the acquisitions of BBN
Corporation, our predecessor, and a web hosting company, which together totaled
$518 million. We currently intend to spend approximately $1.8 billion to $2.0
billion during the year ended December 31, 2000 on capital expenditures, of
which approximately $1.2 billion is expected to be spent on the continued
expansion of our fiber optic network and approximately $250 million is expected
to be spent on the construction of additional data centers. As of March 31,
2000, we had entered into $401 million in commitments for these projected
expenditures. Our capital expenditures program, as currently contemplated, will
require between $11 billion and $13 billion over the five-year period ending
December 31, 2004, the majority of which will be for the expansion of our
network infrastructure. We expect capital expenditures to continue to increase
significantly beyond this period, depending on the pace at which we build and
expand our network infrastructure and increase our employee base to support our
operations and invest in our selling and marketing organization. In the near
term, we believe that the proceeds from this offering, along with the capital
contribution from GTE prior to this offering, should be sufficient to meet our
cash needs through the second quarter of 2001.
Our future cash requirements, however, will depend on a number of factors,
including:
. the pace at which we expand our network infrastructure and the
associated costs;
. the rate at which customers purchase our services and the pricing of
those services;
. the level of marketing required to build our brand, to acquire and
retain customers and to maintain a competitive position in the
marketplace;
. the rate at which we invest in support systems and engineering; and
. investment opportunities in complementary businesses or technologies.
We will be required to raise additional capital to fund our business plan as
currently contemplated. We cannot predict the timing and exact amount of
capital that we will be required to raise. We expect to raise this capital
principally through public offerings or private placements of debt or equity
securities, depending on market conditions. The issuance of additional equity
would be dilutive to the holders of our Class A common stock. We are required
to obtain the consent of Verizon or other future holders of our Class B common
stock prior to issuing any shares of our capital stock, other than pursuant to
our long-term incentive plans, and our agreement with Verizon limits our
ability to incur debt in excess of agreed upon amounts. You should refer to
"Description of Capital Stock" and the section in "Related Party Transactions"
entitled "Subscription Agreement" for more information regarding limitations
imposed on us by our charter and contractual relationship with Verizon. If we
are unable to obtain required additional capital through the issuance of these
securities or are required to obtain it on terms less satisfactory than we
desire, we may be required to delay the expansion of our business.
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<PAGE>
In addition, in the future we may wish to selectively pursue possible
strategic investments in businesses, technologies or products complementary to
ours in order to expand our geographic presence and achieve operating
efficiencies. We may not have sufficient liquidity, or we may be unable to
obtain additional debt or equity financing on favorable terms or at all, to
finance these investments.
Year 2000
We do not believe that the Year 2000 rollover has had, or will have, any
material adverse impact on our operating results or liquidity. We have not
experienced any material contingencies with customers or major suppliers nor
have we experienced any significant Year 2000 events. The estimated total cost
of our Year 2000 compliance efforts is expected to total approximately $60
million, of which $54 million has been expended through December 31, 1999.
Inflation
We do not believe that inflation has had a material adverse impact on our
business or operating results during the periods presented.
Recently Issued Accounting Pronouncements
The Securities and Exchange Commission issued Staff Accounting Bulletin
(SAB) No. 101, Revenue Recognition in Financial Statements, on December 3,
1999. We are required to adopt this new accounting guidance, as amended by SAB
No. 101A, no later than the second quarter of 2000. We implemented this
accounting guidance in the first quarter of 2000.
Quantitative and Qualitative Disclosure About Market Risk
While our long-term debt bears fixed interest rates, the fair value of our
fixed rate long-term debt is sensitive to changes in interest rates. There is a
risk that market rates will increase and the required payments will exceed
those based on the current market rates. The estimated fair value of long-term
debt based on a debt pricing model was lower than its recorded value by
approximately $1.2 million as of December 31, 1998 and by approximately $6.6
million as of December 31, 1999. Under our current risk management policies, we
do not use interest rate derivative instruments to manage our exposure to
interest rate changes.
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<PAGE>
BUSINESS
Overview
We are a leading facilities-based provider of high quality, managed Internet
infrastructure services to enterprises and service providers. We offer a
comprehensive suite of managed Internet infrastructure services, including:
Internet access through dial-up, dedicated and digital subscriber lines; web
hosting and content delivery; and value-added e-business services, such as
virtual private networks for secure data transmissions, security services and
voice-over-IP. We operate a state-of-the-art global network that consists of
recently deployed broadband fiber optic cable in the United States, points of
presence, secure and fault-tolerant data centers and undersea and international
fiber optic cable capacity. Our large base of on-network users and content,
combined with our extensive network, positions us as one of the leading
Internet backbone providers in the world, a status commonly referred to as a
Tier 1 Internet backbone provider. Tier 1 Internet backbone providers have the
network scale and on-network traffic to offer their customers connectivity to
virtually all addresses on the Internet either directly through their Internet
backbone or through cost-free, high speed private peering relationships with
other Tier 1 providers. We believe that service providers are increasingly
connecting to networks with substantial on-network content to improve the
quality of their customers' experience, which in turn drives demand by
enterprises seeking to connect to networks with large numbers of users. We
believe that by taking advantage of this demand cycle, which we call the
"network effect", we will continue to drive significant demand for our services
from both enterprises and service providers and differentiate ourselves from
non-Tier 1 Internet backbone providers. We provide managed Internet
infrastructure services to approximately 6,500 enterprises and approximately
500 service providers, which include Internet service providers and application
service providers.
Unlike many recent entrants into the Internet industry, we have more than
three decades of experience in designing and implementing the architecture of
the Internet and with solving computer networking problems. In 1969, our
predecessor, BBN Corporation designed and helped to implement ARPAnet, which is
widely recognized as the basis for the Internet today. Our network is
recognized as the first Internet backbone and, accordingly, was designated AS-
1. We also developed the first Internet router, delivered the world's first e-
mail message and pioneered the use of the "@" symbol as a universal addressing
standard for electronic mail. More recently, we were one of the first to offer
commercially managed web hosting services and managed security services through
outsourced firewall monitoring.
Industry Background
The Growing Importance of the Internet
The Internet has experienced tremendous growth in the past decade and has
emerged as an important global medium for communications and commerce. The
growth in data that is transmitted over the Internet is driven by a number of
factors, including the rapidly increasing number of network-enabled and
Internet-based applications, the growing number of personal computers linked to
the Internet, advances in network-enabled devices, servers and routers and the
increasing availability of broadband connections.
The explosive growth of the Internet and the increasing demand for data
services are expected to continue. According to International Data Corporation,
the number of Internet users worldwide will increase from 142 million at the
end of 1998 to approximately 502 million by the end of 2003. In addition,
according to International Data Corporation, the number of web pages is
expected to grow from 1.7 billion in 1999 to approximately 13.1 billion in
2003. This growth is expected to lead to a substantial increase in the demand
for bandwidth and other Internet infrastructure services.
The proliferation of the Internet within the business environment, in
particular, has been substantial. Once primarily used for e-mail and retrieving
information, the Internet is now being used as a communications platform for an
increasing number of mission-critical Internet-based applications, such as
those relating to e-commerce, internal networks or intranets, telephone and
facsimile capabilities, supply chain management,
33
<PAGE>
customer service and project coordination via extranets. The Gartner Group
estimates that worldwide business-to-business e-commerce sales will grow from
$145 billion in 1999 to approximately $7.3 trillion in 2004.
To improve the effectiveness and scalability of their critical Internet-
based applications, both enterprises and service providers are requiring
increasing levels of network performance, including capacity, reliability,
security and manageability, across the Internet.
The Growing Demand for Outsourced Internet Infrastructure Solutions
As the Internet and data traffic have grown, the cost and complexity for
enterprises and service providers to manage their own network infrastructure
demands in-house has increased. Traditionally, enterprises were required to
make substantial investments in developing the Internet expertise and
infrastructure necessary to ensure the quality, reliability, security and
availability of their Internet operations. The implementation and maintenance
of Internet infrastructure solutions also require significant technical
expertise and capital expenditures in a number of other areas, such as e-
commerce systems, security and privacy technologies, advanced user interface
and multimedia production. Moreover, the information technology departments
within enterprises are constantly challenged by the need to implement their
Internet business strategy, adopt new and rapidly changing technologies,
transition to new broadband content applications and continuously update
dynamically changing content. As a result, enterprises are seeking Internet
infrastructure service providers that can minimize their exposure to the
capital, human and technological risks associated with in-house solutions. To
increase their competitive edge, enterprises are now outsourcing their critical
Internet operations to increase performance and scalability, speed time-to-
market and reduce costs.
Similarly, service providers are challenged by the rapid growth and
increasing complexity of the Internet infrastructure, the dramatic increase in
data traffic and the growing need to meet the demands of broadband
applications. Service providers are increasingly required to devote substantial
capital and human resources to expanding the capacity and the technological
capabilities of their networks. As the demands of their customer base grow,
these service providers find it more difficult to quickly, cost-effectively and
efficiently deliver service through internal infrastructure expansion. As a
result, service providers are increasingly focusing their resources on sales
and marketing and outsourcing their Internet infrastructure requirements to
organizations focused on developing and enhancing a scalable, high capacity
Internet infrastructure.
The Development of the Internet Infrastructure Services Market
The growing demand from enterprises and service providers for outsourced
Internet infrastructure services has led to the development of an Internet
infrastructure service market comprised of companies focused on solving these
outsourcing requirements. Many of these companies have endeavored to build or
otherwise acquire network facilities in order to provide Internet access, while
others have addressed more specific solutions, such as web hosting or security
services. According to Forrester Research, the Internet access and web hosting
markets in the United States are expected to grow from an aggregate of $4
billion in 1998 to $57 billion by 2003, representing a compound annual growth
rate of approximately 70%.
Enterprises and service providers are increasingly demanding Internet
infrastructure service providers that can deliver a high quality Internet
experience for their users. The ability to deliver this high quality experience
has become more difficult, largely as a result of an increasing number of
Internet users and richer content, including graphics, photographs and
streaming video and audio. In addition, as the number of networks connected to
the Internet has grown, the delay and loss of data that is transmitted over the
Internet has increased. This is particularly true at the major public peering
points used to exchange data between networks in the United States. In order to
increase performance, a number of Internet backbone providers have established
private peering connections with other networks to exchange their traffic. The
quality of an experience on the Internet is therefore highly dependent on the
quality, capacity and reliability of the physical facilities over which
Internet services are provisioned and the Internet backbone through which
Internet access is provided and content is delivered.
34
<PAGE>
The critical elements of delivering a high quality user experience are a
large base of on-network users, content, and high speed, well-managed private
peering relationships with other Tier 1 Internet backbones. Internet backbone
providers that have these competitive strengths are able to route traffic to
virtually all Internet addresses and avoid the need to route traffic across
multiple networks and congested public peering points. Consequently, their
users encounter fewer delays due to transmission bottlenecks across public
peering points, and enterprise and service providers using these Internet
infrastructure service providers are better able to manage the quality of
experience of their end users.
Accordingly, enterprises and service providers increasingly look to the
limited number of providers that offer a comprehensive suite of managed
Internet infrastructure services, a large base of on-network users and content,
reliable and scalable network facilities and Tier 1 Internet connectivity. We
believe that we are among only a few companies in the world that offer the full
complement of these attributes as part of their Internet infrastructure
services solution.
Our Solution
Our solution enables our customers to outsource their Internet
infrastructure needs to a single provider and to scale their Internet
operations in a cost-effective and reliable manner. The key elements of our
solution include:
Comprehensive Suite of Managed Internet Infrastructure Services. We offer a
broad range of managed Internet infrastructure services, including: Internet
access; web hosting and content delivery; and value-added e-business services,
such as virtual private networks for secure data transmission, security
services and voice-over-IP. Our services are designed to enable customers to
purchase the level of service, features, access speed and functionality that
meet their existing requirements, while at the same time allowing them to
easily upgrade services over time. We believe there is significant opportunity
to offer integrated services to enterprise customers as their requirements
evolve from Internet connectivity to more critical Internet applications. As
part of our solution, we install, configure, maintain and monitor industry-
leading hardware and software, offer technical consulting and support, provide
high-volume backup and recovery systems and monitor our Internet backbone
operations 24 hours a day, seven days a week. Additionally, we provide flexible
service pricing that allows our customers to be billed according to their
bandwidth and capacity utilization.
Large Base of On-Network Users and Content. Because we provide Internet
access services to many of the leading Internet service providers, including
America Online, NetZero and Web TV, web hosting services for popular web sites
as Yahoo! and ZDNet, and high speed connections to enterprises that host their
own web sites, such as Microsoft, we carry a significant amount of traffic over
our Tier 1 Internet backbone. We believe enterprises and service providers
choose to connect to our Internet backbone because they can directly route
traffic to, or receive content from, a significant number of other customers
without the need to pass through private peering connections or overloaded
public peering points. This capability results in higher transmission speeds,
lower instances of data loss and greater quality of service, thereby improving
the overall quality of experience for Internet users. We believe that service
providers are increasingly connecting to networks with substantial on-network
content to improve the quality of their customers' experience, which in turn
drives demand by enterprises seeking to connect to networks with large numbers
of users. We believe that by taking advantage of this demand cycle, which we
call the "network effect", we will continue to drive significant demand for our
services from both enterprises and service providers and differentiate
ourselves from non-Tier 1 Internet infrastructure service providers.
State-of-the-Art Network. We operate a state-of-the-art, high capacity
global fiber optic network that is highly reliable and scalable. Over 90% of
our fiber has been deployed within the past two years, and a majority of our
optical electronic equipment has been installed within the past year. Our
highly redundant fiber optic network architecture is designed to minimize
service interruptions in our network operations. We have significant additional
capacity on our fiber network, which already carries a substantial portion of
our traffic. This capacity allows us to scale quickly at favorable incremental
capital costs as we meet increased customer
35
<PAGE>
demands and continue our transition from leased capacity. We also operate eight
data centers in the United States, one data center in the United Kingdom and
one in Japan, through which we provide managed and collocated web hosting
services for enterprises with critical Internet operations. Through our
technologically advanced data centers, we offer customers a secure environment
to house critical Internet operations and to obtain high bandwidth connectivity
to the Internet.
High Performance, Tier 1 Internet Connectivity. We provide high performance
connectivity to the Internet through our Tier 1 Internet backbone and extensive
high speed private peering relationships with other major Internet backbone
providers and, to a lesser extent, public peering points. Our extensive private
peering relationships permit us to have direct, cost-free exchange of traffic
with a significant number of telecommunications carriers and Internet
infrastructure service providers, thus avoiding the congestion of public
peering points when directing traffic to users connected to those Internet
backbones. As a result, not only are we able to offer our customers direct
access to our on-network users and content, but over 85% of the traffic we
deliver to the rest of the Internet is delivered through private peering
connections.
Significant Internet Protocol Engineering and Architectural Expertise.
Drawing upon the breadth and depth of our IP and networking experience and
expertise, including our 756 engineers and 1,119 technicians, we are able to
quickly and cost-effectively identify the Internet infrastructure requirements
of our customers and design and implement appropriate solutions. For service
providers, this entails testing, certifying, deploying and scaling, within our
network, the latest fiber optic and IP routing, switching and web hosting
technology to provide cost-effective and highly reliable managed Internet
infrastructure services. For our enterprise customers, we provide high quality
IP solutions comprised of one or more of our services. For example, we combine
our Internet access, web hosting, virtual private networks and managed security
services to enable secure intranets and extranets for enterprises.
Our Strategy
Our objective is to be the leader in architecting, building and operating
the infrastructure for the Internet economy. The principal elements of our
strategy for pursuing this objective include:
Leveraging the Network Effect. We intend to continue to target enterprises
and service providers with significant Internet infrastructure demands. The
addition of an increasing number of service providers enables us to cost-
effectively scale our network and attract enterprises that seek to connect to
networks with a large number of users. The additional users that these service
providers bring to our network attract enterprises that want to market their
products and services directly to a larger base of users. We believe that
attracting these customers will enhance our position as a leading provider of
managed Internet infrastructure services as a result of the consolidation of a
growing number of users and large volumes of content on our Tier 1 Internet
backbone. We also believe that over time the scale associated with an
increasing customer base will also allow us to pursue premium pricing with
enterprise customers and minimize operating expenses sometimes associated with
private peering connections to other Internet backbones.
Expanding Our Capacity and State-of-the-Art Network. We intend to continue
to expand our capacity and state-of-the-art network in advance of the capacity
demands of our customers. We plan to do this by accomplishing the following by
the end of 2001:
. extending our coverage by deploying up to an additional 4,500 route miles
of fiber optic cable serving approximately 120 metropolitan service areas
and 11 additional international markets;
. expanding our network capacity in the United States to 10 layers of 10
gigabit capacity each;
. increasing our number of dedicated points of presence to nearly 300 and
deploying local fiber rings within selected metropolitan service areas to
increase our reach to end users;
. adding seven additional data centers in key locations worldwide to
address the growing demands for our web hosting and content delivery
services;
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<PAGE>
. expanding our network collocation facilities to enable our service
provider customers to reach new markets quickly and cost-effectively; and
. deploying state-of-the-art optical electronic equipment to maximize the
capacity of our fiber network.
Continuing to Build and Own Our Network Facilities. As we expand, both
domestically and internationally, we intend to build and own the majority of
our network facilities rather than leasing them from other facilities-based
providers. We believe that owning our network facilities:
. provides greater control over the performance, reliability and breadth of
our managed Internet infrastructure services;
. enables us to increase our capacity more quickly to meet increasing
bandwidth demands;
. generates higher gross margins than would be generated through leasing
circuits from other facilities-based providers; and
. improves service delivery to customers by reducing reliance on third-
party providers.
Expanding Our Distribution Capabilities. We intend to develop and expand our
direct sales force and our strategic alliances with other Internet-focused
companies in order to expand our distribution capabilities. Currently, we have
over 350 persons in our direct sales force, and we intend to substantially
increase this sales force by the end of 2001. During the same period, we plan
to substantially increase our Electronic Business Consultant organization,
which is a group of highly skilled sales consultants that are able to aid our
existing and potential customers in designing e-business solutions based on our
managed Internet infrastructure services. In addition, through our eP@rtner
Program, we have formed alliances with leading web integrators, e-business
consultants, interactive agencies and other technology providers. We have
formed similar alliances with international Internet service providers through
our Net.Alliance program to expand distribution outside of the United States.
Our current partners in these programs include, among others, Agency.com,
Cambridge Technology Partners, Cisco Systems, Ernst & Young, Hewlett-Packard,
IBM, Lante, Microsoft, Nortel Networks and Sapient in the United States,
Energis in the United Kingdom and I.NET and Tiscali in Italy. These alliances
serve as a valuable, cost-effective channel for marketing our services. We also
plan to expand our existing reseller relationships to significantly enhance our
distribution capabilities.
Pursuing Strategic Transactions and Alliances. We intend to pursue selective
acquisitions that will allow us to quickly and cost-effectively extend our
geographic presence and customer base, particularly in international markets.
Additionally, we intend to make strategic investments in or enter into joint
ventures or alliances with complementary businesses to broaden our market
presence or expand our strengths in key services. We believe that successfully
pursuing these strategic transactions or alliances will enable us to expand our
geographic and service reach and to broaden our Internet infrastructure
services for our customers.
Using Our Extensive Internet Protocol and Networking Expertise to Develop
New Services. We intend to use our long history of IP and networking expertise
to strengthen our reputation as a leader in the development and deployment of
innovative Internet infrastructure services. We were one of the first to offer
commercially managed web hosting services and managed security services. We
plan to continue to develop and introduce innovative services that address the
evolving requirements of our enterprise and service provider customers. We are
pursuing initiatives such as IP-based voice virtual private networks, enhanced
multi-media streaming and content distribution services and wireless and
satellite access services. In addition, we plan to partner with or make
investments in innovative Internet start-ups and other organizations to enhance
both our access to and incorporation of leading technologies.
Establishing Genuity as a Leading Brand for Internet Infrastructure
Services. We intend to establish Genuity as a leading brand for managed
Internet infrastructure services worldwide. We plan to increase brand awareness
by pursuing an aggressive marketing strategy involving television, radio and
print advertising as well as extensive public relations efforts. We will pursue
additional marketing campaigns specifically targeted at enterprises and service
providers. We also intend to build brand recognition by continuing to work
closely with our eP@rtners and Net.Alliance partners to increase our exposure
to a broader base of customers.
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Our Services
We provide a comprehensive suite of managed Internet infrastructure services
targeted to two primary customer groups, enterprises and service providers. Our
services fall into the following four categories:
. Internet access;
. web hosting;
. value-added e-business services; and
. transport services.
Our enterprise customers rely on our comprehensive suite of managed Internet
infrastructure services to create and implement their e-business strategies.
Our service provider customers rely primarily on our Internet access and web
hosting services, which enable them to focus on the retail aspects of their
business while we provide and manage the underlying scalable infrastructure
necessary to deliver services to their customers. We believe our focus on
developing and tailoring services to meet the needs of our target customers, as
well as the scale and diversity of our services, differentiates us from our
competitors.
Internet Access. We offer a variety of Internet access services to our
enterprise and service provider customers, including dial-up, dedicated and
digital subscriber lines. We also provide a range of customer premise equipment
that is necessary to connect to the Internet, including routers, channel
service units or data services units, modems, software and other products. Our
Internet access services, which accounted for over 77% of our total revenues in
1999, include:
. Dial-up Access. Our dial-up access service enables users to connect to
the Internet using a local telephone number. Our customers can connect to
our Internet backbone through more than 800 local access points in the
United States and, through our reseller relationship with iPass, a remote
access provider, through approximately 1,500 international local access
points in more than 150 countries. DiaLinxSM, which is our remote dial-up
access service for enterprises that enables them to provide their mobile
professionals, telecommuters, customers and business partners with
guaranteed, cost-effective local dial-up access to their intranets and
extranets, as well as the Internet, from around the world. Similarly, our
DiaLinx ISP service enables Internet service providers to expand their
existing dial-up access service without incurring substantial up-front
capital costs and ongoing operational expenses. For other Internet
service providers and organizations that want to quickly offer their
customers a private-label, Internet dial-up access service without
incurring up-front and ongoing investments in network infrastructure or
the burden of providing back office support, we offer a virtual Internet
service provider service, called DiaLinx VISP SM.
. Dedicated Access. Our Internet Advantage SM and ISP Direct SM services
connect enterprises and service providers directly to the Internet
through a dedicated high speed connection. These services are available
throughout the United States and in more than 60 other countries. We
offer a broad spectrum of dedicated connection types with flexible
pricing structures, as well as comprehensive service level guarantees. We
offer dedicated Internet access at speeds ranging from T1, including
fractional up to 1.5 megabits per second, to OC-12, which is capable of
transmitting data at 622 megabits per second.
. Digital Subscriber Line Access. Our digital subscriber line access
service enables high speed digital transmission over telephone lines.
This service allows an end user to use the telephone while connected to
the Internet with only one connection. Unlike dial-up access services,
our digital subscriber line access service provides a full-time
connection that is "always on". We currently offer service in 24 major
metropolitan service areas throughout the United States, with expansion
planned to over 50 major metropolitan service areas, covering over 60% of
the United States population, by the end of 2000. Our digital subscriber
line access services are available in a wide range of dedicated access
speeds, from 144 kilobits per second to 1.5 megabits per second. Our
digital subscriber line access services for enterprises are designed to
meet the needs of telecommuters, branch offices and
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<PAGE>
small businesses by providing high quality Internet access at speeds
faster than dial-up and Integrated Services Digital Network and offered
for a fixed monthly fee. In addition, for our service provider customers,
we coordinate all activities necessary to provide digital subscriber line
access service, including service establishment, network connectivity,
bulk billing and second tier technical support.
Web Hosting. Our web hosting services, which accounted for 7% of our total
revenues in 1999, enable enterprises and application service providers to
outsource the storage and management of their web servers to our special
purpose web hosting facilities. Our Enterprise Advantage SM web hosting service
provides reliable web hosting and high speed network infrastructure, flexible,
fast, and secure web hosting platforms and experienced technical support staff.
We currently operate 10 data centers throughout the world, with eight in the
United States, one in Leeds, England and one in Tokyo, Japan. Each data center
is located in the same building as, or in close proximity to, our network
access points. Our data centers are technologically advanced facilities with
redundant, high speed connectivity to the Internet, uninterruptible power
supplies, back-up generators, fire suppression, raised computer floors,
separate cooling zones, seismically braced racks and high levels of security.
Our Enterprise Advantage services include:
. Managed Web Hosting. Our managed web hosting service provides fully
managed, secure and reliable web hosting capabilities for businesses
operating in Windows NT or UNIX environments that want to use our
expertise to implement and manage their web site infrastructure. We
manage the systems and platforms and also retain ownership of equipment
and software.
. Customer Managed Web Hosting. Our customer managed web hosting service is
designed for enterprises that require administrative control of their web
sites but prefer to partner with an experienced, reliable web hosting
provider. This service provides our customers with pre-configured server
hardware and software, Internet access and the benefit of secure and
continuously monitored data centers. Our customers retain full
responsibility for the content and administration of their web sites.
. Collocation Web Hosting. Our collocation web hosting service is designed
for enterprises that seek to own their own equipment and retain full
responsibility for management, content and administration of their web
sites, but need a secure and scalable hosting facility with high
performance connectivity.
. Content Delivery and High Availability Services. For customers with high
traffic web sites, we also offer optional, high availability services
that can increase web site capacity and performance. We currently offer
four high availability services:
. LoadBalancer. Our LoadBalancer SM service creates a single web address
that represents multiple web servers located in a single data center.
These web servers utilize advanced load balancing techniques, based on
the number of users seeking access to the web site, to connect users
to the web server that will produce the fastest response to their
request.
. Traffic Distributor. Our Traffic Distributor service is designed for
web sites requiring high reliability and involves hosting web servers
in multiple data centers. Enabled by our patent-pending Hopscotch(TM)
load distribution technology, this service enhances the experience of
an end user by directing their content requests to the web server
offering the fastest and most reliable service.
. Site Replicator. Site Replicator enhances web site availability by
mirroring web site content between multiple servers. Site Replicator
copies new files, scripts and web images from the primary server to
the other servers within its defined group. Site Replicator is a
flexible web data replication tool, using efficient algorithms and
intelligent data transfer techniques to minimize overhead and ensure
that content on all web servers is synchronized.
. Site Accelerator. Site Accelerator brings web site content
geographically closer to users, which reduces web page load times.
Because this service is performed in our network, our customers
receive the benefits of caching without any capital investment. Site
Accelerator splits the task of
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<PAGE>
serving content between the cache servers in our network and the
dedicated web site servers. When the content is moved to our cache
servers, the dedicated web site servers are freed up, permitting more
users and more transactions without sacrificing performance from the
perspective of the end user.
Value-added e-Business Services. As enterprises and service providers
continue to use the Internet as a business-critical tool, we believe they will
increasingly demand a wider range of e-business services to ensure security,
enhance productivity, reduce costs and improve service reliability and
scalability. Today, we offer a range of value-added e-business services,
including:
. Virtual Private Networks. With our virtual private network service, we
enable an enterprise and its employees, customers, suppliers and business
partners to securely send and receive information to and from each other
via encrypted dial-up, dedicated, digital subscriber line or cable-modem
Internet connections. Our VPN Advantage SM service is a managed virtual
private network service that makes it possible to communicate securely
over our Internet backbone and over the Internet from virtually anywhere
in the world. With VPN Advantage, our customers benefit from the
capabilities of a large, shared IP-based network infrastructure while
maintaining the look and feel of their own private corporate network.
. Managed Security Services. Our managed security services are scalable and
can be customized to our customers' needs and provide a high level of
protection for their corporate networks. Our managed security services
include monitoring the network perimeters of our enterprise customers, 24
hours a day, seven days a week, and use of firewall management,
maintenance and proactive response techniques to ensure the security of
access points into their computing infrastructure. Our Site Patrol SM for
FireWall-1(R) and our Security Advantage SM are Internet security
services that help to significantly reduce exposure to Internet security
threats and firewall breaches. In addition, we offer a vulnerability
assessment service, Site Scan SM, that helps enterprises strengthen their
network perimeter security by periodically testing for potential
weaknesses and generating recommendations for correcting them.
. Voice-over-Internet Protocol. Through our suite of voice-over-IP
services, including International VoIP Direct SM and ESP Direct SM, we
offer low-cost, high-quality voice-over-IP network transport to Internet
service providers, Internet telephony service providers, enhanced service
providers and telecommunications companies providing voice-over-IP
services to their customers. We seek to provide our customers with
accelerated time-to-market for their customers through innovative,
enhanced solutions enabling voice services such as personal computer-to-
phone and personal computer-to-personal computer.
Transport. Our transport services are generally purchased by
telecommunications carriers and Internet service providers requiring additional
capacity. In delivering these services, we provide a single point of contact
for planning, ordering, installing, billing, maintaining and managing the
transport services of our customers. Our transport services, which accounted
for 12% of our total revenues in 1999, include:
. ATM Service. Our ATM transport service solution is targeted primarily at
carriers and Internet service providers with high bandwidth voice, video
and data transmission requirements. We provide ATM connections between
one or more locations. Our ATM transport services provide logical
permanent virtual connections, thereby supporting applications that send
information at a constant or variable bit rate. We offer a wide range of
speeds at one megabit per second increments and match the application
needs to the desired amount of bandwidth.
. Private Line Service. Our private line service provides dedicated point-
to-point transport services through non-switched, non-usage sensitive
dedicated facilities. Our private line service is supported over our
dedicated Synchronous Optical Network, or SONET, facilities, which
results in a highly reliable network. These services are comprised of
bandwidth delivered in units of: (1) DS-3, which is capable of
transmitting data at 44.736 megabits per second; (2) OC-3, which is
capable of transmitting data at 155.520 megabits per second; (3) OC-12,
which is capable of transmitting data at 622.080 megabits per second; and
(4) OC-48, which is capable of transmitting data at 2.488 gigabits per
second.
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. Network Collocation Services. Our collocation services provide our
customers with a physical location to collocate communications equipment
at our points of presence. This service allows our service provider
customers to expand their market areas without extensive recurring real
estate charges, build-out fees and overhead costs.
Our Network
We operate a state-of-the-art, facilities-based global fiber optic network
designed specifically for IP technology. We own the core components of our
network infrastructure in the United States through indefeasible rights of use,
or IRUs, for the underlying fiber optic cable. Within the United States we also
lease capacity from third parties to provide service to our customers. As of
the end of 1999, we estimate that over 50% of our traffic was transmitted over
this leased capacity. We are in the process of transitioning traffic from
leased capacity to our network infrastructure and expect that over 80% of our
traffic will travel over our owned network by the end of 2001. We also own
undersea capacity through IRUs and lease capacity internationally. Our current
network infrastructure consists of:
. over 17,500 route miles of owned inter-city fiber cable in the United
States that passes through the largest 100 metropolitan service areas and
substantial additional leased capacity;
. undersea capacity to Europe via Atlantic Crossing-1 and to Asia via TPC-
5;
. over 70 dedicated points of presence in the United States through which
high speed dedicated Internet access is provisioned;
. over 800 local access points of presence for dial-up access in the United
States and, through our reseller relationship with iPass, an additional
1,500 local access points of presence in more than 150 other countries;
. nine points of presence in international markets, including Amsterdam,
Dublin, Frankfurt, London (2), Milan, Paris, Sydney and Tokyo, with the
ability to provide service from over 200 additional points of presence in
over 60 countries though leased facilities; and
. eight data centers located in the United States and one each in the
United Kingdom and Japan.
We plan to substantially expand our network infrastructure, both
domestically and internationally. Through the end of 2001, we plan to:
. extend our coverage by deploying an additional 4,500 route miles of fiber
cable serving approximately 120 additional metropolitan service areas in
the United States and build local fiber rings in major metropolitan
service areas in the United States;
. utilize additional international undersea capacity to: (1) Europe via
TAT-14 and FLAG Atlantic; (2) Latin America via Americas II; (3) the
Caribbean via ARCOS-1; and (4) Asia via Japan-US cable network;
. expand our network capacity in the United States to 10 layers of 10
gigabit capacity each;
. add more than 200 additional dedicated points of presence for access in
the United States;
. add an additional 11 points of presence in key international markets;
. add approximately 800,000 additional modems to our North American dial-up
infrastructure and expand our coverage to an additional 300 local markets
in North America;
. expand our broadband coverage to 80 metropolitan service areas and
surrounding cities in the United States; and
. build seven additional data centers in key locations worldwide, which
will increase our existing capacity by approximately 1.2 million square
feet.
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As we expand our network infrastructure, both domestically and
internationally, we intend to primarily build and own our facilities rather
than lease them from other facilities-based providers. In addition, we have
taken the flexible approach of utilizing multiple fiber providers to ensure
higher reliability, quicker deployment of new technology and faster
provisioning for our customers. Our network infrastructure has the following
characteristics:
High Performance, Reliability and Quality. The geographic reach and state-
of-the-art nature of our network enhance our ability to provide a high quality
user experience. We have incorporated a variety of technologies in our network
to ensure high performance and reliable transmission. These technologies
include OC-192, which is capable of transmitting data at 10 gigabits per
second, and SONET transmission equipment employing self-healing protection
switching. These technologies, combined with our ring-based architecture,
increase network reliability and minimize the risk of service outages. In the
event of a failure in any segment of our network infrastructure, traffic is
automatically rerouted across different fiber strands with virtually no
interruption in service. Additionally, our network infrastructure makes
extensive use of railroad rights-of-way that typically offer greater protection
for the fiber than fiber deployed over other rights-of-way such as highways,
telephone poles or overhead power transmission.
Capacity on Demand. We currently have an indefeasible right to use over
17,500 route miles of fiber in the United States, with virtually all of these
fiber route miles having 24 separate strands. These fiber route miles, which
form the core of our network infrastructure in the United States, were
operational at the end of 1999. The majority of the fiber deployed in our
network infrastructure is state-of-the-art Lucent True Wave(R) non-zero
dispersion shifted fiber. This fiber supports multiple wavelengths, each
running at 10 gigabits per second, thus allowing for more capacity on a single
fiber strand. Our fiber network, combined with our network design, enables us
to take advantage of the most recent advances in optical electronic
transmission equipment. For example, we generally are using only four of our
existing 24 strands of fiber, each of which supports up to eight wavelengths
per fiber at 10 gigabits per second data transmission using current generation
optical electronic transmission equipment. However, as optical electronic
transmission equipment providing 16, 32, 50 or even higher numbers of
wavelengths per fiber becomes commercially available, we plan to deploy this
equipment as needed on unused fiber strands to expand the capacity of our
network infrastructure. With the advanced nature of our fiber network and the
advances in optical electronic transmission equipment, we believe we will have
sufficient capacity on our existing fiber in the United States for the
foreseeable future. In addition to our owned facilities, we supplement our
existing route miles with leased capacity from other providers.
Advanced Network Architectures. We believe that owning our network allows us
to implement new network architectures as they become technologically feasible.
For example, IP over dense wave division multiplexing will eliminate the need
for the SONET network layer by relying on IP routers and the dense wave
division multiplexing equipment to perform the re-routing that SONET currently
performs. Furthermore, advanced optical networking transmission equipment will
enable traffic to be switched and routed without being converted to an
electrical signal first. We believe our engineering and architectural expertise
will enable us to quickly deploy these new architectures and technologies,
thereby reducing the complexity of data systems, increasing flexibility and
reducing costs.
Flexible Platform for Multiple Services. Our network has been specifically
designed for IP and can carry any form of packet data, including voice, video
and traditional data services. While many carriers and service providers use
multiple networks and platforms to deliver these distinct services, our IP-
optimized network provides a single platform that simplifies network
management, customer support and service delivery. In addition, ownership of
our facilities enables us to deploy new or enhanced services more quickly. For
example, we designed and deployed one of the first architectures to transmit
real-time voice and data packets with reliability and performance substantially
equivalent to the public switched telephone network. Moreover, our architecture
allows for rapid scalability of capacity, quick geographic expansion and cost-
efficient implementation of new services and features.
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Our Data Centers
We currently operate 10 data centers that have been specifically designed
for managed web and application hosting services and high capacity connectivity
to our network. We have eight data centers in the United States, located in
Palo Alto, California; San Jose, California; Los Angeles, California; Phoenix,
Arizona; Chicago, Illinois; Cambridge, Massachusetts; Washington, D.C.; and New
York, New York. We also have one data center in each of Leeds, England, and
Tokyo, Japan. Our data centers are strategically located in the same building,
or in close proximity to, network access points, and all are directly connected
to our Internet backbone. Our data centers are technologically advanced
facilities with redundant, high speed connectivity to the Internet,
uninterruptible power supplies, back-up generators, fire suppression, computer
floors, separate cooling zones, seismically braced racks and high levels of
physical and network security. Our highly trained staff monitors these systems
24 hours a day and seven days a week. By the end of 2001, we plan to add seven
data centers, adding approximately 1.2 million square feet of additional
capacity. Each of these new data centers will be directly connected to our
network and will be designed specifically for mission-critical servers with
complete redundancy of all support systems. These seven new data centers will
be located in Los Angeles, California; Mountain View, California; Atlanta,
Georgia; Cambridge, Massachusetts; Carteret, New Jersey; Dallas, Texas; and
Chantilly, Virginia.
Our International Operations
We provide global coverage for our international customers. Today, we lease
our network facilities in international markets, including back haul services
from over 200 local points of presence in 60 countries and a SONET fiber ring
connecting London, Paris, Frankfurt and Amsterdam, which is capable of
transmitting data at 155.520 megabits per second. We are able to provide
dedicated access services in more than 60 countries and enable global dial-up
access service in more than 150 countries. We provide web hosting services out
of our data centers in the United Kingdom and Japan and we have the capability
to provide managed security and virtual private network services in over 39
countries. We have nine points of presence in international markets, including
Amsterdam, Dublin, Frankfurt, London (2), Milan, Paris, Sydney and Tokyo. All
of our international points of presence are capable of accepting voice-over-IP
traffic for delivery in the United States.
By the end of 2000, we plan to add 11 additional points of presence in the
following locations: Manchester; Madrid; Stockholm; Dusseldorf; Hamburg; Hong
Kong; Buenos Aires; Sao Paulo; Rio de Janeiro; San Juan; and Mexico City. By
the end of 2000, we also plan to deploy one of the first OC-48 fiber rings in
Europe employing IP over dense wave division multiplexing. We believe this
fiber ring network connecting London, Amsterdam, Frankfurt and Paris will
dramatically improve our ability to provide high-end data services and is
required to meet our rapidly growing traffic in Europe.
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In terms of trans-oceanic capacity, over the past two years we have entered
into a number of agreements for indefeasible rights of use to cable systems
that are either deployed or in the process of deployment. The following table
details our current and planned international cable capacity. The expected
dates of deployment represent approximate time frames in which we believe our
capacity on this cable will become operational and are primarily based on
construction timelines provided to us by third parties.
<TABLE>
<CAPTION>
Expected
Cable System Capacity Terms Deployment
------------- -------------------------------------- -------------- ----------
<S> <C> <C> <C>
Americas II U.S.-Brazil (One STM-1)(a) 25 Years (IRU) Q3 2000
U.S.-Venezuela (One STM-1)
U.S.-Puerto Rico (One DS-3)(b)
Atlantic U.S.-United Kingdom (Two STM-1s) 25 Years (IRU) In Service
Crossing-1 U.S.-Germany (One STM-1) Lease
United Kingdom-Netherlands (One STM-1) Lease
United Kingdom-Germany (One STM-1) Lease
Japan-U.S. U.S.-Japan (Six STM-1s) 25 Years (IRU) Q4 2000
Cable Network U.S.-Hawaii (One STM-1)
Upgrade Capability to 28.5 STM-1s
TAT-14 U.S.-France-Netherlands-Germany- 25 Years (IRU) Q1 2001
Denmark-U.S. (30 STM-1s)
FLAG U.S.-United Kingdom-France-U.S. 25 Years (IRU) Q2 2001
Atlantic-1 (Portable Capacity)
Seven STM-1s Initially
Upgrade Capability to over 50 STM-1s
ARCOS-1 U.S.-Caribbean (Portable Capacity) 25 Years (IRU) Q1 2001
Two STM-1s Initially
Upgrade Capability to 21 STM-1s
TPC-5 U.S.-Japan (One DS-3) Lease In Service
</TABLE>
- --------
(a) STM-1 is capable of transmitting data at 155.520 megabits per second.
(b) DS-3 is capable of transmitting data at 44.736 megabits per second.
Research and Development
We believe that the task of building an Internet infrastructure services
business is primarily one of integrating third-party systems, technologies,
communications equipment, software and services to provide reliable, highly
scalable and cost-effective Internet infrastructure services. Therefore, we
generally use commercially available equipment. Our 30 years of IP and
networking experience and expertise not only enables us to assess the
technology and quality of potential vendors and to assist them in making their
products more responsive to the needs of our customers.
We continually monitor research developments in the various industries
supporting our business. We work closely with the engineering groups of our
existing vendors, technology partners, innovative start-up companies and
complementary service providers to incorporate advanced technology, features
and services. For example, we have worked closely with Cisco Systems, one of
our primary suppliers, to develop new equipment and have been regular
participants in its Technical Advisory Group. Through this and other
cooperative programs, we strive to ensure that new hardware designs address the
evolving requirements of our business and those of our customers.
In addition, we plan to work with innovative start-up companies to assist
them in developing and implementing advanced technologies and converting these
technologies into market-ready products and services. A key component of our
strategy will be to develop strategic relationships with those start-ups that
have technology or services that can help us expedite the execution of our
business plan. The strategic nature of these relationships could take the form
of acquisitions, technology transfers, equity investments or joint product
development.
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Our Customers
We primarily target enterprises and service providers. We have established a
large and diversified base of enterprise customers in a wide range of
industries, including financial services, manufacturing, media and publishing,
consulting services and high technology. As of March 31, 2000, we had
approximately 6,500 enterprise customers, the majority of which were located in
the United States. The following is a representative list of our enterprise
customers.
<TABLE>
<CAPTION>
Financial Services Manufacturing
------------------ -------------
<S> <C> <C>
Block Financial Carrier Corporation
Prebon Yamane Hasbro Interactive
<CAPTION>
Media and Publishing Consulting Services
-------------------- -------------------
<S> <C> <C>
Yahoo! ENTEX Information Systems
ZDNet Sapient
High Technology
---------------
Cabletron
Sybase
</TABLE>
Our customer base also includes many service providers, including
application service providers, Internet service providers and
telecommunications carriers. As of March 31, 2000, we had approximately 500
service provider customers, the majority of which were located in the United
States. The following is a representative list of our service provider
customers.
<TABLE>
<CAPTION>
Consumer Internet Service Providers Business Internet Service Providers
----------------------------------- -----------------------------------
<S> <C>
America Online I.NET S.p.A.
NetZero Ipass
<CAPTION>
Telecommunications Carriers Internet-Centric Related Services
--------------------------- ---------------------------------
<S> <C>
Pacific Gateway Exchange Akamai Technologies
Tiscali S.p.A. Digital Island
</TABLE>
Our Relationship With America Online
We have supplied managed, dial-up access services in the United States to
America Online since 1995. During the year ended December 31, 1999, America
Online accounted for approximately 52% of our total revenues. We entered into a
new agreement with America Online effective as of December 31, 1999, pursuant
to which America Online has agreed to purchase additional dial-up Internet
access services from us for a seven-year term through December 31, 2006. Under
the new agreement, America Online has also agreed to purchase managed digital
subscriber line and other broadband network access services from us for a five-
year term through December 31, 2004. The components and resources used to
provide dial-up access and broadband connections to our network backbone for
America Online are dedicated to them and may not be used by us to service other
customers. In addition, our Columbia, Maryland network operations center is
dedicated to servicing America Online.
Dial-Up Services. Under the new agreement, America Online has committed to
purchase from us agreed upon minimum quantities of dial-up network access
services as measured by the number of dial-up access ports, or modems,
available for America Online customers. America Online has agreed to increase
the number of dial-up access ports to be managed by us through June 2002,
subject to the terms and conditions of the agreement. America Online pays us a
fixed monthly fee for each activated dial-up access port managed by us for it.
Under the agreement, the monthly per access port fee to which we are entitled
will be reduced at
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specified intervals over the term of the agreement. In addition, we have
agreed, subject to limitations, that if we offer a third party better pricing
for comparable dial-up access services than that paid by America Online,
America Online may gain the benefit of this better pricing.
At specified times during the course of the new agreement, America Online
has the right to seek a reduction in the fees paid to us for access ports based
on the then prevailing market prices for comparable dial-up access services. If
we do not agree to reduce our charge to America Online for the applicable dial-
up access ports to the market price, America Online may, subject to advance
notice and other limitations, terminate future dial-up service commitments to
us and decommission an equal number of its existing dial-up access ports with
us.
Beginning January 1, 2003, America Online may, subject to advance notice and
other limitations, decommission dial-up access ports managed by us in
proportion to their decommissioning of dial-up access ports provided by other
vendors. We are required to maintain a dedicated network operations center to
service the portions of our network dedicated to America Online.
Broadband Services. Under the agreement, we also provide broadband services
to America Online in connection with their digital subscriber line service
offerings. America Online also has agreed to purchase additional network
services from us in connection with its other broadband service offerings,
including cable modem, wireless and satellite, as they offer additional
broadband access options to their customers. America Online has committed to
purchase from us the network services necessary to serve specified percentages
of their digital subscriber line and other broadband customers. In connection
with providing digital subscriber line service to an America Online customer,
America Online is responsible for providing its customers with the local access
circuit and we are responsible for the interconnection of that circuit to our
backbone, transmission of the traffic to America Online and the monitoring,
management and control of the network.
We receive a specified monthly fee for each America Online digital
subscriber line and other broadband customer for whom we provide network
services. Under the agreement, America Online pays us monthly fees based on the
number of America Online broadband customers that are connected to our network,
which fees are subject to agreed upon reductions as the number of America
Online digital subscriber line and other broadband customers for whom we are
providing services increases. In addition, we have also agreed to extend
broadband network services. If we do not agree to reduce our fees to America
Online for broadband network services to the market price, America Online may,
subject to advance notice and other limitations, terminate future broadband
service purchase commitments to us and terminate existing broadband service.
General. In providing America Online services under the agreement, we are
obligated to comply with specified minimum service levels. Either party may
terminate the agreement in the event the other party commits a material breach
which is not cured within 30 days after notice of the breach. In addition,
America Online has the right to terminate the agreement in the event of:
. repeated material breaches by us even if cured;
. a violation of the most favored customer pricing provisions;
. a total or near total outage of any of the services provided by us that,
even if lasting fewer than 30 days, is widespread and prolonged;
. our inability to meet our service level commitments or to expand service
availability as required under the agreement; and
. a change in control of us other than changes in control resulting from or
arising out of the closing of the proposed merger of GTE and Bell
Atlantic.
We are also obligated to provide America Online assistance in the 12 months
following any termination of the agreement to ensure a smooth transition of
services. The agreement provides America Online with a right of first refusal
with respect to the sale of our dial-up network access business.
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Under a separate agreement, we have agreed to provide dial-up network access
services to America Online in Japan. This agreement includes similar provisions
to those described above regarding minimum purchase requirements on the part of
America Online Japan, market pricing adjustments, service level requirements
and termination provisions.
Operations and Customer Support
We believe that a high level of operational and customer support is critical
to our success in attracting and retaining enterprise and service provider
customers. We provide superior customer support by understanding the evolving
and often complex technical requirements and business objectives of our
customers. We assist our customers by initially assembling design teams
comprised of product specialists from all relevant areas of our organization,
including Internet access, web hosting and security. These design teams work
closely with our customers from the very beginning of the relationship to
properly identify their Internet infrastructure requirements and design
appropriate solutions. We also assign a project manager to this team when a
customer is prepared to implement its solution. Our design teams can range from
a small group for single service solutions to a dedicated multi-discipline team
for complex solutions. We also assign an implementation engineer to coordinate
all of our activities with a customer. Our implementation engineers assist
customers in developing operational processes and databases for use within
their internal support environment after installation.
We provide toll-free phone access, as well as e-mail or facsimile access, to
our customer support centers. In addition, our web-enabled customer service
tools allow our customers to track order and service status and request
upgrades online. In addition, we have event management teams available 24 hours
a day, seven days a week, to work with the appropriate organizations in the
event of any major Internet-wide event that disrupts service. In these
circumstances, we also utilize our automated emergency broadcast capability to
quickly reach our customer by e-mail, telephone, facsimile or pager.
We provide operational support for all services 24 hours a day, seven days a
week. We also have network engineers and operational support agreements with
our vendors to provide us with support 24 hours a day, seven days a week. Our
primary Network Operations Center is located in our Burlington, Massachusetts
headquarters facility. This Network Operations Center is supported by dual
external power grids with divergent entry, extensive failover battery backup
and dual, on premises power generation stations. In addition, we have a Network
Operations or Operations Support Center in the following locations: Cambridge,
Massachusetts; Columbia, Maryland; Dallas, Texas; and Chantilly, Virginia. Our
Columbia, Maryland network operations center is dedicated to servicing America
Online. Our centers can perform disaster back-up for other centers. Our data
centers are designed with these same commitments to availability, and we
guarantee these capabilities with service level guarantees.
Sales and Marketing
Within the United States, we rely primarily on a direct sales force. This
direct sales force focuses on U.S.-based enterprises and service providers with
domestic and international service requirements. Our sales force within the
United States generally works with the managers of the marketing, sales or
finance departments, as well as with information technology officers within the
enterprise. In addition, through our eP@rtners program, we have formed
alliances with leading web integrators, e-business consultants, interactive
agencies and other technology providers, which increases our access to
potential service provider and enterprise customers. Our current partners in
this program include Agency.com, Cambridge Technology Partners, Cisco Systems,
Ernst & Young, Hewlett-Packard, IBM, Lante, Microsoft, Nortel Networks and
Sapient. These alliances enable us to provide comprehensive e-business
solutions and also serve as a valuable, cost-effective channel for marketing
our services. We also plan to expand our existing reseller relationships to
significantly enhance our distribution capabilities.
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Internationally, we have both a direct sales force and a channel partner
program, which we call our Net.Alliance program. Our international direct sales
force focuses primarily on the international service provider segment, while
our Net.Alliance partners are our primary channel to multinational companies
based outside of the United States. Many of our Net.Alliance partners are both
customers and resellers of our services. This channel gives us distribution
capabilities in over 14 countries globally. Our current partners in this
program include Energis in the United Kingdom and Tiscali and I.NET in Italy.
All of our sales representatives participate in extensive technical and
consultative sales training programs that we believe enable them to better
comprehend, respond to and resolve the complex networking problems of our
customers. As of March 31, 2000, we had a direct sales force of over 350
people.
We only recently changed our name to Genuity. To be successful, we must
establish and strengthen our brand recognition. We intend to incur significant
expenses to promote our brand. Our marketing organization is responsible for
developing the strength and awareness of the Genuity brand on a local, national
and international basis. We intend to build brand awareness through a variety
of methods, including radio, print advertising in trade journals and special-
interest publications and our web site. In addition, we also employ public
relations personnel in-house and work with an outside public relations agency
to provide broad coverage in the Internet and computer networking fields. To a
limited extent, we also directly market our services at seminars and trade
shows such as Internet World, ISPCon, COMnet, CeBit and various Gartner Group
information technology conferences.
Competition
The market for Internet infrastructure services is extremely competitive and
subject to rapid technological change. We expect to encounter increased
competition in the future as a result of increased consolidation and
development of strategic alliances in the industry. In addition, we will
compete with foreign service providers as we expand internationally and as
these service providers increasingly compete in the United States market. Our
principal competitors in the Internet infrastructure services market may be
divided into Internet infrastructure service providers and niche players
offering services competitive with one or more of our services.
Internet Infrastructure Service Providers. We believe our primary
competitors are those Internet infrastructure service providers that offer a
similar breadth of services and possess the network users and content to offer
their customers connectivity to virtually all addresses on the Internet, either
through their Internet backbone or through high speed private peering
relationships that permit them to have direct, cost-free exchange of traffic
with a significant number of carriers and other Internet service providers.
These competitors include UUNET Technologies, a subsidiary of MCI WorldCom,
AT&T, Cable & Wireless and Sprint. UUNET has substantially greater market share
than we do, and some of the others also have greater market share than we do.
UUNET is a competitor for America Online's access requirements and is reported
to provide a substantial portion of those requirements. In addition, MCI
WorldCom and Sprint have announced a proposed merger. We believe this proposed
merger would substantially increase the market share and competitive position
of UUNET, even if it were required to divest itself of portions of its Internet
backbone as a condition to the merger. Some of these competitors also are able
to bundle their Internet service offerings with other complementary services
that we do not provide, such as local and long distance voice, data
transmission and video services, thereby reducing the price of their services
relative to ours. We may not be able to offset the effects of any price
reductions. We also compete with an increasing number of Internet service
providers that have a significant regional, national or international presence
but do not offer as broad a range of services or possess fewer users and less
on-network content than the infrastructure service providers listed above.
These competitors include, among others, Level 3 Communications, Qwest
Communications, KPNQwest, Deutsche Telekom, PSINet, Verio Communications and
Williams Communications Group. As a result of the increase in the number of
competitors and the vertical and horizontal integration that is occurring in
this industry, we currently encounter and expect to continue to encounter
significant competition, which could force us to, among other things, reduce
our rates and invest more heavily in infrastructure.
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We believe we compete with these competitors primarily on the basis of
quality and quantity of on-network users and content, breadth of service
offerings, geographic reach and quality of network infrastructure, capacity,
quality of service and price. While we believe that our network infrastructure,
comprehensive suite of services and expertise in designing, developing and
implementing managed Internet infrastructure solutions distinguish us from our
competitors, many of our existing and potential competitors have greater
financial and other resources, more customers, a larger installed network
infrastructure, greater market recognition and more established relationships
and alliances in the industry. As a result, these competitors may be able to
develop and expand their network infrastructure and service offerings more
quickly, adapt more swiftly to new or emerging technologies and changes in
customer demands, devote greater resources to the marketing and sale of their
offerings, pursue acquisition and other opportunities more readily and adopt
more aggressive pricing policies.
Niche Players. There are numerous competitors that service generally one or
a small number of the specific Internet infrastructure requirements of
enterprise customers. These competitors include, among others:
. web-hosting companies, such as Digex and Exodus Communications;
. broadband Internet access providers such as Covad Communications and
Rhythms NetConnections, both of which focus on digital subscriber line
services;
. providers of security and virtual private networks, such as Pilot Network
Services; and
. transport service providers, such as Level 3 Communications, Qwest
Communications and Williams Communications Group.
We believe that there are relatively few barriers to entry in these markets.
We compete with these niche players on the basis of technical expertise,
quality of service, reliability and price.
There are numerous other companies from a variety of industries that have
also focused on our target market. For example, many of the major cable
companies have begun offering, or are exploring the possibility of offering,
Internet access through their current networks to include Internet access
capabilities. Direct broadcast satellite and wireless communications providers
have also entered the Internet access market with various wireless and
satellite-based service technologies. We believe that direct broadcast
satellite and wireless communications providers have also entered the Internet
access market.
As we continue to expand our operations in markets outside the United
States, we will also encounter new competitors and competitive environments.
Our foreign competitors may enjoy a government-sponsored monopoly on
telecommunications services essential to our business, and will generally have
a better understanding of their local industry and longer working relationships
with local infrastructure providers.
Employees
As of March 31, 2000, we had a total of 3,557 employees, of which 1,263 were
in customer service and support, 866 were in engineering, 761 were in sales and
marketing, 345 were in information technology and 322 were in finance and
administration. Our employees are not represented by any collective bargaining
agreement, and we believe that relations with our employees are good.
Real Estate Facilities
The following table provides information about our principal real estate
facilities throughout the United States and abroad. We occupy our headquarters
and primary Network Operations Center in Burlington, Massachusetts under a
lease that expires in 2009. This lease includes renewal options for two three-
year periods. We are constructing two new buildings in Woburn, Massachusetts,
which are scheduled for completion in the next 12 months. We plan to move our
corporate headquarters to one of these new buildings while retaining our
Burlington, Massachusetts facility as an operations center. We lease space for
our other Network Operating Center in Columbia, Maryland.
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Proprietary Rights
We rely on a combination of patent, copyright, trademark and trade secret
laws and contractual restrictions to establish and protect our technology. We
own, either exclusively or jointly, an interest in nearly 200 inventions that
are the subject of patents, patent applications or patent disclosures. These
legal protections provide only limited protection. Further, the market for
Internet infrastructure services is subject to rapid technological change.
Accordingly, while we intend to continue to protect our proprietary rights
where appropriate, we believe that our success in maintaining a technology
leadership position is more dependent on the technical expertise and innovative
abilities of our personnel than on these legal protections.
Despite our efforts to protect our proprietary technology, we cannot assure
you that the steps taken by us will be adequate to prevent misappropriation of
our technology or that our competitors will not independently develop
technologies that are substantially equivalent or superior to our technology.
The laws of many countries do not protect our proprietary technology to as
great an extent as do the laws of the United States. We may need to resort to
litigation in the future to enforce our intellectual property rights, to
protect our trade secrets, to determine the validity and scope of the
proprietary rights of others or to defend against claims of invalidity. We are
also subject to the risk of adverse claims and litigation alleging infringement
of the intellectual property rights of others. Any resulting litigation could
result in substantial costs and diversion of management and other resources and
could have a material adverse effect on our business and financial condition.
Regulatory Matters
The following summarizes regulatory developments and legislation that we
believe are currently material to us. It does not describe all present and
proposed federal, state, local and foreign regulation and legislation affecting
the telecommunications industry.
Our existing and planned Internet operations are not actively regulated by
the Federal Communications Commission or any other government agency of the
United States at the present time, other than regulations that apply to
businesses generally. However, one of our subsidiaries, GTE Telecom, Inc., is
classified as an "interexchange carrier" and provides primarily private line
data services, primarily in the area of data transmission. As a result, this
subsidiary is regulated as a telecommunications carrier and is subject to the
requirements described below under "Telecommunications Services." Furthermore,
the regulations governing the telecommunications industry generally are often
subject to regulatory, judicial, or legislative modification and are in a state
of flux at the present time. Some private parties and regulators have called
the current regulatory status of various Internet service offerings into
question. We cannot predict the actions of the regulatory authorities that have
jurisdiction in this area or whether any of these authorities will attempt to
impose new regulations on Internet services or expand their interpretations of
existing regulations to make them apply directly to Internet services.
Accordingly, we do not know whether current or future regulations could have a
material adverse effect on us. If any regulatory authority imposes new
regulations or expands their interpretations of existing regulations to make
them applicable to Internet operations, some or all of the following rules may
be applied to those operations. However, if new regulations are imposed on our
industry, or existing regulations are expanded to cover our industry, these
regulations will almost certainly also apply to all similarly situated parties
offering comparable services, including our competitors.
Federal Telecommunications Regulation
Federal regulations have undergone major changes in the last four years as
the result of the enactment of the Telecommunications Act of 1996. The
Telecommunications Act is the most comprehensive reform of the
telecommunications law in the United States since the Communications Act was
enacted in 1934. For example, the Telecommunications Act imposes
interconnection and access requirements on telecommunications carriers and on
all local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers.
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Under the current regulatory regime, communications related services are
generally classified into one of the following three definitional categories:
(1) information services; (2) private carrier services; and (3)
telecommunications services or common carriage. Because the boundaries between
these categories are neither precise nor well-fixed, and the industry is so
dynamic, we cannot predict where particular services will be classified, now or
in the future. The regulations associated with each type of classification are
described below.
Information Services. Except for the provision of underlying basic
transmission capability, Internet services have generally been considered to be
"information services." Under current law, operators of information services
are exempt from regulation by the Federal Communications Commission, but
operators of telecommunications services are not similarly exempt. However, the
Federal Communications Commission continues to review its regulatory position
on the usage of the basic network and communications facilities used by
Internet service providers. Whether it will assert regulatory authority over
the Internet, and the level of any asserted authority, is a pending issue.
While the Federal Communications Commission has determined in an April 1998
report to Congress that Internet access providers should not be treated as
telecommunications carriers and therefore should not be regulated, it is
expected that the status of various types of Internet service providers will
continue to be uncertain. In the same report, the Federal Communications
Commission also concluded that some of the services currently offered over the
Internet, such as phone-to-phone IP telephone services, may be functionally
indistinguishable from traditional telecommunications service offerings, and
that their non-regulated status may have to be reexamined. The report also
indicated that the Federal Communications Commission would determine on a case-
by-case basis whether to subject IP telephone service providers to regulation,
including whether to require them to contribute financially to universal
service support mechanisms, which could also subject these services to other
forms of regulation. The Federal Communications Commission has also stated that
it may require Internet service providers that use their own transmission
facilities to provide Internet access services to contribute to universal
service mechanisms, and has previously considered and rejected the possibility
of regulating Internet backbone peering arrangements, although that issue
remains subject to further review.
Private Carrier Services. The offering of private carrier services typically
entails the offering of telecommunications, but these services are provided to
a limited class of users on the basis of individually negotiated terms and
conditions that do not meet the definition of a telecommunications service
under the Telecommunications Act. These private carriers are generally
unregulated by the Federal Communications Commission, but are subject to
universal service payment obligations, discussed below, based on their gross
revenues from end users. These private carriers may also be subject to access
charges if interconnected to local exchange facilities.
Telecommunications Services. A significant amount of regulation applies to
providers of telecommunications services. The Communications Act defines
telecommunications carriers as entities offering telecommunications for a fee,
directly to the public or to classes of users so as to be effectively available
directly to the public. The law does not distinguish on the basis of the
facilities used to provide these services. "Telecommunications" is defined as
the transmission, between or among points specified by the user, of information
of the user's choosing, without change in the form or content of the
information as sent and received. The Federal Communications Commission has
found that the definition of "telecommunications carrier" is essentially the
same as the definition of "common carrier". Telecommunications carriers are
subject to regulatory requirements that may impose substantial administrative
and other burdens on their operations.
The Federal Communications Commission imposes regulations on some common
carriers that have been found by the Federal Communications Commission to have
some degree of market power, otherwise known as dominant carriers. The Federal
Communications Commission imposes less regulation on other common carriers,
which have been found by the Federal Communications Commission not to have
market power, otherwise known as "non-dominant carriers", such as GTE Telecom,
Inc. These non-dominant carriers do not need express prior authorization to
provide domestic services and can file tariffs on one day's notice. The Federal
Communications Commission requires common carriers to obtain a formal
authorization to construct
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and operate telecommunications facilities and to provide or resell
telecommunications services between the United States and international points.
The Federal Communications Commission also regulates carrier exits from
markets.
General Obligations. All telecommunications carriers are subject to the
complaint process and rules and regulations of the Federal Communications
Commission, as well as various other requirements set out in Title II of the
Communications Act of 1934, as amended. In addition, telecommunications
carriers have the following general obligations:
. not to charge unreasonable rates or engage in unreasonable practices;
. to provide service on reasonable request;
. not to unreasonably discriminate in their service offerings;
. to comply with reporting requirements;
. to offer customer premises equipment for sale on an unbundled basis to
the extent that it is offered;
. to allow resale of their services in some circumstances; and
. to restrict their use of customer information.
In addition, telecommunications carriers are subject to other regulatory
requirements and are required to contribute to the Universal Service Fund, the
Telecommunications Relay Service Fund, the Number Portability Fund and the
North American Number Plan Administration Fund. Telecommunications carriers
must also pay regulatory fees associated with filing license applications and
other documents with the Federal Communications Commission.
Interconnection Obligations. All telecommunications carriers have the basic
duty to interconnect and interoperate, either directly or indirectly, with the
facilities of other telecommunications carriers.
Section 214 Authorizations. Common carriers are obligated to obtain, under
Section 214 of the Communications Act, authorization from the Federal
Communications Commission to provide services between the United States and
other countries, and to disclose, among other things, the extent to which they
are owned or controlled by foreign entities. The compliance with these
regulatory requirements imposes administrative and other burdens on these
carriers.
Tariffs and Pricing Requirements. The Federal Communications Commission has
eliminated the requirements that non-dominant interstate interexchange
carriers, such as GTE Telecom, maintain tariffs on file with the Federal
Communications Commission for domestic interstate services. Under the rules of
the Federal Communications Commission, after a nine-month transition period,
relationships between interstate carriers and their customers would be set by
contract. At that point, the Federal Communications Commission would no longer
recognize or accept tariffs for interstate, domestic interexchange services.
Currently, a court imposed stay is in effect and interstate long distance
telephone companies are therefore still required to file tariffs. However,
competitive access providers do not have to file tariffs for their exchange
access services, but may if they choose to do so. There has been no proposal to
detariff international services.
Customer Proprietary Network Information. The use by a telecommunications
carrier of customer proprietary network information, which generally includes
any information regarding a subscriber's use of a telecommunications service
obtained by a carrier solely by virtue of the carrier-customer relationship, is
subject to statutory restrictions. This customer proprietary network
information does not include a subscriber's name, telephone number and address,
if that information is published or accepted for publication in any directory
format. A telecommunications carrier may use a customer's proprietary network
information only to market a service that is "necessary to, or used in" the
provision of a service that the carrier already provides to the customer,
unless it receives the customer's prior oral or written consent to use that
information to market other
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services. The rules of the Federal Communications Commission regarding how to
obtain consent have recently been struck down in the courts, leaving the
current state of the customer proprietary network information requirements
uncertain. In addition, the Federal Communications Commission recently relaxed
a number of the requirements it initially adopted, which gives some flexibility
to carriers on how to comply with these rules. These rules, either as adopted
or as modified, may impede the ability of a telecommunications carrier to
effectively market integrated packages of services and to expand existing
customers' use of its services.
Universal Service. The Federal Communications Commission has recently
expanded aid to schools and libraries and extensively revamped the support
structure for high cost-of-service areas. These providers of interstate
telecommunications services, as well as some other entities, such as private
carriers offering excess capacity to end user customers, must contribute to a
fund to pay for these programs. The schools and libraries and rural health care
support mechanisms are assessed against interstate and international end-user
revenues. The contribution level and overall size of federal support may
change. Several petitions for administrative reconsideration of various Federal
Communications Commission universal service orders are pending, and there are a
number of other proceedings relating to universal service at the Federal
Communications Commission and federal courts of appeals that are still ongoing.
The rules of the Federal Communications Commission also require that
telecommunications carriers contribute to the Number Portability Fund, the
Telecommunications Relay Services Fund and the North American Number Plan
Administrator Fund.
Communications Assistance for Law Enforcement Act. Telecommunications
carriers may incur significant expenses to assure that their networks comply
with the requirements of the Communications Assistance for Law Enforcement Act.
Under this statute, telecommunications carriers are required to:
. provide law enforcement officials with call content and call identifying
information pursuant to a valid electronic surveillance warrant; and
. provide sufficient capacity for use by law enforcement officials in
executing authorized electronic surveillance.
While the telecommunications industry is attempting to negotiate legislative
and administrative provisions that would compensate carriers for some of the
costs associated with complying with this statute, as it stands today those
issues have not been definitively resolved.
Local Exchange Carriers
Telecommunications carriers that are defined as local exchange carriers are
subject to special regulatory provisions, in addition to those described above.
A local exchange carrier is defined as a provider of telephone exchange service
or exchange access. Telephone exchange service is defined as service within a
telephone exchange or connected system of exchanges operated to provide inter-
communicating service of the character ordinarily furnished by a single
exchange, covered by the local exchange charge, or comparable service provided
through a system of switches, transmission equipment or other facilities, or
combination thereof, by which a subscriber can originate and terminate a
telecommunications service. The universe of carriers that are classified as
local exchange carriers has never been fully defined by the Federal
Communications Commission. If an entity is found to be a local exchange
carrier, it will have the following obligations:
Reciprocal Compensation. This requires all local exchange carriers to
establish compensation arrangements with other carriers for the transport and
termination of telecommunications.
Resale. This requires all local exchange carriers to permit resale of their
telecommunications services without unreasonable restrictions or conditions.
Number Portability. This requires all local exchange carriers to permit
users of telecommunications services to retain existing telephone numbers
without impairment of quality, reliability or convenience when switching to
another service provider at the same location.
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Non-discriminatory Access and Dialing Parity. This requires all local
exchange carriers to provide nondiscriminatory access to telephone numbers,
operator services, directory assistance and directory listing with no
unreasonable dialing delays and to give customers access to their selected
carrier without having to dial extra digits.
Access to Rights-of-Way. This requires all local exchange carriers to permit
competing carriers access to poles, ducts, conduits and rights of way at
reasonable and nondiscriminatory rates, terms and conditions.
In addition, incumbent local exchange carriers also face additional pricing,
network unbundling, and other obligations.
State Telecommunications Regulation
States also regulate telecommunications services, including through
certification of providers of intrastate services, regulation of intrastate
rates and service offerings, and other regulations. The Telecommunications Act
prohibits state and local governments from enforcing any law, rule or legal
requirement that prohibits or has the effect of prohibiting any person from
providing any interstate or intrastate telecommunications service. In addition,
under current policies of the Federal Communications Commission, any dedicated
transmission service or facility that is used more than 10% of the time for the
purpose of interstate or foreign communication is subject to the jurisdiction
of the Federal Communications Commission to the exclusion of any state
regulation. Under the Telecommunications Act, states retain jurisdiction to
adopt regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of communications services and
safeguard the rights of consumers. Accordingly, the degree of state involvement
in local telecommunications services may be substantial. Furthermore, states
generally give municipal authorities responsibility over the access to rights-
of-way, franchises, zoning, and other matters of local concern, which means
that localities may also have involvement in the regulation of the
telecommunications industry.
Other Potential Regulation
Federal and state laws and regulations relating to the liability of online
service companies and other Internet service providers for information carried
on or disseminated through their networks are currently unsettled. Several
private lawsuits seeking to impose this type of liability on online service
companies and Internet access providers are pending. Legislation has been
enacted and new legislation has been proposed that imposes liability for or
prohibits transmission of some types of information on the Internet. The
imposition of potential liability on us and other Internet service providers
for information carried on or disseminated through our systems could require us
to implement measures to reduce our exposure to this liability, which may
require us to spend substantial amounts on or discontinue some of our service
or product offerings. While we carry professional liability insurance, it may
not be adequate to compensate or may not cover us if we become liable for
information carried on or carried by our network. Any costs not covered by
insurance incurred as a result of this liability or asserted liability could
have a material adverse effect on our business, financial condition and results
of operation. The increased attention on liability issues as a result of
lawsuits and legislative actions and proposals could also impact the growth of
Internet use.
Due to the increase in Internet use and publicity, it is possible that other
laws and regulations will be adopted regarding the Internet, including laws
pertaining to privacy, consumer protection, the dissemination of unlawful or
otherwise disfavored content, and the pricing and characteristics of services
or products. Additional legislative initiatives, including laws involving
taxation of Internet services and transactions, Internet regulation and
universal service contribution requirements for Internet providers have been
proposed. The adoption of these types of laws or regulations could inhibit the
continued growth of the Internet or other wide area information networks,
impose additional costs on us, expose us to greater potential liability from
regulatory actions or private legal proceedings or otherwise adversely affect
our business operations or performance. We cannot predict the impact, if any,
that those or other future laws and regulations or legal or regulatory changes
may have on our business.
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Other companies in our industry are not generally subject to direct
regulation by the Federal Communications Commission or any other governmental
agency of the United States, other than regulations that apply to all business
organizations. However, in connection with the merger between Bell Atlantic and
GTE, the Federal Communications Commission has reviewed our relationship with
Verizon. In addition, the Federal Communications Commission continues to review
its regulatory position on the usage of the basic network and communications
facilities by Internet companies.
Recently, the Federal Communications Commission adopted rules that direct
incumbent local exchange carriers to share their telephone lines with providers
of high speed Internet access and other data services. This ruling enables
competitive carriers to provide digital subscriber line-based services over the
same telephone lines simultaneously used by incumbent local exchange carriers
to provide basic telephone service. These changes may increase competitive
pressures on incumbent local exchange carriers in the offering of advanced
telecommunications services, including digital subscriber line services.
International Regulatory Matters
The laws relating to the provision of Internet and telecommunications
services in other countries vary substantially from country to country and are
undergoing a rapid process of development and change. There are a variety of
regulations in different jurisdictions regarding the manner in which services
are to be provided, and some countries impose liability for providing access to
prohibited content and restrict the transfer of personal information. As we
continue to expand into international markets, these laws will have an
increasing impact on our operations. We do not know whether new or existing
laws or regulations could have a material adverse effect on us or our ability
to offer some or all of our services in any country.
The ability for us to provide some or all of our Internet and other
services, including the ownership and operation of the necessary assets and
facilities in any particular country, will depend upon the extent to which
applicable laws and regulations permit us to provide our services. We believe
that the provision of some services, such as our voice-over-IP services, is
more likely to be subject to local country regulation than other Internet
services provided by us. Foreign countries treat voice-over IP differently.
Some countries impose no regulation on the service, while others allow voice-
over-IP but grant only a limited number of licenses to providers. In some
instances, the country requires licenses, but will grant an unlimited number of
licenses to providers. Finally, there are some countries that prohibit the
service altogether. Whether a carrier can provide voice-over-IP services in any
given country thus heavily depends on local regulations and the actions of
local governments.
We currently have the ability to provide services in countries without
obtaining regulatory authorizations, approvals, or licenses. In eight countries
(Brazil, Germany, Ireland, Italy, Japan, Mexico, The Netherlands and Spain)
where we currently have or are in the process of commencing operations, we have
either obtained or have applied for regulatory approvals, authorizations, or
licenses. In addition, as we enter new markets, we anticipate obtaining similar
approvals, authorizations and licenses as required by applicable local rules
and regulations in order to acquire, own and operate the necessary assets and
facilities, and to provide services, in these countries. We do not know if we
will obtain the necessary local regulatory approvals to own and operate the
assets and facilities necessary to provide service, or to provide the services
themselves, in any country, or that local country laws or regulations will not
change. Any failure to obtain approvals, or loss of authorization, to provide
services in any country could have a material adverse effect on us.
Legal Proceedings
We are not involved in any legal proceedings which we believe would, if
adversely determined, have a material adverse effect upon our business,
financial condition or results of operations.
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MANAGEMENT
The following table sets forth information concerning our executive officers
and directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Paul R. Gudonis......... 46 Chairman of the Board and Chief Executive Officer
Joseph C. Farina........ 50 President and Chief Operating Officer
Daniel P. O'Brien....... 45 Executive Vice President and Chief Financial Officer
Ira H. Parker........... 43 Senior Vice President, General Counsel and Secretary
Steven H. Blumenthal.... 46 Senior Vice President, Network Planning, Design and Engineering
Susan H. Bowman......... 46 Senior Vice President, Human Resources
James L. Freeze......... 39 Senior Vice President, Chief Strategy Officer and Director
Charles J. Gibney....... 54 Senior Vice President, Enterprise Solutions and Director
Michael J. Kalagher..... 54 Senior Vice President, Network Operations
Paul A. O'Brien......... 47 Senior Vice President, Sales and Marketing
Richard Stuntz.......... 46 Senior Vice President, Network Services
</TABLE>
Paul R. Gudonis has served as our Chairman and Chief Executive Officer since
April 2000. He has led the growth of Genuity since 1994, becoming President of
Genuity in 1998, one year after GTE acquired BBN. From 1990 to 1994, he served
as Vice President/General Manager-International of the Communications Industry
Group of EDS Corporation. Prior to 1990, Mr. Gudonis served as a senior
executive at several venture-backed start-up companies in the Boston,
Massachusetts area specializing in software and telecommunications services. He
started his career at AT&T, launching the first cellular phone operation in the
United States as Vice President-Marketing for Ameritech Mobile Communications.
Mr. Gudonis serves as a director of Boston Communications Group, Inc., a
provider of information technology services to the wireless industry. In
addition, he is Vice Chairman of the Massachusetts High Tech Council, a
director of the Massachusetts Software and Internet Council and a director of
the Massachusetts Telecommunications Council. He is a founding member of the
Global Internet Project, a group of Internet chief executive officers who
engage in public policy advocacy in support of Internet growth and expansion.
Mr. Gudonis holds a B.S. in Electrical Engineering from Northwestern University
and an M.B.A. from Harvard Business School.
Joseph C. Farina will serve as our President and Chief Operating Officer
upon the completion of this offering. From 1998 to 2000, he served as President
and Chief Executive Officer of Bell Atlantic's Data Solutions Group. He was
Executive Vice President-Operations Assurance for Bell Atlantic from 1995 to
1998. From 1993 to 1995, Mr. Farina served as both Vice President-Corporate
Business Development of NYNEX Corporation, a Regional Bell Operating Company
that is now part of Bell Atlantic, and President of the NYNEX Network Systems
Company, leading NYNEX's international expansion into Europe and Asia. Prior to
that time, he served as President of NYNEX Properties and Vice President-
Operations of NYNEX Mobile Communications, where he launched the inaugural
wireless service in New York City and Boston. Mr. Farina holds a B.S. from
Fordham University and an M.B.A. from St. John's University.
Daniel P. O'Brien will serve as our Executive Vice President and Chief
Financial Officer upon the completion of this offering. Since June 1998, Mr.
O'Brien served as the Executive Vice President--Finance and Chief Financial
Officer of GTE. From July 1997 to June 1998, he served as Vice President and
Treasurer of GTE, and from October 1995 to July 1997 he served as Assistant
Treasurer-Capital Markets of GTE. Prior to 1993, when he joined the Treasury
Department of GTE, Mr. O'Brien held several positions with the Electrical
Products Group of GTE, including Vice President-Controller of GTE European
Lighting in Geneva, Switzerland from August 1991 to January 1993. Mr. O'Brien
holds a B.S. in Chemistry from Boston College and an M.B.A. from University of
Chicago.
Ira H. Parker will serve as our Senior Vice President, General Counsel and
Secretary upon completion of this offering. From November 1997 to the
completion of this offering, he served as Vice President and General Counsel
with Genuity. In 1999, in addition to his General Counsel position at Genuity,
Mr. Parker was appointed
56
<PAGE>
Vice President and Deputy General Counsel of GTE. From July 1993 to November
1997, Mr. Parker was a partner in the Washington, D.C. office of the law firm
of Alston & Bird, where he founded and headed the Electronic Commerce Practice
Area. Prior to 1993, Mr. Parker served in a number of positions with the United
States Federal Deposit Insurance Corporation, including Assistant General
Counsel for Litigation and Policy from August 1989 to May 1992 and Deputy
General Counsel for Litigation for the Resolution Trust Corporation from May
1992 to June 1993. In 1978, Mr. Parker received his B.A. from Brooklyn College
and he received his J.D. from Emory University in 1981.
Steven H. Blumenthal will serve as our Senior Vice President, Network
Planning, Design and Engineering upon the completion of this offering. Since
1977, he has held several positions with BBN Corporation and Genuity, including
Vice President for Network Engineering and Technology. Mr. Blumenthal has been
responsible for the engineering of Genuity's network infrastructure and the
development of Internet services. He also led the design and construction of
our network infrastructure. Mr. Blumenthal holds a B.S.E.E. and M.S.E.E. from
the Massachusetts Institute of Technology.
Susan H. Bowman will serve as our Senior Vice President, Human Resources
upon the completion of this offering. From September 1997 to the completion of
this offering, Ms. Bowman served as Vice President, Human Resources for Genuity
and GTE Technology Service Corporation. Prior to that time, she held several
positions with GTE, including serving as the Strategic Human Resources Business
Partner for the Network Operations Group. Ms. Bowman holds a Ph.D. in
industrial/organizational psychology from the University of South Florida.
James L. Freeze has served as a Director since April 2000 and will serve as
our Senior Vice President and Chief Strategy Officer upon the completion of
this offering. From August 1999 to the completion of this offering, he served
as Vice President of Business Development for Genuity. From July 1998 to August
1999, he served as a senior telecommunications analyst at Forrester Research,
Inc., an Internet research firm. From June 1997 to June 1998, Mr. Freeze served
as Vice President of Sales and Marketing of Genuity, an Internet service
provider and web hosting company. Prior to 1997, he held several positions with
CompuServe Inc., a worldwide provider of network access hosting and Internet
services to the business and consumer markets. Mr. Freeze holds a B.S. and M.A.
from Ohio State University and a J.D. from Capital University.
Charles J. Gibney has served as a Director since April 2000 and will serve
as our Senior Vice President, Enterprise Solutions upon the completion of this
offering. From April 1998 to May 2000, he served as President and General
Manager of Enterprise Services of Genuity. From January 1988 to March 1998, he
served as Senior Vice President of International and Corporate Business of
Cable & Wireless Inc., a global communications company. From 1962 to 1988, Mr.
Gibney held various positions including the director of National Sales for
Sprint, a telecommunications company, and from 1962 to 1974, he held several
positions with Pacific Bell, a Regional Bell Operating Company.
Michael J. Kalagher will serve as our Senior Vice President, Network
Operations upon the completion of this offering. From January, 2000 to the
completion of this offering, Mr. Kalagher served as Vice President of
Operations and Customer Service for BBN Corporation and Genuity. From July,
1995 to December, 1999, Mr. Kalagher has held several positions, including
Divisional VP of Operations and Customer Service and Vice President of
Operations for our DiaLinx remote access service. From 1969 to 1995, he held
several positions with Digital Equipment Corp., a supplier of networked
computer systems, software and services, including serving as Operations
Manager for Worldwide Marketing and Field Service Manager in the Central
European Region. Mr. Kalagher studied Electrical Engineering and Business at
the undergraduate level, and is a 1982 P.mD. graduate of the Harvard Business
School.
Paul A. O'Brien will serve as our Senior Vice President, Sales and Marketing
upon the completion of this offering. From October, 1999 to the completion of
this offering, he served as Vice President of Sales and Marketing for GTEI.
From April 1998 to October 1999, he was Vice President and General Manager of
the IP Telecom Services business unit of GTEI. From January, 1995 to April,
1998, Mr. O'Brien served as Vice President of the Communications Industry Busi-
ness unit of NCR, a provider of information technology business solutions.
57
<PAGE>
From May 1990 to December 1994, he served as Vice President of Marketing for
Cincinnati Bell Telephone, a telecommunications company. Prior to 1990, Mr.
O'Brien held several positions with AT&T and New England Telephone. Mr. O'Brien
holds a B.S. from Westfield College and an M.B.A from Suffolk University.
Richard Stuntz will serve as our Senior Vice President, Network Services
upon the completion of this offering. From April 1998 to the completion of this
offering, he served as Vice President and General Manager of On-Line Services
for Genuity. He was previously the Vice President for Business Planning and
Management from March 1997 to April 1998. From 1992 to 1997, Mr. Stuntz was
first Director, and then Vice President of Contracts for BBN Corporation. Prior
to joining BBN Corporation in 1986, he held several positions with Westinghouse
Electric Corporation, a public utilities, manufacturing and defense contracting
company. Mr. Stuntz holds a B.A. from Duke University.
Composition of Board of Directors
Upon completion of our public offering, our by-laws will provide that our
board of directors will consist of no less than three persons and no more than
20. Our board of directors will consist of 10 directors: (1) three Class I
directors whose terms expire at the first annual meeting of stockholders; (2)
three Class II directors whose terms expire at the second annual meeting of
stockholders; (3) three Class III directors whose terms expire at the third
annual meeting of stockholders; and (4) one director selected annually by the
holder or holders of the Class B common stock, voting separately as a class.
Under our by-laws, at our first annual meeting of stockholders at least one
of the incumbent Class I directors will not be renominated for election and our
board of directors will nominate at least two new Class I directors. This will
increase the number of directors to 11. The Class I directors will be elected
to a three-year term.
At our second annual meeting of stockholders at least one of the incumbent
Class II directors will not be renominated for election and our board of
directors will nominate at least two new Class II directors. This will increase
the number of directors to 12. The Class II directors will be elected to a
three-year term.
At our third annual meeting of stockholders at least two of the incumbent
Class III directors will not be renominated for election and our board of
directors will nominate at least three new Class III directors. This will
increase the number of directors to 13. The Class III directors will be elected
to a three year term.
For each subsequent annual meeting of stockholders, our board of directors
will determine the nominees for directors in the class of directors to be
elected at the meeting.
Committees of Board of Directors
We have a compensation committee comprised of and and an audit
committee comprised of and . The compensation committee has the
authority to approve salaries and bonuses and other compensation matters for
our officers and consultants, to approve employee health and benefit plans and
to administer our stock option plans. The audit committee, which is comprised
of independent directors, has the authority to recommend the appointment of our
independent auditors and to assist our board of directors in its review of the
results and scope of audits, internal accounting controls and other accounting
related matters.
Compensation Committee Interlocks and Insider Participation
None of our executive officers serves as a member of the board of directors
or compensation committee of any entity which has one or more executive
officers serving as a member of our board of directors or compensation
committee.
58
<PAGE>
Director Compensation
We intend to pay cash compensation to non-employee members of our board of
directors in the amount of $30,000 annually. We will reimburse each member of
the board of directors for reasonable expenses incurred in connection with
attending a meeting of the board of directors or any committee thereof. In
addition, pursuant to our 2000 Compensation Plan for Non-Employee Directors,
upon completion of this offering, each non-employee member of our board of
directors will receive an option to purchase 30,000 shares of our Class A
common stock at an exercise price per share equal to the initial public
offering price on the front cover of this prospectus. However, any director
initially elected to serve a one-year term will receive a one-time option to
purchase 15,000 shares of our Class A common stock to vest at the conclusion of
the term and any director initially elected to serve a two-year term will
receive a one-time option to purchase 22,500 shares of our Class A common stock
to vest at the conclusion of the term. These options to purchase shares shall
be at an exercise price equal to the initial public offering price set forth on
the cover of this prospectus.
Executive Compensation
The following table shows the cash compensation paid or accrued for the
fiscal year ended December 31, 1999 to our chief executive officer and each of
our four most highly compensated executives other than the chief executive
officer. GTE will not compensate our officers going forward and therefore this
compensation is indicative only of the historical compensation paid by GTE to
these officers and is not indicative of the compensation that Genuity will pay
to these individuals in the future. The arrangements regarding the future
compensation and other incentives of our executive officers are currently under
study.
The options granted below represent options to acquire common stock of GTE.
Under the existing terms of the GTE Corporation 1997 Long-Term Incentive Plan,
the offering will not result in accelerated vesting of the remaining unvested
portion of these options. Instead, these options will continue to vest
according to their terms. These options were granted in recognition of past
service to GTE. These officers will not receive future grants of GTE or Verizon
options following the offering.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation
------------------------------------ ---------------------------------------------
Shares of
Restricted GTE Common
Stock Stock LTIP All Other
Name and Principal Other Annual Awards Underlying Payments Compensation
Position Salary ($) Bonus ($)(1) Compensation ($)(2)(3) Options (#) ($)(4) ($)(5)
------------------ ---------- ------------ ------------ ---------- ----------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 349,308 305,300 -- 80,642 43,400 1,027,500 5,000
Chairman and Chief
Executive Officer
Charles J. Gibney....... 289,808 126,200 -- 27,018 15,700 319,300 14,911
Senior Vice President,
Enterprise Solutions
Ira H. Parker........... 214,404 137,100 -- 21,535 20,900 216,400 7,200
Senior Vice President,
General Counsel and
Secretary
David B. Monaghan....... 221,708 109,700 -- 26,855 12,200 333,800 12,372
Vice President, Finance
Paul A. O'Brien......... 208,962 88,100 -- 5,506 35,700 -- 13,533
Senior Vice President,
Sales and Marketing
</TABLE>
- --------
(1) These amounts represent the annual bonus received by each executive under
the GTE Corporation 1997 Executive Incentive Plan for the year ended
December 31, 1999, of which a portion has been deferred into restricted
stock units payable at maturity, generally a minimum of three years from
the time of deferral, in common stock of GTE. GTE restricted stock units
will not be granted to these officers in the future.
59
<PAGE>
(2) The number of restricted stock units received was calculated by dividing
the sum of deferrals under (a) the annual bonus and (b) the LTIP payments
by the average closing price of the common stock of GTE on the New York
Stock Exchange Composite Transactions Tape for the twenty consecutive
trading days following the release to the public of the financial results
of GTE for the fiscal year in which the bonus and LTIP payments were
earned. Each executive received matching restricted stock units on the
basis of one additional restricted stock unit for every four restricted
stock units earned. The dollar value of the matching restricted stock units
is based on the average closing price of the common stock of GTE on the
date of grant for each related restricted stock unit as described above.
Additional restricted stock units were received on each dividend payment
date based upon the amount of the dividend paid and the closing price of
the common stock of GTE on the New York Stock Exchange Composite
Transactions Tape on the dividend declaration date.
(3) The aggregate amount of the restricted stock units as of the end of the
year ended December 31, 1999 was 12,416, 1,981, 1,000 and 4,406 for Messrs.
Gudonis, Gibney, Parker and Monaghan, respectively, and the aggregate value
of these restricted stock units was $876,104, $139,784, $70,562 and
$310,898 for Messrs. Gudonis, Gibney, Parker and Monaghan, respectively,
based solely upon the closing price of the common stock of GTE on December
31, 1999.
(4) These amounts represent payments under the GTE Corporation 1997 Long-Term
Incentive Plan, of which a portion has been deferred into restricted stock
units payable at maturity, generally a minimum of three years from the time
of deferral, in common stock of GTE. These awards became immediately non-
forfeitable and payable when the GTE stockholders and Bell Atlantic
stockholders approved the merger. Each payment equaled the average of the
performance percentage for each individual for the three award cycles
completed prior to the date the merger was approved. We also included in
these amounts projected dividends through the end of the award cycle. GTE
restricted stock units will not be granted to these officers in the future.
(5) These amounts consist of contributions under the BBN Corporation Retirement
Trust Agreement of $5,000 for Mr. Gudonis and under the GTE Savings Plan of
$7,200 for Messrs. Gibney, Parker, Monaghan, and O'Brien. This column also
includes contributions by GTE to the GTE Executive Salary Deferral Plan of
$7,711, $5,172 and $6,333 for Messrs. Gibney, Monaghan and O'Brien,
respectively. These executives will not be eligible to contribute to the
GTE Savings Plan or the GTE Executive Salary Deferral Plan following the
offering.
60
<PAGE>
Option Grants in Last Fiscal Year
The following table describes grants of stock options to purchase GTE common
stock to those executive officers listed in the Summary Compensation Table for
the year ended December 31, 1999. These options vest as to one-third of the
aggregate number of shares each year, commencing one year after the date of
grant. These stock option grants included a replacement stock option feature.
This feature provides that, if an executive exercises a stock option by
delivering previously owned shares that are sufficient to pay the exercise
price plus applicable tax withholdings, the executive will receive an
additional one-time stock option grant. The number of shares represented by
that option will be equal to the number of previously owned shares surrendered
in this transaction. This replacement stock option will be granted with an
exercise price equal to the fair market value on the date of grant. No stock
appreciation rights were granted for the year ended December 31, 1999. These
options were granted in recognition of past service to GTE. These officers will
not receive future grants of GTE or Verizon options following the offering.
The potential realizable value is calculated based on the term of the option
at its date of grant. It is calculated assuming that the fair market value of
the common stock of GTE on the date of grant appreciates at the indicated
annual rates compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the appreciated
stock price. These numbers are calculated based on the requirements of the
Securities and Exchange Commission and do not reflect our estimate of future
stock price growth.
<TABLE>
<CAPTION>
Individual Grants
------------------------------------------
Shares of % of Total
GTE Common Options Exercise Potential Realizable
Stock Granted to or Base Value at Assumed
Underlying Employees Price Annual Rates of Stock
Options in Per Expiration Price Appreciation
Name Granted Fiscal Year Share Date for Option Term
---- ---------- ----------- -------- ---------- ---------------------
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 43,400 * $65.0313 2/15/2009 $1,774,355 $4,498,105
Charles J. Gibney....... 15,700 * 65.0313 2/15/2009 642,092 1,627,194
Ira H. Parker........... 400 * 63.0313 1/10/2009 16,013 40,580
10,100 * 65.0313 2/15/2009 413,065 1,046,794
5,600 * 68.7500 9/1/2009 242,123 613,589
4,800 * 73.8400 11/03/2009 222,312 564,904
David B. Monaghan....... 12,200 * 65.0313 2/15/2009 498,950 1,264,444
Paul A. O'Brien......... 8,900 * 65.0313 2/15/2009 363,988 922,422
20,000 * 66.7500 4/29/2009 839,569 2,127,642
6,800 * 73.8400 11/03/2009 315,792 800,280
</TABLE>
- --------
* Less than one percent.
61
<PAGE>
Fiscal Year End Option Values
The following table provides information for the executive officers listed
in the Summary Compensation Table regarding exercises of GTE options during the
year ended December 31, 1999 and GTE options held as of December 31, 1999. The
values in the table have been calculated on the basis of the fair market value
of the shares of common stock of GTE on December 31, 1999 less the applicable
exercise price. These options were granted in recognition of past service to
GTE. These officers will not receive further grants of GTE or Verizon options
following the offering.
<TABLE>
<CAPTION>
Shares of GTE Common
Stock Underlying Value of Unexercised
GTE Unexercised Options at In-the-Money Options
Common Stock Fiscal Year End (#) Fiscal Year End ($)
Acquired Value ------------------------- -------------------------
Name on Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- --------------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul R. Gudonis......... 0 0 229,075 79,400 5,426,247 923,380
Charles J. Gibney....... 0 0 29,700 15,700 271,947 85,371
Ira H. Parker........... 6,000 189,750 9,700 20,900 156,111 67,271
David B. Monaghan....... 6,500 282,750 38,500 12,200 839,048 66,339
Paul A. O'Brien......... 0 0 15,000 35,700 167,815 122,775
</TABLE>
Awards Under Long Term Incentive Plans in Last Fiscal Year
The following table sets forth grants under the GTE Corporation 1997 Long-
Term Incentive Plan to those executive officers listed in the Summary
Compensation Table for the year ended December 31, 1999. These executives will
receive no further awards under the GTE Corporation 1997 Long-Term Incentive
Plan as of the date of the offering. In addition, any payouts to these
executives will be reduced on a pro-rata basis as of the date of the offering.
<TABLE>
<CAPTION>
Performance Estimated Future Payouts
or Other Under Non-Stock
Shares, Period Price-Based Plans
Units or Until -------------------------
Other Maturation Threshold Target Maximum
Name Rights (#) or Payout (Units) (Units) (Units)
---- ---------- ----------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
Paul R. Gudonis................ 6,400 Three years 1,798 6,915
Charles J. Gibney.............. 1,800 Three years 506 1,945
Ira H. Parker.................. 2,070 Three years 575 2,211
David B. Monaghan.............. 1,200 Three years 337 1,297
Paul A. O'Brien................ 1,350 Three years 374 1,438
</TABLE>
The estimated future payouts in the above table are calculated for
illustrative purposes only and are based upon the dividend rate and price of
the common stock of GTE at the close of business on December 31, 1999. The
target award is the dollar amount derived by multiplying the number of units
credited to the participant at the end of the award cycle by the average
closing price of the common stock of GTE as reported on the New York Stock
Exchange Composite Transactions Tape during the last 20 business days of the
award cycle.
The maximum amount of the award has intentionally been left blank because it
is not possible to determine the maximum number of units until the award cycle
has been completed. The maximum amount of the award is determined by the extent
to which the actual results of GTE for five key financial measures exceed the
target levels.
62
<PAGE>
Pension Plan
The following table illustrates the estimated annual benefits payable under
the defined benefit pension plans of GTE. The information assumes normal
retirement at age 65 and is calculated on a single life annuity basis, based
upon final average earnings, integrated with social security as described
below, and years of service.
<TABLE>
<CAPTION>
Years of Service
-------------------------------------------
Final Average Earnings 15 20 25 30 35
---------------------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$ 300,000.................... $63,765 $85,020 $106,275 $127,530 $148,785
400,000.................... 85,515 114,020 142,525 171,030 199,535
500,000.................... 107,265 143,020 178,775 214,530 250,285
600,000.................... 129,015 172,020 215,025 258,030 301,035
700,000.................... 150,765 201,020 251,275 301,530 351,785
800,000.................... 172,515 230,020 287,525 345,030 402,535
900,000.................... 194,265 259,020 323,775 388,530 453,285
1,000,000.................... 216,015 288,020 360,025 432,030 504,035
</TABLE>
Messrs. Gibney, Parker, Monaghan and O'Brien participate in the GTE Service
Corporation Plan for Employees' Pensions. The GTE Service Corporation Plan is a
noncontributory pension plan for the benefit of all employees of GTE Service, a
wholly owned subsidiary of GTE, and participating affiliates who are not
covered by collective bargaining agreements. It provides a benefit based on a
participant's years of service and earnings. Pension benefits provided by GTE
Service and contributions to the GTE Service Corporation Plan are related to
basic salary and incentive payments, exclusive of overtime, differentials, some
types of incentive compensation and other similar types of payments. Under the
GTE Service Corporation Plan, pensions are computed on a two-rate formula basis
of 1.15% and 1.45% for each year of service, with the 1.15% service credit
being applied to that portion of the average annual salary for the five highest
consecutive years that does not exceed $33,000, which is the portion of salary
subject to the Federal Social Security Act, and the 1.45% service credit being
applied to that portion of the average annual salary for the five highest
consecutive years that exceeds this level up to the statutory limit on
compensation. As of February 29, 2000, the credited years of service under the
GTE Service Corporation Plan for Messrs. Gibney, Parker, Monaghan and O'Brien
were 11, 2, 31 and 1, respectively. Although these executives will no longer be
employed by GTE Service and will no longer accrue a pension under the GTE
Service Pension Plan as of the date of the offering, they along with other
active employees of Genuity who participate in the GTE Service Corporation Plan
will continue to be credited with additional years of age and service with
Genuity for purposes of early retirement eligibility under the GTE Service
Corporation Plan. In addition, they will have an assumed annual salary growth
of 3.5% under the GTE Service Corporation Plan. These special provisions will
expire upon the earliest to occur of the following: (i) the date that is five
years after the date of offering, (ii) an employee's termination of employment
with Genuity, or (iii) the date that Genuity becomes a majority-owned
subsidiary of Verizon. Service credit for GTE retiree welfare benefits will be
provided in a similar manner to the service recognition for pension purposes.
Under federal law, an employee's benefits under a qualified pension plan,
such as the GTE Service Corporation Plan, are limited to set maximum amounts.
GTE maintains the Excess Pension Plan, which supplements the benefits of any
participant in the GTE Service Corporation Plan in an amount by which any
participant's benefits under the GTE Service Corporation Plan are limited by
law. In addition, the GTE Supplemental Executive Retirement Plan provides
additional retirement benefits under management incentive plans or special
arrangements as determined by GTE Service or one of its affiliates. The
Supplemental Executive Retirement Plan and the Excess Pension Plan benefits are
payable in a lump sum or an annuity.
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<PAGE>
2000 Long-Term Incentive Plan
Our employees have historically been granted options to purchase common
stock of GTE. On April , 2000, our board of directors adopted the 2000 Long-
Term Incentive Plan, effective immediately, which has also been approved by GTE
as our sole stockholder. The 2000 Long-Term Incentive Plan provides for the
grant of a variety of stock and stock-based awards and other benefits,
including stock options, restricted and unrestricted shares, deferred stock,
stock-based performance awards and stock appreciation rights; but excluding any
short-term or long-term cash awards. The 2000 Long-Term Incentive Plan will be
administered by our board of directors or by the compensation committee of our
board of directors. The administrator has the authority to determine
eligibility, grant awards and make all other determinations under the plan.
Our 2000 Long-Term Incentive Plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees. Non-qualified stock options, and all other awards may be granted to
employees, officers and directors. The option exercise price of each stock
option and the amount, if any, payable by participants under other awards shall
be determined by the administrator, except that stock options will not be
granted with an exercise price that is less than the fair market value of the
Class A common stock on the date of grant. We anticipate that we will not grant
our existing employees any additional awards under the 2000 Long-Term Incentive
Plan during the four-year period following the offering.
Options granted under our 2000 Long-Term Incentive Plan may have a term of
up to 10 years. The awards are transferable to the extent, if any, determined
by the administrator. The period or periods during which an award will be
exercisable or remain outstanding, including any periods following termination
of service, the manner of exercise and other details of awards will be
determined by the administrator consistent with the 2000 Long-Term Incentive
Plan.
We have reserved shares of our Class A common stock for issuance under
the 2000 Long-Term Incentive Plan, subject to adjustment for stock splits and
similar events. Concurrently with this offering, we expect to issue options to
purchase shares of our Class A common stock at an exercise price equal to
the initial public offering price set forth on the cover page of this
prospectus. The 2000 Long-Term Incentive Plan will terminate on January ,
2010, unless sooner terminated in accordance with the terms of the plan.
2000 Compensation Plan for Non-Employee Directors
The 2000 Compensation Plan for Non-Employee Directors was approved by our
board of directors on April , 2000 and has been approved by GTE as our sole
stockholder. Pursuant to this plan, non-employee directors who have agreed to
serve on the board of directors will receive, effective upon the completion of
this offering, a $30,000 annual cash fee and one-time option to purchase 30,000
shares of our Class A common stock at an exercise price equal to the initial
public offering price set forth on the front cover of this prospectus. These
stock options will vest in three equal installments commencing on the day of
this offering and on the day immediately preceding the annual meeting of
stockholders in each of the next years. However, any director initially
elected to serve a one-year term will receive a one-time option to purchase
15,000 shares of our Class A common stock to vest at the conclusion of the term
and any director initially elected to serve a two-year term will receive a one-
time option to purchase 22,500 shares of our Class A common stock to vest at
the conclusion of the term. These options to purchase shares shall be at an
exercise price equal to the initial public offering price set forth on the
cover of this prospectus. The administrator also has the discretion under this
plan to grant options to non-employee directors in amounts and in terms as it
deems is not inconsistent with the plan. We have reserved a total of shares
of Class A common stock for issuance under the 2000 Compensation Plan for Non-
Employee Directors, of which, after taking into account the grants expected
to be made effective upon the completion of this offering, remain available for
future grants.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our certificate of incorporation provides that our directors will not be
liable to us or our stockholders for monetary damages for any breach of
fiduciary duty, except to the extent otherwise required by the Delaware General
Corporation Law. This provision will not prevent our stockholders from
obtaining injunctive or other relief against our directors nor does it shield
our directors from liability under federal or state securities laws.
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Our certificate of incorporation also requires us to indemnify our directors
and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to a few very limited exceptions where indemnification
is not permitted by applicable law. Our certificate of incorporation also
requires us to advance expenses, as incurred, to our directors and executive
officers in connection with any legal proceeding to the fullest extent
permitted by the Delaware General Corporation Law. These rights are not
exclusive.
In addition to the indemnification provisions contained in our certificate
of incorporation, before the completion of this offering, we intend to enter
into indemnity agreements with each of our directors and executive officers.
These agreements will provide for the indemnification of our executive officers
and directors for all expenses and liabilities incurred in connection with any
action or proceeding brought against them by reason of the fact that they are
or were agents of Genuity. We also intend to obtain directors' and officers'
insurance to provide coverage for our directors, executive officers and some of
our employees for specific liabilities, including public securities matters. We
believe that these indemnification provisions and agreements and this insurance
are necessary to attract and retain qualified directors and officers.
The limitation of liability and indemnification provisions in our
certificate of incorporation may discourage stockholders from bringing a
lawsuit against our directors for breach of their fiduciary duty. They may also
reduce the likelihood of derivative litigation against directors and officers,
even though an action, if successful, might benefit us and other stockholders.
Furthermore, the value of the Class A common stock may be adversely affected to
the extent we pay the costs of settlement and damage awards against directors
and officers as required by these indemnification provisions.
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RELATED PARTY TRANSACTIONS
We have provided below a summary description of the significant agreements
that we expect to execute with GTE Service Corporation and other affiliates of
GTE, which will become effective at the same time as the completion of this
offering. These descriptions, which summarize the material terms of the
agreements, are not complete. You should read the full text of these
agreements, which have been filed with the Securities and Exchange Commission
as exhibits to the registration statement of which this prospectus is a part.
We believe that the terms of these agreements are comparable to those that
would have resulted from arms-length negotiations with parties other than GTE
and its affiliates. We intend to negotiate any future agreements with Verizon
on the same basis.
Transition Services Agreements
GTE and its affiliates currently provide a range of administrative and
support services to us. We will enter into an Agreement for Transition Services
and an Agreement for Information Technology Transition Services with GTE
Service.
Agreement for Transition Services. Under this agreement, GTE Service will
provide, to the extent we continue to require them on a transitional basis, the
following services currently provided to us by various GTE affiliates:
. accounting and cash processing services, including payroll, asset
accounting and accounts payable;
. billing and collection processing services;
. human resources services and benefits administration, including
relationships with employee benefits providers; and
. real estate support services, including project management and
environmental and safety services.
Agreement for Information Technology Transition Services. We and GTE Service
will enter into this agreement in order to provide or receive, to the extent
either party continues to require them on a transitional basis, the following
services:
. software support services to ensure that software continues to run
effectively after the offering; and
. hardware support services, including help desk support for personal
computers, systems support centers for critical servers and local area
network support.
In addition, we will provide wide area network support to GTE Service, and
GTE Service will provide us with wide area network support in areas outside of
Bell Atlantic's local service region. GTE Service also will provide us with
computer programming and technical services, including the development of
software interfaces and modifications and enhancements to existing systems.
Unless otherwise agreed, the ownership of any work product, including
intellectual property, created during the provision of services under either of
the transition service agreements will be determined under the terms and
conditions of the Software Development and Technical Services Agreement
described below. Similarly, any licenses relating to software will be granted
on the same terms and conditions as used in the Software License Agreement
described below.
The fees for these transition services are fixed under the agreements and
were negotiated based on historical costs and comparable market prices. Both
agreements have a term of one year, although some services will be used for
less than a year. We will be able to terminate each or any portion of the
agreements at any time upon 120 days notice to GTE Service. As an exception,
the billing and collection processing services require 180 days notice in order
to provide adequate transition time. GTE Service has the right to terminate the
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agreements on 120 days notice only with respect to the information technology
services that it receives from us. In connection with any termination or
expiration, GTE Service will be obligated to cooperate with us to transition
the work to another provider and to use commercially reasonable efforts to
secure our continued use of any necessary third party technology.
Purchase, Resale and Marketing Agreement
We will enter into a Purchase, Resale and Marketing Agreement under which
Verizon will purchase services from us that will include Internet access,
value-added e-business services and private line and asychronous transfer mode
transport services. Verizon will be permitted to use these services internally
or resell them on a stand-alone basis or as part of a bundled solution. Those
services resold by Verizon may be co-branded with us or may be branded without
use of our marks. To the extent we jointly market our services with Verizon, we
will do so in compliance with all applicable federal law. We will not jointly
market our services with Verizon in states in which Verizon would not have
legal authority under applicable federal law to operate our company. We have
granted Verizon most favored customer pricing and volume-based discounts. Under
the terms of the agreement, Verizon will purchase at least $500 million of our
services over a five-year period. In the event that Verizon has not purchased
$200 million in services by the end of the third year of the contract, it would
be required to pay to us at that time the difference between the amount of
services purchased to date and $200 million. Similarly, in the event Verizon
has not purchased $500 million in services by the end of the fifth year of the
contract, it would be required to pay to us at that time the difference between
the amount of services purchased to that date, including any shortfall payment
made at the end of the third year, and $500 million. The minimum purchase
commitment is reduced in the event we do not comply with various obligations as
to competitive pricing and other aspects of service, sale and delivery.
In order for us to properly plan for increasing demands for our services by
our customers, Verizon is required to provide us with 18-month forecasts of its
requirements on a quarterly basis. The agreement will remain in effect for five
years and is renewable for additional one-year periods by mutual consent of the
parties. Verizon may terminate the agreement on 90 days notice if a legislative
or regulatory order materially or adversely changes its rights, obligations or
risks in relation to the resale of our services. In this event, Verizon is
obligated to cooperate with us to ensure the orderly transition to us of all
outstanding reseller agreements, including the assignment of these agreements,
and to reimburse us for costs incurred by us relating to this transition.
Under the agreement, Verizon must provide us with 180 days prior written
notice of the date on which it intends to exercise its option to convert its
Class B common stock. This notice will also indicate if there are any states in
which Verizon does not expect to have legal authority under applicable federal
law to operate a long distance business at the time of the conversion of the
Class B common stock. Upon receipt of this notice, we will adjust our
operations in the states designated by Verizon in a manner necessary to allow
Verizon to be in compliance with applicable federal law in these states after
Verizon obtains a greater than 10% equity interest in our capital stock. In no
event will the states designated by Verizon account for more than 3% of our
total revenues during the preceding 12 months. Verizon will agree to pay an
amount necessary to make us financially whole as a result of our modification
of our business pursuant to this arrangement.
In conjunction with the Purchase, Resale and Marketing Agreement described
above, we also plan to provide to Verizon undersea cable capacity in the ARCOS-
1 Caribbean Ring System and have committed to negotiate with Verizon with
respect to operating capacity on the Americas III Cable Network currently under
construction.
Intellectual Property Agreements
We intend to enter into the following agreements with GTE Service in order
to allocate rights relating to existing and future patents, software, other
types of intellectual property and technical services.
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Intellectual Property Ownership and Cross License Agreement. This agreement
will apportion the ownership of existing patents, patent applications and other
types of intellectual property between GTE Service and us. Under the agreement,
existing patents and patent applications that relate exclusively to us will be
owned exclusively by us. Existing patents and patent applications that relate
to both us and GTE Service will be jointly owned by us and GTE Service. The
remaining existing patents and patent applications that relate to GTE Service
will be owned exclusively by GTE Service. Both we and GTE Service will grant
each other a perpetual, non-exclusive, royalty-free worldwide license to each
other's existing patents and patent applications. In addition, we will jointly
own any currently existing, non-statutory intellectual property. Those patents
and patent applications that either GTE Service or we develop in the future
will be owned pursuant to applicable laws or any controlling agreements.
Software License Agreement. We plan to enter into a Software License
Agreement with GTE Service under which it will grant us a non-exclusive, non-
transferable, worldwide license to use software programs owned by GTE Service
for our internal operations. In addition, GTE Service will provide us with
updates to the licensed software programs pursuant to the Agreement for
Information Technology Transition Services described above. In exchange for the
license, we will pay GTE Service an annual license fee for each licensed
software program. The term of each license will be one year and will be
automatically renewable for successive one-year periods upon the payment of
annual license fees. We may terminate or cancel any software license upon 30
days written notice to GTE Service. The licenses that GTE Service will grant us
pertain to the object code of the licensed software programs only. The source
code of the licensed software programs will be placed in an escrow account and
may be made available to us pursuant to the terms and conditions of a separate
escrow agreement.
Software Development and Technical Services Agreement. Under this agreement,
GTE Service will provide us with software development and other technical
services. For services related exclusively to our business, the newly created
deliverable, including any newly created software and accompanying
documentation, and all intellectual property rights in the deliverable, will be
transferred to us by GTE Service. In return, we will grant to GTE Service a
perpetual, royalty-free worldwide license to any deliverable owned by us for
the internal use of GTE Service only. For services not related exclusively to
us, GTE Service will retain ownership of any deliverable and will grant us a
non-exclusive, royalty-free, non-sublicensable, non-transferable license to use
the deliverable owned by GTE Service for our internal use only. The agreement
will have a term of one year and will be renewable for successive one-year
terms by mutual consent of the parties. We may terminate the agreement at any
time following written notice to GTE Service.
Network Monitoring Agreement
Under the terms of an existing agreement, we receive continuous monitoring
for some elements of our network infrastructure from GTE Network Services,
including monitoring of network-enabling devices and processes to detect
anomalies occurring in the network. The fees for monitoring services are fixed
under the agreement and were negotiated based on historical costs and
comparable market prices. The agreement may be terminated by us on 90 days
notice.
Real Estate Agreements
We plan to enter into several agreements with Verizon to allocate space in
various leased and owned properties between us and Verizon. None of the
properties involved are material to our operations or business. Provisions of
each agreement, including the lease and sublease payment of rent terms, vary
depending on the underlying lease at the specified property and the result of
negotiations pertaining to specific issues at a specified property.
We will also enter into real estate guaranty agreements with GTE and
Verizon. GTE has agreed to either issue new or continue existing guaranties to
support our real estate obligations. GTE has agreed to continue
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these guaranties until six months following this offering or the date on which
both Standard & Poor's and Moody's publish a credit rating for us, whichever
occurs first. We have agreed to pay GTE a commercially reasonable fee during
the time the guaranties are in force.
Registration Rights Agreement
We plan to enter into a Registration Rights Agreement with Verizon under
which Verizon will have the right to require us to register shares of Class A
common stock that are issued following conversion of our Class C common stock,
which will have been issued upon conversion of Class B common stock. Verizon
shall be entitled to demand registrations and will be able to participate in
any offering of our securities by us or for the account of any of our other
securityholders. Verizon will have the right to transfer or assign this
agreement, in whole or in part, to any transferee of its Class B common stock
or Class C common stock.
Subscription Agreement
GTE will execute a subscription agreement in connection with its receipt of
the Class B common stock. Under this agreement, GTE will exchange all of the
shares of our common stock that it owns for such number or shares of Class B
common stock that will equal 10% of the total number of shares of our common
stock immediately after the completion of this offering. The subscription
agreement contains customary representations and warranties, including with
respect to the issuance of the Class B common stock. The subscription agreement
also includes provisions enabling Verizon to purchase additional shares of
Class B common stock under the circumstances described in the section in
"Description of Capital Stock" entitled "Right to Purchase Additional Shares
Upon Conversion." In addition, the subscription agreement contains provisions
requiring us to obtain the consent of the holders of a majority of the
outstanding Class B common stock prior to taking the following actions:
. making acquisitions or entering into joint ventures involving cash,
stock, stock equivalents or assets in excess of $100 million individually
or $500 million in the aggregate during any 12-month period;
. making any dispositions of assets outside the ordinary course of business
within the first two years after this offering and, thereafter, making
dispositions of assets in excess of $50 million individually or $250
million in the aggregate in any 12-month period;
. incurring, during any 12-month period, indebtedness that exceeds an
anticipated debt level for that period to be jointly agreed upon by us
and GTE prior to the completion of this offering;
. entering into agreements or arrangements that contain provisions that
trigger a default or require a material payment when Verizon exercises
its conversion right; and
. declaring extraordinary dividends or making other distributions to the
holders of our common stock, including our Class A common stock.
We will not be required to obtain the consent of the holders of the Class B
common stock to take the above actions if at any time:
. Verizon controls more than 50% of the then outstanding shares of Class B
common stock, and the common stock controlled by Verizon and its
affiliates constitutes less than 10% of our outstanding common stock on
an as converted basis; or
. Verizon controls 50% or less of the outstanding shares of Class B common
stock, and the outstanding shares of Class B common stock constitute 50%
or less of our outstanding common stock on an as converted basis.
Verizon has the right to transfer some or all of its shares of Class B
common stock to one or more parties that would be able to prevent us from
taking the actions described above.
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SOLE STOCKHOLDER
Prior to this offering, all of the outstanding shares of our common stock
will be owned by GTE. The mailing address of GTE Corporation is 1255 Corporate
Drive, Irving, Texas 75038. Upon completion of this offering, Verizon will
beneficially hold all of the outstanding shares of our Class B common stock,
which will represent 10% of the voting power of our outstanding capital stock
at that time, before giving effect to any outstanding options to purchase
shares of our Class A common stock under our long-term incentive plans. Except
for Verizon, we are not aware of any person or group that will beneficially own
more than five percent of our Class A common stock or Class B common stock upon
completion of this offering. There will not be any shares of our Class C common
stock outstanding immediately after this offering.
None of our directors and executive officers beneficially owns any shares of
our common stock. We intend to grant to our officers and directors options to
purchase an aggregate of shares of our Class A common stock with an exercise
price equal to the public offering price set forth on the cover page of this
prospectus.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the completion of this offering, our authorized
capital stock will consist of shares of Class A common stock, par value
$0.01 per share, shares of Class B common stock, par value $0.01 per share,
shares of Class C common stock, par value $0.01 per share, and shares of
preferred stock, no par value per share. Immediately following the completion
of this offering, there will be outstanding:
. shares of Class A common stock, all of which will be owned by the
investors purchasing shares in this offering;
. options to purchase shares of Class A common stock;
. shares of Class B common stock, all of which will be owned by Verizon
indirectly;
. no shares of Class C common stock; and
. no shares of preferred stock.
The shares of Class B common stock held by Verizon and its affiliates are
convertible into shares of Class C common stock. Prior to any exercise of the
underwriters' over-allotment option, if the shares of Class B common stock were
converted into shares of Class C common stock, the Class C common stock would
constitute approximately 82% of our outstanding common stock, before giving
effect to any issuance of shares of Class A common stock upon the exercise of
outstanding options of Genuity or otherwise.
In the event that the underwriters exercise any portion of the over-
allotment option, we will issue additional shares of Class B common stock to
Verizon for no additional consideration. Immediately after the exercise of the
underwriters' over-allotment option and the issuance of these additional
shares, the total number of shares of Class B common stock that Verizon will
beneficially own will equal 10% of the total number of shares of Class A common
stock and Class B common stock then outstanding, before giving effect to any
issuance of shares of Class A common stock upon the exercise of outstanding
options of Genuity. Despite the issuance of the additional shares of Class B
common stock to Verizon, the aggregate number of shares of Class C common stock
issuable upon conversion of the Class B common stock, including the additional
shares, will remain the same because the conversion ratio will be adjusted. If
the Class B common stock were converted into Class C common stock immediately
after the exercise in full of the underwriters' over-allotment option and the
issuance of the additional shares of Class B common stock, the Class C common
stock would constitute 80% of our outstanding common stock, before giving
effect to any issuance of shares of Class A common stock upon the exercise of
outstanding options of Genuity.
Common Stock
The shares of our Class A common stock, Class B common stock and Class C
common stock are identical in all respects except for voting rights, conversion
rights and as otherwise described below. The rights, preferences and privileges
of holders of our Class A common stock, Class B common stock and Class C common
stock are subject to the rights of the holders of shares of any other class of
common stock that we may authorize and issue and any series of preferred stock
that we may designate and issue in the future.
Voting Rights. Each share of Class A common stock and Class B common stock
entitles the holder to one vote on each matter submitted to a vote of our
stockholders. Each share of Class C common stock, which may be held only by
Verizon and its affiliates, entitles the holder to five votes on each matter.
Except as required by applicable law or as discussed below, the holders of the
Class A common stock, Class B common stock and Class C common stock vote
together as a single class on all matters submitted to a vote of our
stockholders.
So long as 50% of the shares of Class B common stock outstanding immediately
following the completion of this offering, including additional shares of Class
B common stock issued to Verizon in connection with the exercise of the over-
allotment option, remain outstanding, no person or group of persons acting
together, as
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determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934,
will be permitted to vote any of the shares of Class A common stock
beneficially owned by that person or group of persons in excess of 15% of the
aggregate number of then outstanding shares of Class A common stock, except as
set forth below. To the extent any person or group of persons beneficially owns
more than 15% of the shares of Class A common stock, the vote of any excess
shares will be apportioned among the other holders of Class A common stock in
accordance with their respective percentage ownership. In order to enforce this
limitation, our certificate of incorporation permits us to require stockholders
or groups that have filed or, in the reasonable judgment of our board of
directors after consultation with legal counsel, were required by law to have
filed, a Schedule 13D or Schedule 13G, or any successor schedules or forms,
under the Securities Exchange Act, to certify to us in writing the number of
shares of Class A common stock beneficially owned by them as of the applicable
record date. This prohibition on voting excess shares of Class A common stock
does not apply to Verizon or its affiliates or to any person or group of
persons that acquired Class A common stock by converting Class B common stock.
So long as any shares of Class B common stock remain outstanding, the
holders of Class B common stock, voting separately as a class, will have the
right to elect one member of our board of directors. The holders of Class B
common stock are also entitled to vote with the holders of the Class A common
stock and Class C common stock in the election of the other directors. You
should refer to the section in "Management" entitled "Composition of Board of
Directors" for a more detailed description of our board of directors.
In addition, the affirmative vote of the holders of a majority of the
outstanding shares of Class B common stock, voting separately as a class, is
required for:
. any issuance of capital stock, securities convertible into our capital
stock or share equivalents, other than shares of our capital stock
reserved at the time of this offering for issuance to employees and
directors pursuant to our stock option plans;
. any authorization of additional capital stock;
. any material change in the nature or scope of our business;
. any merger, consolidation, sale of all or substantially all of our assets
or any similar transaction;
. any amendment to our certificate of incorporation or our by-laws that
affects the rights of the holders of our Class B common stock;
. any action that would make it unlawful for a holder of Class B common
stock to exercise its conversion rights; and
. any filing or declaration of bankruptcy or any full or partial
liquidation.
This class vote will not be required if at any time:
. Verizon controls more than 50% of the then outstanding shares of Class B
common stock, and the common stock owned by Verizon and its affiliates
constitutes less than 10% of our outstanding common stock on an as
converted basis; or
. Verizon controls 50% or less of the then outstanding shares of Class B
common stock, and the outstanding shares of Class B common stock
constitute 50% or less of our outstanding common stock on an as converted
basis.
We have also entered into an agreement that requires us to obtain the
consent of Verizon or its assignees prior to taking other actions. You should
refer to the section in "Related Party Transactions" entitled "Subscription
Agreement."
Dividends, Distributions and Stock Splits. Subject to preferences that may
apply to any outstanding series of preferred stock, the holders of each of our
three classes of common stock are entitled to receive dividends at the same
rate if, as and when dividends are declared by the board of directors out of
assets legally available therefor. In the case of dividends or distributions
payable in common stock, only shares of Class A common stock will be
distributed on Class A common stock, only shares of Class B common stock will
be distributed on Class B common stock and only shares of Class C common stock
will be distributed on Class C common stock. In no
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event may any of the shares of Class A common stock, Class B common stock or
Class C common stock be subdivided or combined in any manner unless each other
class is subdivided or combined in the same proportion.
Conversion. The Class A common stock has no conversion rights. The Class B
common stock is convertible by Verizon and its affiliates into shares of Class
C common stock. Prior to any exercise of the underwriters' over-allotment op-
tion, if the shares of Class B common stock were converted into shares of Class
C common stock, the Class C common stock would constitute approximately 82% of
our outstanding common stock, before giving effect to any issuance of shares of
Class A common stock following the exercise of any outstanding options under
our long-term incentive plans or otherwise. Under our proposal to the Federal
Communications Commission, the shares of Class B common stock held by Verizon
must be converted on or prior to , 2005, unless by that date Verizon is
permitted by law to provide long distance services with respect to at least 95%
of the telephone lines in the Bell Atlantic states. In that event, the date by
which Class B common stock held by Verizon can be converted will be extended
until at least , 2006.
The shares of Class B common stock held by any person other than Verizon or
its affiliates may not be converted into Class C common stock. Instead, such
shares are convertible at any time into shares of Class A common stock. The
number of shares of Class A common stock into which such shares of Class B
common stock are convertible is equal to the number of shares of Class C common
stock into which such shares would be convertible if they were held by Verizon
or its affiliates.
Only Verizon and its affiliates may hold Class C common stock. The Class C
common stock is convertible into Class A common stock, in whole or in part, at
any time and from time to time at the option of the holder, on the basis of one
share of Class A common stock for each share of Class C common stock. Each
share of Class C common stock will automatically convert into one share of
Class A common stock if at any time (1) the shares are transferred to any
person other than Verizon and its affiliates or (2) the aggregate number of
outstanding shares of Class C common stock, together with any shares of Class C
common stock issuable upon conversion of Class B common stock, and the number
of shares of Class A common stock controlled by Verizon and its affiliates
constitute less than 10% of our then outstanding common stock.
Right to Purchase Additional Shares Upon Conversion. If at the time Verizon
or its affiliates converts shares of Class B common stock into shares of Class
C common stock, and after the conversion, Verizon and its affiliates together
control shares of Class A common stock and Class C common stock that together
equal or exceed 70% of the total number of shares of common stock outstanding
at that time, then Verizon will have the right to acquire from us a number of
shares of Class A common stock so that Verizon and its affiliates combined
ownership of Class A and Class C common stock will be equal to 80% of the total
number of shares of common stock outstanding at that time. The price payable
per share in this purchase would be the average of the closing prices for the
Class A common stock for the 30 trading days immediately preceding the date of
the purchase. This right to purchase additional shares may be exercised only
one time.
Liquidation. In the event of any dissolution, liquidation, or winding up of
our affairs, whether voluntary or involuntary, the holders of the Class A
common stock, the Class B common stock and the Class C common stock will be
entitled to share ratably, in proportion to the number of shares they represent
of our outstanding common stock, in the assets legally available for
distribution to stockholders, in each case after payment of all of our
liabilities and subject to preferences that may apply to any series of
preferred stock then outstanding. We may not dissolve, liquidate or wind up our
affairs without obtaining the consent of the holders of the outstanding shares
of our Class B common stock.
Mergers and Other Business Combinations. If we enter into a merger,
consolidation or other similar transaction in which shares of our common stock
are exchanged for or converted into securities, cash or any other property, the
holders of each class of our common stock will be entitled to receive an equal
per share amount of the securities, cash, or other property, as the case may
be, for which or into which each share of any other class of common stock is
exchanged or converted. However, in any transaction in which shares of capital
stock are distributed, the shares that are exchanged for or converted into the
capital stock may differ as to voting rights and conversion rights only to the
extent that the voting rights and conversion rights of Class A
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common stock, Class B common stock and Class C common stock differ at that
time. As described above, the holders of the Class B common stock, voting
separately as a class, must consent to any merger, consolidation or other
similar transaction.
Other Provisions. The holders of our Class A common stock, Class B common
stock and Class C common stock are not entitled to preemptive rights. There are
no redemption provisions or sinking fund provisions that apply to the Class A
common stock, the Class B common stock or the Class C common stock.
Preferred Stock
Our board of directors has the authority, without further action by the
holders of our Class A common stock or Class C common stock, to issue from time
to time, shares of our preferred stock in one or more series. The issuance of
shares of preferred stock is, however, subject to the approval of holders of
the Class B common stock. Once the approval of the holders of the Class B
common stock has been obtained, our board of directors may fix the number of
shares, designations, preferences, powers and other special rights of the
preferred stock. The preferences, powers, rights and restrictions of different
series of preferred stock may differ. The issuance of preferred stock could
decrease the amount of earnings and assets available for distribution to
holders of common stock or affect adversely the rights and powers, including
voting rights, of the holders of common stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes, may also have the effect of discouraging, delaying or
preventing a change in control of our company, regardless of whether the
transaction may be beneficial to stockholders. After the closing of this
offering, there will be no shares of preferred stock outstanding and we have no
current plans to issue any shares of preferred stock.
Anti-takeover Effects of Delaware Law and our Certificate of Incorporation and
By-laws
In addition to the special approval and conversion rights of the Class B
common stock and the provision referred to above relating to the voting of
beneficial ownership above 15% of our outstanding shares of Class A common
stock, there are provisions of the Delaware General Corporation Law and other
provisions of our certificate of incorporation and by-laws that may be deemed
to have an anti-takeover effect and may discourage, delay or prevent a tender
offer or takeover attempt that a stockholder might consider in its best
interest, including those attempts that might result in a premium over the
market price for the shares held by our stockholders. These provisions are
summarized in the following paragraphs. The provisions relating to the
existence of a classified board and the procedure for removing directors would
not apply following the conversion of a majority of the then outstanding shares
of Class B common stock.
Classified Board of Directors. Other than the director elected by the
holders of our Class B common stock, our board of directors will be divided
into three classes of directors, as nearly equal in size as possible, serving
staggered three-year terms. Upon expiration of the term of a class of
directors, the directors in that class will be elected for three-year terms at
the annual meeting of stockholders in the year in which the term for that class
of directors expires. In addition, our certificate of incorporation provides
that directors may be removed only for cause by the affirmative vote of the
holders of two-thirds of the shares of capital stock entitled to vote in the
election of directors. Under our certificate of incorporation and by-laws, a
vacancy on the board of directors, including a vacancy resulting from an
enlargement of the board of directors, other than the currently planned
enlargement of the board of directors during the first three years after the
date of this offering as described in the section in "Management" entitled
"Composition of Board of Directors", may only be filled by vote of a majority
of the directors then in office. The classification of the board of directors
and the limitations on removing directors and filling vacancies could have the
effect of making it more difficult for a third party to acquire, or of
discouraging a third party from acquiring, control of us.
Stockholder Action; Special Meeting of Stockholders. Our certificate of
incorporation eliminates the ability of our Class A common stock to act by
written consent. Our by-laws further provide that special meetings of our
stockholders may be called only by the chairman of the board of directors, the
chief executive officer or, if none, the president, or a majority of the board
of directors. These provisions could have the effect of delaying until the next
annual meeting of stockholders those actions that are favored by the holders of
a majority of our
74
<PAGE>
outstanding voting securities. These provisions may also discourage another
person from making a tender offer for our common stock, because that person,
even if it acquired a majority of our outstanding voting securities, would be
able to take action as a stockholder, such as electing new directors or
approving a merger, only at a duly called meeting of stockholders and not by
written consent.
Advance Notice Requirements for Stockholder Proposals and Directors
Nominations. Our by-laws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for
election as directors at an annual meeting of stockholders, must provide timely
notice thereof in writing. To be timely, a stockholder's notice must be
received at our principal executive offices not less than 90 days nor more than
120 days prior to the anniversary date of the immediately preceding annual
meeting of stockholders. In the event that the annual meeting is called for a
date that is not within 30 days before or after the anniversary date, in order
to be timely, notice from the stockholder must be received no later than the
tenth day following the date on which notice of the annual meeting was mailed
to stockholders or made public, whichever occurred earlier. Our by- laws also
specify requirements as to the form and content of a stockholder's notice.
These provisions may preclude stockholders from bringing matters before an
annual meeting of stockholders or from making nominations for directors at an
annual meeting of stockholders.
Authorized but Unissued Shares. The authorized but unissued shares of common
stock and preferred stock are available for future issuance without approval of
the holders of Class A or Class C common stock. These additional shares may be
utilized for a variety of corporate purposes, including future public offerings
to raise additional capital, corporate acquisitions and employee benefit plans.
The existence of authorized but unissued shares of common stock and preferred
stock could render more difficult or discourage an attempt to obtain control of
us by means of a proxy contest, tender offer, merger or otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is EquiServe.
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<PAGE>
CERTAIN UNITED STATES TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF CLASS A COMMON STOCK
This section summarizes certain United States federal income and estate tax
consequences of the ownership and disposition of our Class A common stock by a
non-U.S. holder. You are a non-U.S. holder if you are, for United States
federal income tax purposes:
. a non-resident alien individual;
. a foreign corporation;
. a foreign partnership; or
. an estate or trust that in either case is not subject to United States
federal income tax on a net income basis on income or gain from Class A
common stock.
This section does not consider the specific facts and circumstances that may
be relevant to a particular non-U.S. holder and does not describe special tax
rules that could apply to a non-U.S. holder who was previously a U.S. resident
or citizen. This section does not address the treatment of a non-U.S. holder
under the laws of any state, local or foreign taxing jurisdiction. This section
is based on the tax laws of the United States, including the Internal Revenue
Code of 1986, as amended, existing and proposed regulations, and administrative
and judicial interpretations, all as currently in effect. These laws are
subject to change, possibly on a retroactive basis.
You should consult a tax advisor regarding the United States federal tax
consequences of acquiring, holding and disposing of Class A common stock in
your particular circumstances, as well as any tax consequences that may arise
under the laws of any state, local or foreign taxing jurisdiction
Dividends
Except as described below, if you are a non-U.S. holder of Class A common
stock, dividends paid to you are subject to withholding of United States
federal income tax at a 30% rate or at a lower rate if you are eligible for the
benefits of an income tax treaty that provides for a lower rate. Under
currently effective United States Treasury regulations, for purposes of
determining if dividends are subject to the 30% withholding tax, dividends paid
to an address in a foreign country are presumed to be paid to a resident of
that country, unless the person making the payment has knowledge to the
contrary. Under current interpretations of United States Treasury regulations,
this presumption also applies for purposes of determining whether a lower
withholding rate applies under an income tax treaty.
Under United States Treasury regulations that will generally apply to
dividends paid after December 31, 2000, you must satisfy certification
requirements in order to claim the benefit of a lower treaty rate.
Additionally, if you are a partner in a foreign partnership, you, in addition
to the foreign partnership, must satisfy the certification requirements and the
partnership must provide information as well. The Internal Revenue Service will
apply a look-through rule in the case of tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under a tax treaty, you may obtain a refund of any amounts withheld in excess
of that rate by filing a refund claim with the United States Internal Revenue
Service.
If the dividends are "effectively connected" with your conduct of a trade or
business within the United States, and, if required by a tax treaty, the
dividends are attributable to a permanent establishment that you maintain in
the United States, then the dividends generally are not subject to withholding
tax. Instead, "effectively connected" dividends are taxed at rates applicable
to United States citizens, resident aliens and domestic United States
corporations.
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<PAGE>
If you are a corporate non-U.S. holder, "effectively connected" dividends
that you receive may be subject to an additional "branch profits tax" at a 30%
rate or at a lower rate if you are eligible for the benefits of an income tax
treaty that provides for a lower rate.
Gain on Disposition of Class A Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on gain that you recognize on a disposition of Class
A common stock unless:
. the gain is "effectively connected" with your conduct of a trade or
business in the United States, and the gain is attributable to a
permanent establishment that you maintain in the United States, if that
is required by an applicable income tax treaty as a condition for
subjecting you to United States taxation on a net income basis;
. you are an individual, you hold the Class A common stock as a capital
asset, you are present in the United States for 183 or more days in the
taxable year of the sale and certain other conditions exist; or
. we are or have been a United States real property holding corporation for
federal income tax purposes and you held, directly or indirectly, at any
time during the five-year period ending on the date of disposition, more
than 5% of the Class A common stock and you are not eligible for any
treaty exemption.
If you are a corporate non-U.S. holder, "effectively connected" gains that
you recognize may also, under certain circumstances, be subject to an
additional "branch profits tax" at a 30% rate or at a lower rate if you are
eligible for the benefits of an income tax treaty that provides for a lower
rate.
We have not been, are not and do not anticipate becoming a United States
real property holding corporation for United States federal income tax
purposes.
Federal Estate Taxes
Class A common stock held by an individual who is a non-U.S. holder at the
time of death will be included in the holder's gross estate for United States
federal estate tax purposes, unless an applicable estate tax treaty provides
otherwise.
Information Reporting and Backup Withholding
In certain circumstances, dividends paid with respect to Class A common
stock, and gross proceeds from the disposition of Class A common stock, could
be subject to information reporting and backup withholding tax at a rate of
31%. Under currently applicable law, if you are a non-U.S. holder, dividends
paid to you at an address outside the United States will not be subject to
United States information reporting requirements or backup withholding tax.
Beginning with respect to payments made after December 31, 2000, a non-U.S.
holder will be entitled to such exemption only if the non-U.S. holder provides
a Form W-8BEN, or satisfies certain documentary evidence requirements for
establishing that it is a non-U.S. holder, or otherwise establishes an
exemption.
If you sell your Class A common stock outside of the United States through a
non-U.S. office of a non-U.S. broker, and the sales proceeds are paid to you
outside the United States, then United States backup withholding and
information reporting requirements generally will not apply to that payment.
However, United States information reporting, but not backup withholding, will
apply to a payment of sales proceeds, even if that payment is made outside the
United States, if you sell your Class A common stock through a non-U.S. office
of a broker that:
. is a United States person;
. derives 50% or more of its gross income for certain periods from the
conduct of a trade or business in the United States;
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<PAGE>
. is a "controlled foreign corporation" as to the United States; or
. with respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
- one or more of its partners are U.S. persons, as defined in United
States Treasury regulations, who in the aggregate hold more than 50%
of the income or capital interests in the partnership;
- at any time during its tax year, the foreign partnership is engaged in
a United States trade or business,
unless the broker has documentary evidence in its files that you are a non-U.S.
person or you otherwise establish an exemption.
If you receive payments of the proceeds of a sale of Class A common stock to
or through a United States office of a broker, the payment is subject to both
United States backup withholding and information reporting unless you certify,
under penalties of perjury, that you are a non-U.S. person or you otherwise
establish an exemption.
You generally may obtain a refund of any amounts withheld under the backup
withholding rules that exceed your income tax liability by filing a refund
claim with the United States Internal Revenue Service.
78
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
The sale of a substantial amount of our Class A common stock, including
shares issued upon exercise of outstanding options to purchase Class A common
stock, in the public market after this offering could adversely affect the
prevailing market price of our Class A common stock. Furthermore, because no
shares of Class A common stock will be available for sale shortly after this
offering due to the contractual restrictions on resale described in the section
entitled "Underwriting" and the legal restrictions on resale described below,
the sale of a substantial amount of common stock in the public market after
these restrictions lapse could adversely affect the prevailing market price of
our Class A common stock and our ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding an aggregate of
shares of our Class A common stock, as well shares of Class B common
stock that are convertible into an aggregate of shares of Class C common
stock. This Class C common stock is convertible into shares of Class A
common stock. All of the shares of our Class A common stock sold in this
offering will be freely tradable without restriction or further registration
under the Securities Act, unless the shares are purchased by "affiliates" as
that term is defined in Rule 144 under the Securities Act. Any shares purchased
by an affiliate may not be resold except pursuant to an effective registration
statement or an applicable exemption from registration, including an exemption
under Rule 144 of the Securities Act. The shares of Class A common stock
issuable upon conversion of the Class C common stock will be "restricted
securities" as that term is defined in Rule 144 under the Securities Act. These
restricted securities may be sold in the public market only if they are
registered or if they qualify for an exemption from registration under Rule 144
or Rule 701 under the Securities Act. All of the shares of Class B common stock
are subject to contractual restrictions on resale as described more fully in
the section entitled "Underwriting".
Stock Options
Immediately after the completion of this offering, there will be options to
purchase shares of our Class A common stock outstanding under our long-term
incentive plans. Shortly after the completion date of this offering, we expect
to file a registration statement under the Securities Act covering shares of
Class A common stock reserved for issuance under our long-term incentive plans.
The shares of our Class A common stock registered under this registration
statement would be immediately available for sale in the open market, subject
to vesting restrictions for these options.
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<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated and Salomon Smith Barney Inc. are
acting as U.S. representatives, and the international underwriters named below,
for whom Morgan Stanley & Co. International Limited and Salomon Brothers
International Limited are acting as international representatives, have
severally agreed to purchase, and we have agreed to sell to them, severally,
the number of shares indicated below:
<TABLE>
<CAPTION>
Number
of
Underwriters Shares
------------ ------
<S> <C>
U.S. Underwriters
Morgan Stanley & Co. Incorporated...................................
Salomon Smith Barney Inc. ..........................................
Subtotal............................................................
International Underwriters
Morgan Stanley & Co. International Limited .........................
Salomon Brothers International Limited .............................
Subtotal............................................................
----
Total.............................................................
====
</TABLE>
We refer to the U.S. underwriters and the international underwriters, and
the U.S. representatives and the international representatives, as the
"underwriters" and the "representatives", respectively. The underwriters are
offering the shares of Class A common stock subject to their acceptance of the
shares from us and subject to prior sale. The underwriting agreement provides
that the obligations of the underwriters to pay for and accept delivery of the
shares of Class A common stock offered by this prospectus are subject to the
approval of various legal matters by their counsel and to other conditions. The
underwriters must take and pay for all of the shares of Class A common stock
offered by this prospectus if any of these shares are taken. However, the
underwriters are not required to take or pay for the shares covered by the
underwriters' over-allotment option described below.
In the agreement between U.S. and international underwriters, sales may be
made between U.S. underwriters and international underwriters of any number of
shares as may be mutually agreed. The per share price of any shares sold by the
underwriters shall be the public offering price listed on the cover page of
this prospectus, in United States dollars, less an amount not greater than the
per share amount of the concession to dealers described below.
The underwriters initially propose to offer part of the shares of Class A
common stock directly to the public at the public offering price listed on the
cover page of this prospectus and part to dealers at a price that represents a
concession not in excess of $ a share under the public offering price. Any
underwriter may allow, and dealers may reallow, a concession not in excess of
$ a share to other underwriters or to dealers. After the initial offering of
the shares of Class A common stock, the offering price and other selling terms
may from time to time be varied by the representatives.
We have granted to the U.S. underwriters an option, exercisable for 30 days
from the date of this prospectus, to purchase up to an aggregate of
additional shares of Class A common stock at the public offering price listed
on the cover page of this prospectus, less underwriting discounts and
commissions. The U.S. underwriters may exercise this option solely for the
purpose of covering overallotments, if any, made in connection with the
offering of the shares of Class A common stock offered by this prospectus. To
the extent
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<PAGE>
the option is exercised, each U.S. underwriter will become obligated, subject
to conditions, to purchase about the same percentage of the additional shares
of Class A common stock as the number listed next to the U.S. underwriter's
name in the preceding table bears to the total number of shares of Class A
common stock listed next to the names of all U.S. underwriters in the
preceding table. If the U.S. underwriters exercise the option in full, the
total price to the public would be $ , the total underwriters' discounts and
commissions would be $ and total proceeds to us would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
Class A common stock offered by them.
We have applied to have our Class A common stock listed on the under
the symbol " ".
Each of Genuity, the directors and executive officers of Genuity and GTE
has agreed that, without the prior written consent of Morgan Stanley & Co.
Incorporated and Salomon Smith Barney Inc. on behalf of the underwriters, it
will not, during the period ending 180 days after the date of this prospectus:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or otherwise transfer or dispose of
directly or indirectly, any shares of Class A common stock or any
securities convertible into or exercisable or exchangeable for Class A
common stock; or
. enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
Class A common stock;
whether any transaction described above is to be settled by delivery of Class
A common stock or such other securities, in cash or otherwise. The
restrictions described in this paragraph do not apply to:
. the sale of shares to the underwriters;
. our issuance of shares of Class A common stock upon the exercise of an
option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing; or
. transactions by any person other than us relating to shares of Class A
common stock or other securities acquired in open market transactions
after the completion of the offering of the shares.
In order to facilitate the offering of the Class A common stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the price of the Class A common stock. Specifically, the underwriters
may over-allot in connection with the offering, creating a short position in
the Class A common stock for their own account. In addition, to cover over-
allotments or to stabilize the price of the Class A common stock, the
underwriters may bid for, and purchase, shares of Class A common stock in the
open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and
may end any of these activities at any time.
From time to time, Morgan Stanley & Co. Incorporated and Salomon Smith
Barney Inc., have provided, and continue to provide, investment banking
services to GTE and Bell Atlantic.
We and the underwriters have agreed to indemnify each other against
liabilities, including liabilities under the Securities Act.
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<PAGE>
Directed Share Program
At our request, the underwriters have reserved for sale, at the initial
offering price, up to shares of our Class A common stock offered by this
prospectus. The number of shares of Class A common stock available for sale to
the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares that are not so purchased will be offered
by the underwriters to the general public on the same basis as the other shares
offered hereby.
Pricing of the Offering
Prior to this offering, there has been no public market for the Class A
common stock. The initial public offering price will be determined by
negotiations between us and the U.S. representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of our company and its industry in general, sales, earnings and other
financial operating information of our company in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and some
financial and operating information of companies engaged in activities similar
to those of our company. The estimated initial public offering price range
indicated on the cover page of this preliminary prospectus is subject to change
as a result of market conditions and other factors.
VALIDITY OF CLASS A COMMON STOCK
The validity of the Class A common stock offered by this prospectus will be
passed upon by Ropes & Gray, Boston, Massachusetts, for Genuity, and by
Sullivan & Cromwell, New York, New York, for the underwriters.
EXPERTS
The financial statements and schedule included in this prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act with respect to the Class A common stock to be sold in this offering. This
prospectus, which constitutes a part of the registration statement, does not
contain all of the information set forth in the registration statement or the
exhibits and schedules that are part of the registration statement. Any
statements made in this prospectus as to the contents of any contract,
agreement or other document are not necessarily complete. With respect to each
such contract, agreement or other document filed as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matter involved, and each statement in this prospectus shall
be deemed qualified in its entirety by this reference. You may read and copy
all or any portion of the registration statement or any reports, statements or
other information in the files at the following public reference facilities of
the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Washington, D.C. New York, New York Chicago, Illinois
Room 1024, Judiciary Plaza Seven World Trade Center 500 West Madison Street
450 Fifth Street, N.W. Suite 1300 Suite 1400
Washington, D.C., 20549 New York, New York 10048 Chicago, Illinois 60661
</TABLE>
You can request copies of these documents upon payment of a duplicating fee
by writing to the Commission. You may call the Commission at 1-800-SEC-0330 for
further information on the operation of its public reference rooms. Our
filings, including the registration statement, will also be available to you on
the Internet web site maintained by the Commission at http://www.sec.gov.
We intend to furnish our stockholders with annual reports containing
financial statements audited by our independent auditors.
83
<PAGE>
GENUITY INC.
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Combined Statements of Operations for the six months ended June 30, 1997
related to the Predecessor and for the Years Ended December 31, 1997,
1998 and 1999 related to Genuity......................................... F-3
Combined Balance Sheets as of December 31, 1998 and 1999.................. F-4
Combined Statements of Cash Flows for the six months ended June 30, 1997
related to the Predecessor and for the years ended December 31, 1997,
1998 and 1999 related to Genuity......................................... F-5
Combined Statements of Changes in Stockholder's Equity for the six months
ended June 30, 1997 related to the Predecessor and for the years ended
December 31, 1997, 1998 and 1999 related to Genuity...................... F-6
Combined Statements of Comprehensive Loss for the six months ended June
30, 1997 related to the Predecessor and for the years ended December 31,
1997, 1998 and 1999 related to Genuity................................... F-7
Notes to Combined Financial Statements.................................... F-8
</TABLE>
F-1
<PAGE>
After the recapitalization, issuance of Class B common stock and finalization
of agreements discussed in Note 14 to Genuity Inc.'s combined financial
statements are effected, we expect to be in a position to render the following
audit report.
ARTHUR ANDERSEN LLP
April 7, 2000
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholder of Genuity Inc.:
We have audited the accompanying combined balance sheets of Genuity Inc.
(comprised of certain operations of GTE Internetworking Incorporated and
wholly-owned by GTE Corporation) (the Company) as of December 31, 1998 and
1999, and the related combined statements of operations, changes in
stockholder's equity, cash flows and comprehensive loss for each of the three
years in the period ended December 31, 1999. We have also audited the
statements of operations, changes in shareholder's equity, cash flows and
comprehensive loss of the Company's predecessor for the six months ended June
30, 1997, the period prior to the acquisition by the Company. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 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 financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of December
31, 1998 and 1999, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999 and the results
of operations and cash flows of the Predecessor for the six months ended June
30, 1997 in conformity with accounting principles generally accepted in the
United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental schedule is presented
for purposes of complying with the Securities and Exchange Commission's rules
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Boston, Massachusetts
, 2000
F-2
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Predecessor Genuity
------------- -------------------------------
Six Months Year Ended December 31,
Ended -------------------------------
June 30, 1997 1997 1998 1999
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues
Access...................................................................... $ 94,126 $ 128,838 $ 350,777 $ 574,503
Hosting..................................................................... 9,601 9,690 33,469 48,811
Transport................................................................... -- 65,221 72,412 89,541
Other....................................................................... 2,591 3,035 14,880 37,569
-------- --------- --------- ---------
Total revenues............................................................ 106,318 206,784 471,538 750,424
Operating Expenses
Cost of goods sold.......................................................... 92,670 184,914 512,967 786,965
Selling, general and administrative......................................... 38,801 144,360 316,491 399,529
Depreciation and amortization............................................... 10,536 49,483 104,523 188,667
-------- --------- --------- ---------
Total operating expenses.................................................. 142,007 378,757 933,981 1,375,161
-------- --------- --------- ---------
Operating Loss................................................................ (35,689) (171,973) (462,443) (624,737)
Other Income (Expense)
Interest expense, net....................................................... (478) (1,346) (20) (183)
Other, net.................................................................. (1,496) 1,814 (2,924) (32)
-------- --------- --------- ---------
Loss Before Income Taxes...................................................... (37,663) (171,505) (465,387) (624,952)
Income Taxes.................................................................. -- 535 1,653 1,737
-------- --------- --------- ---------
Net Loss...................................................................... $(37,663) $(172,040) $(467,040) $(626,689)
======== ========= ========= =========
Basic and Diluted Loss Per Common Share....................................... $( ) $( ) $( ) $( )
======== ========= ========= =========
Basic and Diluted Weighted-Average Common Shares Outstanding..................
- --------------------------------------------------
======== ========= ========= =========
</TABLE>
See notes to combined financial statements.
F-3
<PAGE>
GENUITY INC.
COMBINED BALANCE SHEETS
(dollars in thousands)
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents............................ $ 13,883 $ 6,044
Receivables, less allowances of $3,651 and $5,550.... 150,630 217,649
Receivables--affiliates.............................. 18,077 40,462
Note receivable--affiliate........................... 33,574 --
Other current assets................................. 19,099 13,627
---------- ----------
Total current assets............................... 235,263 277,782
Property, Plant and Equipment, Net..................... 908,039 1,524,390
Goodwill and Other Intangibles, Net.................... 556,435 542,876
Other Assets........................................... 3,724 28,111
---------- ----------
Total assets....................................... $1,703,461 $2,373,159
========== ==========
Liabilities and Stockholder's Equity
Current Liabilities:
Short-term obligations, including current
maturities.......................................... $ 20,499 $ 25,921
Note payable--affiliate.............................. -- 126,503
Accounts payable..................................... 73,711 142,752
Accounts payable--affiliates......................... 13,440 38,647
Accrued compensation and related liabilities......... 15,763 49,637
Accrued circuits..................................... -- 44,786
Accrued liabilities.................................. 41,008 81,696
Advanced billings.................................... 10,172 26,320
---------- ----------
Total current liabilities.......................... 174,593 536,262
Long-Term Obligations.................................. 126,855 112,717
Employee Benefit Plan Obligations and Deferred
Compensation.......................................... 46,388 20,466
Other Liabilities...................................... 3,406 370
---------- ----------
Total long-term liabilities........................ 176,649 133,553
---------- ----------
Stockholder's Equity:
Class B common stock--$ par value shares issued
and outstanding..................................... -- --
Additional paid-in capital........................... 2,004,380 2,983,426
Other comprehensive income........................... 3,928 2,696
Accumulated deficit.................................. (656,089) (1,282,778)
---------- ----------
Total stockholder's equity......................... 1,352,219 1,703,344
---------- ----------
Total liabilities and stockholder's equity......... $1,703,461 $2,373,159
========== ==========
</TABLE>
See notes to combined financial statements.
F-4
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Genuity
----------- ---------------------------------
Six Months Year Ended December 31,
Ended June ---------------------------------
30, 1997 1997 1998 1999
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................................................... $(37,663) $(172,040) $ (467,040) $ (626,689)
Adjustments to reconcile net loss to net cash provided by (used in)
operations:
Depreciation and amortization............................................... 10,536 49,483 104,523 188,667
Changes in current assets and current liabilities:
Receivables--net........................................................... (15,602) (24,289) (76,723) (89,404)
Other current assets....................................................... 726 (9,020) (6,730) 5,472
Other current liabilities.................................................. 46,265 104,761 (82,421) 175,160
Other, net.................................................................. (1,766) (28,467) 26,823 (52,495)
-------- --------- ---------- ----------
Net cash provided by (used in) operating activities........................... 2,496 (79,572) (501,568) (399,289)
-------- --------- ---------- ----------
Cash flows from investing activities:
Capital expenditures........................................................ (2,830) (255,903) (505,303) (672,030)
Purchase of businesses, net of cash acquired................................ -- (517,788) -- --
Other, net.................................................................. -- -- -- (36,244)
-------- --------- ---------- ----------
Net cash used in investing activities......................................... (2,830) (773,691) (505,303) (708,274)
-------- --------- ---------- ----------
Cash flows from financing activities:
Repayment of long-term debt................................................. (34,012) (11,363) (29,547) (37,512)
Change in short-term obligations............................................ 10,249 346 9,904 5,422
Change in note payable/receivable--affiliate................................ -- 256,352 (289,926) 160,077
Contributions from GTE...................................................... -- 610,688 1,327,260 971,737
-------- --------- ---------- ----------
Net cash provided by (used in) financing activities........................... (23,763) 856,023 1,017,691 1,099,724
-------- --------- ---------- ----------
Net increase (decrease) in cash and cash equivalents.......................... (24,097) 2,760 10,820 (7,839)
Cash and cash equivalents, beginning of period................................ 102,870 303 3,063 13,883
-------- --------- ---------- ----------
Cash and cash equivalents, end of period...................................... $ 78,773 $ 3,063 $ 13,883 $ 6,044
======== ========= ========== ==========
Supplemental Cash Flows Disclosure
Cash paid during the year for:
Interest.................................................................... $ 671 $ 2,142 $ 16,401 $ 4,403
======== ========= ========== ==========
State income taxes.......................................................... $ -- $ 535 $ 1,653 $ 1,737
======== ========= ========== ==========
Noncash Investing and Financing Activities:
Capital lease obligation incurred for equipment purchase.................... $ 20,425 $ 21,469 $ 54,958 $ 23,374
======== ========= ========== ==========
Accounts payable--work in process........................................... -- $ 22,119 $ 27,570 $ 54,584
- --------------------------------------------------
======== ========= ========== ==========
</TABLE>
See notes to combined financial statements.
F-5
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY
(dollars in thousands)
<TABLE>
<CAPTION>
Additional Other
Common Paid-In Accumulated Comprehensive Treasury
Stock Capital Deficit Income (Loss) Shares Total
------- ---------- ----------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance, December 31,
1996................... $25,041 $ 115,456 $ (5,967) $ -- $(28,419) $ 106,111
Stock option
exercises............. 88 1,912 -- -- -- 2,000
Conversion of
debentures............ 249 7,562 -- -- -- 7,811
Net loss............... -- -- (37,663) -- -- (37,663)
Other.................. -- -- -- (1,033) -- (1,033)
------- ---------- ----------- ------- -------- ----------
Balance, June 30, 1997.. $25,378 $ 124,930 $ (43,630) $(1,033) $(28,419) $ 77,226
======= ========== =========== ======= ======== ==========
- --------------------------------------------------------------------------------------------
GENUITY
Balance, December 31,
1996................... $ -- $ 47,764 $ (17,009) $ -- $ -- $ 30,755
Conversion of
Predecessor equity
instruments........... -- 16,186 -- -- -- 16,186
Capital contributions--
GTE................... -- 610,688 -- -- -- 610,688
Net loss............... -- -- (172,040) -- -- (172,040)
Other.................. -- -- -- 2,046 -- 2,046
------- ---------- ----------- ------- -------- ----------
Balance, December 31,
1997................... -- 674,638 (189,049) 2,046 -- 487,635
Tax benefit on exercise
of stock options--
GTE................... -- 2,482 -- -- -- 2,482
Capital contributions--
GTE................... -- 1,327,260 -- -- -- 1,327,260
Net loss............... -- -- (467,040) -- -- (467,040)
Other.................. -- -- -- 1,882 -- 1,882
------- ---------- ----------- ------- -------- ----------
Balance, December 31,
1998................... -- 2,004,380 (656,089) 3,928 -- 1,352,219
Tax benefit on exercise
of stock options--
GTE................... -- 7,309 -- -- -- 7,309
Capital contributions--
GTE................... -- 971,737 -- -- -- 971,737
Net loss............... -- -- (626,689) -- -- (626,689)
Other.................. -- -- -- (1,232) -- (1,232)
------- ---------- ----------- ------- -------- ----------
Balance, December 31,
1999................... $ -- $2,983,426 $(1,282,778) $ 2,696 $ -- $1,703,344
======= ========== =========== ======= ======== ==========
</TABLE>
See notes to combined financial statements.
F-6
<PAGE>
GENUITY INC.
COMBINED STATEMENTS OF COMPREHENSIVE LOSS
(dollars in thousands)
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- -------------------------------
Six Months Year Ended December 31,
Ended June 30, -------------------------------
1997 1997 1998 1999
-------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Loss..................................................................... $(37,663) $(172,040) $(467,040) $(626,689)
Other Comprehensive Income (Loss):
Foreign currency translation adjustments.................................... (113) (37) 32 118
Unrealized gain (loss) on securities........................................ (920) 2,083 1,850 (1,350)
-------- --------- --------- ---------
(1,033) 2,046 1,882 (1,232)
-------- --------- --------- ---------
Comprehensive Loss........................................................... $(38,696) $(169,994) $(465,158) $(627,921)
- --------------------------------------------------
======== ========= ========= =========
</TABLE>
See notes to combined financial statements.
F-7
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1997, 1998 and 1999
1.Description of Business and Summary of Significant Accounting Policies:
Description of Business and Organization
Genuity Inc. (Genuity or the Company), a Delaware corporation, is a wholly-
owned subsidiary of GTE Corporation (GTE). Genuity is a leading facilities-
based provider of managed Internet infrastructure services. By leveraging a
technologically advanced, high-bandwidth global fiber-optic network, data
center facilities, and a rapidly growing base of business and consumer users
and content directly attached to its Internet backbone, Genuity engineers and
delivers a comprehensive suite of managed Internet infrastructure services.
These services include Internet access through dial-up, dedicated and digital
subscriber lines; web hosting and content delivery; and value added e-business
services, such as virtual private networks for secure data transmission,
security services and voice-over-IP. Genuity's services are provided to both
enterprises and service providers including Internet service providers,
application service providers and carriers.
Genuity's predecessor incurred net losses of $37.7 million for the six
months ended June 30, 1997. Genuity incurred net losses of $172.0 million,
$467.0 million and $626.7 million for the years ended December 31, 1997, 1998
and 1999, respectively. To date, Genuity has incurred cumulative operating
losses of $1,282.8 million. Given the level of planned operating and capital
expenditures, Genuity expects to continue to incur significant operating losses
for the next several years.
The markets in which Genuity operates can be characterized as rapidly
changing due to technological developments, evolving industry standards and
customer demands and frequent new product and service introductions and
enhancements. Genuity expects to continue to make significant investments to
expand its capacity and facilities infrastructure, develop brand recognition,
broaden the range of service offerings and expand its sales, marketing,
technical and customer support personnel. These efforts will require
significant expenditures, a substantial portion of which will be made before
any significant corresponding revenue may be realized.
Genuity is also dependent on a limited source of suppliers for a number of
components and parts necessary for its network buildout and operations. Genuity
does not carry significant inventories of components and has no guaranteed
supply arrangements with vendors. Shortages from these suppliers could cause
significant delays in or abandonment of the expansion of the network and could
have an adverse affect on Genuity's operating results.
Basis of Presentation
The accompanying combined financial statements of Genuity include the
financial position of some of the operations of GTE Internetworking as of
December 31, 1998 and 1999 and results of their operations for each of the
three years in the period ended December 31, 1999. Certain of the operations
and assets included in these combined financial statements were transferred to
Genuity on , 2000. GTE acquired BBN Corporation effective June 30, 1997.
This acquisition was accounted for as a purchase business combination and,
consequently, the results of operations of BBN Corporation, excluding the
operations of BBN Technologies (BBNT), which are being retained by GTE, are
included in Genuity for the periods after June 30, 1997. The results of
operations of our predecessor represent the results of BBN Corporation,
excluding the operations of BBNT.
Genuity prepares its combined financial statements in accordance with
generally accepted accounting principles, which require that management make
estimates and assumptions that affect reported amounts. Actual results could
differ from these estimates.
The combined financial statements of Genuity include the accounts of all
majority-owned subsidiaries. All significant intercompany amounts have been
eliminated.
F-8
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Revenue Recognition
Revenue is generally recognized when services are rendered or products are
delivered to customers. Access, web hosting and transport customers typically
sign one or two-year contracts. Access customer contracts provide for monthly-
recurring service fees and/or fees based on utilization. Web hosting revenues
are derived primarily from monthly fees, usage of bandwidth and monthly server
management fees. Transport revenues are based on customer usage of circuit
mileage and bandwidth. Other value-added service revenue is generally based on
monthly collocation fees or based on usage of service. Billings made or
payments received in advance of providing services are deferred until the
period these services are provided.
Genuity has contracts with some customers that provide service level
commitments. If Genuity does not meet the required service levels, it may be
obligated to provide credits, usually in the form of free service for a short
period of time. These amounts are accounted for in cost of sales. To date,
credits issued under these arrangements for Genuity's failure to meet service
level commitments have not been material. During 1999, one of Genuity's vendors
experienced failures on its network, which resulted in a disruption to
Genuity's customers. Genuity's vendor provided credits to Genuity for the
service failure, which Genuity passed on to its customers.
Advertising Costs
Genuity expenses the cost of advertising as incurred. The Predecessor's
advertising expense was $5.1 million for the six months ended June 30, 1997.
Genuity's advertising expense was $4.6 million, $16.5 million and $21.5 million
for the years ended December 31, 1997, 1998 and 1999, respectively. Advertising
expense is included as a component of selling expense in the accompanying
combined statements of operations.
Income Taxes
Genuity has historically filed its federal income tax return on a
consolidated basis with GTE. Upon completion of the initial public offering,
Genuity will be deconsolidated from GTE for income tax purposes. Income tax
payments and refunds will be determined based on the stand-alone filings of
Genuity. The accompanying combined financial statements are presented as if
Genuity was a stand-alone company for all periods presented. The Predecessor
was part of a stand-alone entity, and its taxes were recorded on that basis.
Genuity and the Predecessor computed their current and deferred income tax
expense on a stand-alone basis in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes," which
requires recognition of deferred tax liabilities and assets based upon the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax
liabilities and assets are determined based on the difference between the
financial statement and tax basis of assets and liabilities using tax rates in
effect for the year in which the differences are expected to reverse. A
valuation allowance has been established to reflect the likelihood of
realization of deferred tax assets.
F-9
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Genuity has approximately $39 million of net operating losses and $10
million of research credit carryforwards, which are limited in use due to the
fact that they were generated by the Predecessor.
Loss Per Common Share
Loss per common share is calculated based on the provisions of SFAS No. 128,
"Earnings per Share." Basic loss per common share of the Predecessor was
computed by dividing net loss by the weighted-average number of common shares
outstanding during the period. The basic loss per share of Genuity was computed
based on the number of common shares that were issued in connection with the
recapitalization of Genuity, which occurred on . No stock options or
awards of the Predecessor were considered in calculating diluted loss per
common share as their effect would be antidilutive. Genuity has no potentially
dilutive common shares.
Cash and Cash Equivalents
Cash and cash equivalents include investments in short-term, highly liquid
securities, which have maturities when purchased of three months or less.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation and amortization. Depreciation is computed over the assets'
estimated useful lives using the straight-line method. Useful lives used in
computing depreciation are as follows: buildings and fixtures--10 to 30 years,
communications network--fiber-optic cable--20 to 25 years, communications
network--data processing equipment and machinery which include labor and other
direct costs--3 to 10 years and furniture--5 to 7 years. Leasehold improvements
are amortized over the shorter of the lease period or their estimated useful
lives using the straight-line method. Maintenance and repairs are charged to
expense as incurred; improvements are capitalized.
When property is sold or retired, the cost of the property and the related
accumulated depreciation are removed from the combined balance sheet and any
gain or loss on the transaction is included in the accompanying combined
statement of operations.
Work in progress represents costs incurred for the build-out and expansion
of the network infrastructure and includes engineering costs and capitalized
interest. When these assets are placed in service, the costs are recorded in
the appropriate property, plant and equipment accounts and depreciation begins.
Genuity leases data communications equipment under a capital lease
agreement. The assets and liabilities under the capital lease are recorded at
the present value of minimum lease payments. Assets under the capital lease are
depreciated over the term of the lease, which is generally 5 years.
Communications network--fiber optic cable primarily includes an indefeasible
right of use agreement with Qwest Communications International Inc. at December
31, 1999.
Goodwill and Other Intangibles
Goodwill and other intangible assets pertain to the acquisitions of the
Predecessor and the assets of a web hosting business acquired in 1997, and
internal use software. Goodwill is being amortized on a straight-line basis
over the lesser of 20 years or the period benefited. Other intangible assets
include customer bases,
F-10
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
trademarks, developed technology and in-place work forces in connection with
the acquisitions, and internal use software. Customer bases and in-place work
forces are amortized in a manner consistent with historical attrition patterns
over 3 to 10 years. Trademarks, developed technology and internal use software
are amortized on a straight-line basis over 3 to 10 years.
Software
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." Under the provisions of this SOP,
effective January 1, 1999, Genuity was required to capitalize and amortize the
cost of all internal-use software. Prior to the adoption of SOP 98-1, primarily
all software was expensed as incurred. Software expensed in 1997 and 1998 was
approximately $17.3 million and $1.4 million, respectively. Capitalized
software is amortized over a useful life ranging from 3 to 5 years. Software
maintenance costs are expensed as incurred.
Employee Benefit Plans
For periods prior to the initial public offering, Genuity participated in
GTE's pension and postretirement health care and life insurance benefit plans.
The plans' cost and liability recorded by Genuity are based on Genuity's
participation in GTE's plans.
Valuation of Long-Lived Assets
Genuity periodically reviews the values assigned to long-lived assets such
as intangibles and property, plant and equipment, to determine whether any
impairments exist that are other than temporary. If circumstances indicated
that long-lived assets have been impaired, Genuity would estimate gross cash
flows for the estimated useful life of the asset, compared to its carrying
value. Genuity's management believes that no impairments exist related to its
long-lived assets in the accompanying combined balance sheets.
Concentrations of Credit Risk and Significant Customers
Genuity's accounts receivable subject it to credit risk. Genuity performs
regular credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Genuity's risk of loss is limited due
to advance billings to some of its customers for services and the ability to
terminate service on delinquent accounts. The credit risk is also mitigated by
the large number of customers comprising the customer base, with the exception
of one large customer, America Online. Revenues from America Online in relation
to Genuity's and Predecessor's total revenues were significant. However, the
credit risk associated with America Online is mitigated by advance billings and
timely collections. The average accounts receivable balance of America Online
represented 34% and 44% of Genuity's receivable balance during 1998 and 1999,
respectively, while revenues from America Online represented 53% and 52% of
Genuity's total revenues for the years ended December 31, 1998 and 1999,
respectively.
Genuity has been a supplier of network access services in the United States
to America Online since 1995. Genuity entered into a new agreement with America
Online effective as of December 31, 1999, pursuant to which America Online has
agreed to purchase additional dial-up access services from Genuity for a seven-
year term through December 31, 2006. Under the new agreement, America Online
has also agreed to purchase managed digital subscriber line and other broadband
network access services from Genuity for a five-year term through December 31,
2004. This agreement includes provisions for minimum purchase requirements at
fixed monthly fees, subject to market pricing adjustments, service level
requirements and termination provisions.
F-11
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
In providing America Online services under the agreement, Genuity is
obligated to comply with specified minimum service levels. Either party may
terminate the agreement in the event the other party commits a material breach
which is not cured within the specified period. In addition, America Online has
the right to terminate the agreement in the event of: (1) repeated material
breaches by Genuity; (2) a violation of the most favored customer pricing
provisions; (3) a total or near total outage of any of the services provided by
Genuity that, while lasting fewer than thirty days, is widespread and
prolonged; (4) our inability to meet our service level commitments or to expand
service availability as required under the agreement; and (5) a change in
control other than through this initial public offering. Genuity is also
obligated to provide America Online assistance in the twelve months following
any termination of the agreement to ensure a smooth transition of services. The
agreement provides America Online with a right of first refusal with respect to
the sale of our dial-up network access business.
Under a separate agreement with America Online Japan and Genuity's Japanese
branch, Genuity has agreed to provide dial-up network access services to
America Online in Japan. This agreement also includes minimum purchase
requirements on the part of America Online Japan, market pricing adjustments,
service level requirements, and termination provisions.
Financial Instruments
Financial instruments include cash and cash equivalents, accounts
receivable, equity securities, accounts payable, notes payable and debt. The
fair values of financial instruments included in the combined balance sheets,
other than long-term debt, closely approximate their recorded values. The
recorded values of equity securities equal their fair values based on quoted
market prices, and are classified as available-for-sale securities. The
securities are included in other current assets in the accompanying combined
balance sheets and have a cost of $11.8 million and $3.5 million at December
31, 1998 and 1999, respectively. The estimated fair value of long-term debt
based on a debt pricing model was lower than its recorded value as of December
31, 1998 and 1999 by approximately $1.2 million and $6.6 million, respectively.
Comprehensive Loss
Comprehensive loss is the change in equity from transactions and other
events and circumstances that are not from owners. Included in other
comprehensive income (loss) are foreign currency translation gains and losses
and unrealized gains and losses on available-for-sale securities.
Foreign Currency Translation
Assets and liabilities of units operating in foreign countries are
translated into U.S. dollars using the exchange rates in effect on the balance
sheet date. Results of operations are translated using the average exchange
rates prevailing throughout the period. Foreign assets, liabilities and results
of operations are not material in all periods presented.
Recent Accounting Pronouncement
On December 3, 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." Genuity is required to adopt this accounting guidance, as amended
by SAB No. 101A, no later than the second quarter of 2000. Genuity adopted this
accounting in the first quarter of 2000.
F-12
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
2.GTE's Proposed Merger with Bell Atlantic Corporation:
In July 1998, GTE and Bell Atlantic Corporation (Bell Atlantic) agreed to
enter into a merger of equals transaction. The new combined company is Verizon
Communications (Verizon). Under the terms of the agreement, which was
unanimously approved by the boards of directors of both companies and a
majority of the shareholders, GTE's shareholders will receive 1.22 shares of
Verizon stock for each share of GTE's stock that they own. The merger is
subject to regulatory approvals.
Under the Telecommunications Act of 1996, Regional Bell Operating Companies,
including the Bell Atlantic local telephone operating companies, and their
respective affiliates, are generally prohibited from providing long distance
services that originate in any state in which they operate an incumbent local
telephone company. These provisions restrict the operations of these companies
until they have satisfied a 14-point competitive checklist under Section 271 of
the Telecommunications Act of 1996 (Telecommunications Act) and obtained
authority from the Federal Communications Commission (FCC) to provide long
distance services in the states in which they operate an incumbent local
telephone company.
Bell Atlantic is an incumbent local telephone company in 13 states,
stretching from Maine to Virginia, and the District of Columbia. Bell Atlantic
has obtained the necessary authorization to provide long distance service
originating in New York. Because Genuity provides services in Bell Atlantic's
region that could be characterized as long distance services, Bell Atlantic and
GTE cannot complete their merger until they either (1) receive relief from the
Telecommunications Act restrictions for the remaining states in which Bell
Atlantic provides local telephone services or (2) implement a structure that
complies with the requirements of the Telecommunications Act.
To ensure compliance with the requirements of the Telecommunications Act and
to receive FCC approval of their merger, Bell Atlantic and GTE have proposed a
structure to the FCC under which (1) GTE will exchange all of the currently
outstanding shares of Genuity common stock for shares of Class B common stock
and (2) Genuity will make an initial public offering of Class A common stock.
As a result, immediately after completion of Genuity's initial public offering,
the investors purchasing shares in the initial public offering will own shares
of Genuity's Class A common stock possessing 90% of the total voting power of
Genuity's capital stock and GTE will own shares of Genuity's Class B common
stock possessing 10% of the total voting power of Genuity's capital stock.
Genuity's Class B common stock is convertible at any time into shares of
Genuity's Class C common stock that represent approximately 82% of Genuity's
total capital stock and possess approximately 96% of the total voting power of
Genuity's capital stock, in each case before giving effect to any outstanding
options to purchase shares of Genuity common stock, the exercise of the
underwriters' over-allotment option or other additional issuances of Genuity
common stock. If the underwriters over-allotment option is exercised, Genuity's
Class B common stock would be convertible into shares of Class C common stock
representing 80% of Genuity's total capital stock.
Under the terms of the proposal to the FCC, the shares of Class B common
stock held by Verizon must be converted on or prior to 2005, subject to
extension. Assuming no additional issuances of Genuity's common stock after
completion of this offering, Verizon will control Genuity if and when it
converts its Class B common stock into Class C common stock. Subject to limited
exceptions, if Verizon is unable to convert its shares of Class B common stock
within this time period, it would be required to dispose of those shares.
Bell Atlantic and GTE are required to receive the formal approval of the FCC
for the proposed structure.
F-13
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
3.Property, Plant and Equipment, Net
Property, plant and equipment, net was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
----------------------
1998 1999
---------- ----------
<S> <C> <C>
Land................................................ $ 2,356 $ 2,417
Buildings and fixtures.............................. 6,654 14,771
Communications network--fiber-optic cable........... 300,035 481,573
Communications network--data processing
equipment and machinery............................ 483,944 732,306
Furniture........................................... 11,083 18,653
Leasehold improvements.............................. 95,418 164,542
Work in progress.................................... 177,607 402,740
---------- ----------
Sub-Total......................................... 1,077,097 1,817,002
Accumulated depreciation............................ (169,058) (292,612)
---------- ----------
Total............................................. $ 908,039 $1,524,390
========== ==========
</TABLE>
During 1999, Genuity completed its initial buildout of its communications
network in the United States. Costs directly related to the network have been
capitalized, including amounts associated with the indefeasible rights of use.
Genuity commenced depreciation as individual segments were placed in service.
The Predecessor's depreciation expense was $10.5 million for the six months
ended June 30, 1997. Genuity's depreciation expense was $18.8 million, $56.3
million and $138.9 million for the years ended December 31, 1997, 1998 and
1999, respectively.
Interest and network engineering costs capitalized as part of property,
plant and equipment were as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- -------------------------------
Six Months
Ended June 30, For the Year Ended December 31,
-------------- -------------------------------
1997 1997 1998 1999
-------------- -------------------- ----------
<S> <C> <C> <C> <C>
Network engineering costs... $422 $ 1,422 $ 10,263 $ 23,148
Capitalized interest........ -- -- 17,700 6,408
---- --------- ---------- ----------
Total..................... $422 $ 1,422 $ 27,963 $ 29,556
==== ========= ========== ==========
</TABLE>
F-14
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
4.Goodwill and Other Intangibles, Net
Goodwill and other intangibles, net was comprised of the following (in
thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Goodwill................................................ $496,192 $496,192
Customer bases.......................................... 77,000 77,000
Trademarks.............................................. 34,000 34,000
Developed technology.................................... 19,000 19,000
In-place work forces.................................... 9,190 9,190
Internal use software................................... -- 36,244
-------- --------
Sub-Total............................................. 635,382 671,626
Accumulated amortization................................ (78,947) (128,750)
-------- --------
Total................................................. $556,435 $542,876
======== ========
</TABLE>
Genuity's amortization expense was $30.7 million, $48.3 million and $49.8
million for the years ended December 31, 1997, 1998 and 1999, respectively.
5.Debt
Long-term obligations and short-term obligations were as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
-------- --------
<S> <C> <C>
6% convertible subordinated debentures.................... $ 55,903 $ 48,948
Capital leases............................................ 70,952 63,769
-------- --------
Total long-term obligations............................. $126,855 $112,717
======== ========
Note payable--affiliate................................... $ -- $126,503
Current portion of capital leases......................... 20,499 25,921
-------- --------
Total short-term obligations............................ $ 20,499 $152,424
======== ========
</TABLE>
On April 1, 1987, Predecessor issued $84.7 million of 6% convertible
subordinated debentures. The 6% convertible subordinated debentures due 2012
may be converted by the bondholders into cash at an exchange ratio of $966.67
for each $1,000 in principal amount of debentures. The debentures are unsecured
obligations of Genuity and are subordinated in right of payment to Genuity's
senior indebtedness, if any. Debt issuance costs are being amortized over the
term of the debentures. The unamortized balance at December 31, 1999 of $0.6
million is included in other assets in the accompanying combined balance
sheets.
Genuity is required to contribute to a sinking fund annual payments equal to
5% of the aggregate principal amount issued. The sinking fund was calculated to
retire 70% of the original debentures prior to maturity. To date Genuity has
purchased and retired debentures with a face value of $37.3 million which has
been used to satisfy the annual sinking fund requirements through 2006.
F-15
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
The interest rate on the note payable to/receivable from GTE is based on an
intercompany borrowing interest rate established by GTE, which fluctuated
between 4.85% and 6.58% in 1997, 5.41% and 6.24% in 1998 and 6.04% and 6.75% in
1999.
Genuity has entered into leasing agreements to finance some equipment
acquisitions. The underlying assets serve to collateralize the debt. The
borrowings bear interest at effective rates of 5.07% to 9.50% and have terms of
5 years from the date of purchase, with principal and interest payable
quarterly in advance. The leases include purchase and renewal options at fair
market values. The leases are classified as capital leases in accordance with
the provisions of SFAS No. 13, "Accounting for Leases."
Assets under capital leases were as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
1998 1999
------- --------
<S> <C> <C>
Data processing equipment................................. $91,682 $115,056
Accumulated depreciation.................................. (25,936) (51,792)
------- --------
Total................................................... $65,746 $ 63,264
======= ========
</TABLE>
6.Stockholder's Equity
Common Stock
The authorized and issued common stock of Genuity is based on the number of
common shares that will be issued in connection with the recapitalization of
Genuity, which occurred on . In connection with the recapitalization, the
1,000 shares of common stock issued and outstanding were converted to
shares of Class B common stock.
Additional Paid-In Capital
Genuity received contributions from GTE of $610.7 million, $1,327.3 million
and $971.7 million, for the years ended December 31, 1997, 1998 and 1999,
respectively.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss includes cumulative foreign currency
translation adjustments and the cumulative unrealized loss on investments in
securities. The Predecessor's cumulative foreign currency translation
adjustment was a loss of $0.1 million as of June 30, 1997 and Genuity's
cumulative foreign currency translation adjustment was a gain of $0.1 million
as of December 31, 1999. The Predecessor's cumulative unrealized loss on
investments in securities was $0.9 million as of June 30, 1997 and Genuity's
cumulative unrealized gain on investments in securities was $2.1 million, $3.9
million and $2.6 million as of December 31, 1997, 1998 and 1999, respectively.
7.Stock-Based Compensation
GTE maintains broad-based stock option plans that has historically covered
substantially all Genuity employees. Genuity employees will not participate in
these plans after the initial public offering. Prior to 1997, options were
granted separately or in conjunction with stock appreciation rights (SARs).
Beginning in 1997, the granting of SARs was discontinued. In 1997, GTE's
shareholders approved the GTE Corporation 1997 Long-
F-16
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Term Incentive Plan (the LTIP). Each option granted under the LTIP conveys the
right to purchase, at fair market value on the date of the grant, shares of GTE
common stock. Generally, options have a term of 10 years and become vested over
a period not to exceed three years. At December 31, 1999, 1,595,984 options
granted to Genuity employees were exercisable in shares of GTE common stock.
Options granted under the Predecessor's stock incentive plan were converted
into GTE options or plan participants received cash.
In 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." As permitted by SFAS No. 123, GTE continues to apply the
recognition and measurement provisions of Accounting Principles Board Opinion
(APB) No. 25, "Accounting for Stock Issued to Employees." In accordance with
APB No. 25, compensation expense is not recognized for stock options on the
date of grant since it is GTE's practice to grant options with an exercise
price equal to the fair market value of its common stock on the date of grant.
Under SFAS No. 123, compensation cost is measured at the grant date based on
the value of the award and is recognized over the service or vesting period.
Had compensation cost for GTE's stock options been determined under SFAS No.
123, based on the fair market value at the grant dates, pro forma net loss and
basic loss per share of Genuity would have been as follows (in thousands except
per share amounts):
<TABLE>
<CAPTION>
Genuity
-------------------------------
For the Year Ended December
31,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Net loss
As reported.............................. $(172,040) $(467,040) $(626,689)
Pro forma................................ (173,055) (472,845) (648,201)
Basic and diluted loss per share
As reported.............................. $ ( ) $ ( ) $ ( )
Pro forma................................ ( ) ( ) ( )
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for GTE options granted during the years ended December 31, 1997,
1998 and 1999: expected volatility of 18%-19.5%, expected maturities of seven
years, risk-free interest rates equal to the yield on seven-year U.S. Treasury
notes on the grant date and expected dividend yield of approximately 3%.
8.Employee Benefit Plans
Genuity does not intend to offer a pension or other postretirement plan to
employees once its employees are no longer employees of GTE. Genuity does
intend to offer a defined contribution (401(k)) plan.
GTE sponsors several qualified and nonqualified pension plans and other
postretirement benefit plans for its employees, which prior to the initial
public offering, include Genuity's employees. The Predecessor did not sponsor
either a pension plan or an other postretirement benefit plan. Approximately
600 of Genuity's employees are covered under defined benefit pension plans and
postretirement health care and life insurance plans. Pension plans are
generally noncontributory by plan participants. Postretirement health care
plans are generally contributory and include a limit on the portion of the cost
of benefits for recent and future retirees paid by Genuity.
F-17
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
The cost and liability for the pension and other postretirement benefit
plans recorded by Genuity are based on Genuity's participation in GTE's plans,
representing an allocation of the GTE's plans' assets and liabilities.
Genuity's pension expense was $0.5 million, $0.9 million and $2.6 million for
the years ended December 31, 1997, 1998 and 1999, respectively. Genuity's other
postretirement benefit expense was $0.2 million, $0.4 million and $0.3 million
for the years ended December 31, 1997, 1998 and 1999, respectively. Genuity's
pension liability was $2.5 million and $5.1 million as of December 31, 1998 and
1999, respectively. Genuity's other postretirement benefit liability was $2.0
million and $2.2 million as of December 31, 1998 and 1999, respectively.
GTE sponsors employee savings and stock ownership plans under section 401(k)
of the Internal Revenue Code. Through the date of the initial public offering
the plans cover substantially all full-time employees of Genuity. Under the
plans, Genuity provides matching contributions in either cash or GTE common
stock based on qualified employee contributions. Genuity's matching
contributions charged to income were $1.0 million, $3.1 million, and $4.8
million for the years ended December 31, 1997, 1998 and 1999, respectively.
BBN Corporation maintained the BBN Corporation Retirement Trust Agreement,
which is a 401(k) plan that includes matching and profit sharing features. The
plan covers most employees of Genuity who are not covered by the GTE Savings
Plan. It is anticipated that the plan will be sponsored and maintained by
Genuity or one of its affiliates after the offering. The Predecessor's matching
contribution charged to income was $0.6 million for the six months ended June
30, 1997.
9.Interest Expense, Net
The combined statements of operations reflect total interest expense, less
interest capitalized during construction and interest income as follows (in
thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- --------------------------
Six Months
Ended June 30, Year Ended December 31,
-------------- --------------------------
1997 1997 1998 1999
-------------- ------- -------- -------
<S> <C> <C> <C> <C>
Interest expense.................. $(2,951) $(1,346) $(17,720) $(9,952)
Interest capitalized.............. -- -- 17,700 6,408
Interest income................... 2,473 -- -- 3,361
------- ------- -------- -------
Total........................... $ (478) $(1,346) $ (20) $ (183)
======= ======= ======== =======
</TABLE>
10.Income Taxes
The income tax accounts included in the accompanying combined balance sheets
and statements of operations are presented as if Genuity were a stand-alone
company for all periods presented. The Predecessor was part of a stand-alone
entity, and its income taxes were recorded on that basis. Taxable losses of
Genuity aggregating $111.3 million, $524.4 million and $636.7 million for the
years ended December 31, 1997, 1998 and 1999, respectively, have been benefited
to GTE in its consolidated tax return. Genuity received reimbursements
aggregating $39.2 million, $184.9 million and $222.8 million for the years
ended December 31, 1997, 1998 and 1999, respectively. To present Genuity's tax
provisions on a basis consistent with future periods these reimbursements have
been accounted for as capital contributions. The tax provision included in the
accompanying combined statements of operations represents the amounts owed for
state taxes.
F-18
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
The significant components of Genuity's deferred tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------
1998 1999
-------- --------
<S> <C> <C>
Deferred tax assets:
Employee benefit obligations........................... $ 21,183 $ 22,200
NOL carryforward....................................... 24,480 24,014
Predecessor goodwill................................... 10,241 11,830
Capitalized software................................... 3,548 5,256
Other.................................................. 14,238 13,233
-------- --------
Total deferred tax assets............................ 73,690 76,533
-------- --------
Deferred tax liabilities:
Depreciation and amortization.......................... (7,100) (32,688)
Other intangibles...................................... (35,775) (29,247)
Operating leases....................................... (4,201) (4,201)
Other.................................................. (5,308) (2,090)
-------- --------
Net deferred tax asset............................... 21,306 8,307
-------- --------
Deferred tax asset--current.......................... 7,604 7,785
Deferred tax asset--noncurrent....................... 13,702 522
Valuation allowance.................................. (21,306) (8,307)
-------- --------
$ -- $ --
======== ========
</TABLE>
The net operating losses included above relate to Predecessor and are
limited in their utilization under Internal Revenue Code Section 382. A full
valuation allowance has been recorded in the accompanying combined financial
statements to offset the net deferred tax asset because its future
realizability is uncertain.
The difference between the income tax rate computed by applying the
statutory federal income tax rate of 35% to income before income taxes and the
actual effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----- ----- -----
<S> <C> <C> <C>
Statutory rate............ (35.0%) (35.0%) (35.0%)
Increase (decrease)
resulting from--
State taxes, net of
federal benefit........ 0.3 0.3 0.2
Goodwill................ 4.2 2.7 2.0
Meals and
entertainment.......... 0.1 0.1 --
Change in valuation
allowance.............. 6.5 (3.1) (2.1)
Tax losses benefited to
GTE.................... 25.0 35.3 35.0
Other................... (0.8) -- 0.1
----- ----- -----
0.3% 0.3% 0.2%
===== ===== =====
</TABLE>
11.Segment Reporting
Effective December 31, 1998, Genuity adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." SFAS No. 131 establishes
standards for reporting financial information about operating segments in
annual and interim financial statements and requires restatement of prior year
information. Operating segments are defined as units of a business for which
financial information is available that is evaluated by the primary decision-
makers in determining the manner in which resources are allocated and in
assessing performance of the business.
F-19
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Genuity's operations are reported in three segments, Access, Hosting and
Transport.
Access--Internet access pertains to a variety of global Internet access
services, including dial-up, dedicated, DSL and other broadband, by providing
and managing the underlying scaleable infrastructure. Genuity also provides a
range of customer premise equipment necessary to connect to the Internet,
including routers, channel service units/data services units, modems, software
and other products. Customers receive 24 hours per day, 7 days per week network
monitoring and technical support from Genuity's Network Operations Centers
(NOC).
Hosting--Hosting pertains to services that allow customers to successfully
implement their e-business strategies through scaleable, reliable and secure
Web sites, which serve as their e-business storefronts. Thee-business model
enables companies to decrease sales costs; accelerate time to market; access
new sales channels; increase revenues, productivity and customer satisfaction;
and gain competitive advantage. Genuity currently operates ten global data
centers, eight in the US, one in Leeds, England and one in Tokyo, Japan.
Through the web hosting operation center, Genuity monitors these systems 24
hours a day and 7 days a week.
Transport--Genuity provides a broad range of transport services to customers
through a single point of contact for planning, ordering, installing, billing,
maintaining and managing our customers transport services. Genuity provides
seamless operation of local loops, central office connections and interexchange
carrier transport. Through Genuity's NOC, network faults, intrusion or
environmental alarms are observed, diagnostics are performed, and referrals or
dispatches are initiated as needed.
Other--Represents revenue from international operations and international
sales of domestic operations and revenue generated from value-added Internet
services of security, virtual private networks and voice over IP.
As the network, which is referred to as GNI, supports the Access, Hosting
and Transport segments, it is not allocated between the Access, Hosting and
Transport units for management reporting, or consequently, segment reporting
purposes. Similarly, selling, general and administrative expenses are not
allocated to the segments for management or segment reporting purposes.
Revenues for America Online in relation to the Predecessor's total revenues
represented 54% for the six months ended June 30, 1997. Revenues for America
Online in relation to Genuity's total revenues were 42%, 53% and 52% for the
years ended December 31, 1997, 1998 and 1999, respectively.
Management utilizes several measurements to evaluate its operations and
allocate resources. However, the principal measurements are consistent with
Genuity's financial statements. The accounting policies of the segments are the
same as those described in Note 1.
F-20
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Financial information for Genuity's segments is as follows (in thousands):
<TABLE>
<CAPTION>
Predecessor Genuity
-------------- ----------------------------------
Six Months Year Ended December 31,
Ended June 30, ----------------------------------
1997 1997 1998 1999
-------------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues
Access.................................................................. $ 94,126 $ 128,838 $ 350,777 $ 574,503
Hosting................................................................. 9,601 9,690 33,469 48,811
Transport............................................................... -- 65,221 72,412 89,541
Other................................................................... 2,591 3,035 14,880 37,569
-------- ---------- ---------- ----------
Total revenues...................................................... 106,318 206,784 471,538 750,424
Operating Expenses
Cost of goods sold...................................................... 92,670 184,914 512,967 786,965
Selling, general and administrative..................................... 38,801 144,360 316,491 399,529
Depreciation and amortization........................................... 10,536 49,483 104,523 188,667
-------- ---------- ---------- ----------
Total operating expenses............................................ 142,007 378,757 933,981 1,375,161
-------- ---------- ---------- ----------
Operating Loss............................................................ $(35,689) $ (171,973) $ (462,443) $ (624,737)
======== ========== ========== ==========
Property, Plant and Equipment, Net
Access.................................................................. $ 44,212 $ 50,849 $ 100,884 $ 178,988
Hosting................................................................. 7,957 23,023 29,310 52,998
Transport............................................................... -- 27,313 26,752 31,706
GNI..................................................................... -- 263,467 704,951 1,162,287
Other................................................................... 20,010 2,174 46,142 98,411
-------- ---------- ---------- ----------
Total................................................................. $ 72,179 $ 366,826 $ 908,039 $1,524,390
======== ========== ========== ==========
Capital Expenditures/1/
Access.................................................................. $ 1,316 $ 9,544 $ 20,039 $ 97,638
Hosting................................................................. 402 2,919 4,878 29,581
Transport............................................................... -- 215 7,485 11,003
GNI..................................................................... -- 263,610 458,038 531,719
Other................................................................... 1,112 23,203 97,391 80,047
-------- ---------- ---------- ----------
Total................................................................. $ 2,830 $ 299,491 $ 587,831 $ 749,988
======== ========== ========== ==========
Depreciation and Amortization
Access.................................................................. $ 6,375 $ 6,341 $ 12,649 $ 32,543
Hosting................................................................. 138 2,534 8,514 12,585
Transport............................................................... -- 6,852 8,012 7,180
GNI..................................................................... -- 143 19,119 72,475
Other................................................................... 4,023 33,613 56,229 63,884
-------- ---------- ---------- ----------
Total................................................................. $ 10,536 $ 49,483 $ 104,523 $ 188,667
- --------------------------------------------------
======== ========== ========== ==========
</TABLE>
- --------
/1/ Includes accruals and capital leases.
F-21
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
12.Commitments and Contingencies
Leases
Genuity leases office space and network equipment under long-term capital
and operating leases. These leases have options for renewal with provisions for
increased rent upon renewal. The Predecessor's rent expense was $2.1 million
for the six months ended June 30, 1997, and Genuity's rent expense was $5.1
million, $12.9 million and $19.9 million for the years ended December 31, 1997,
1998 and 1999, respectively. Rent expense is included in cost of goods sold and
selling, general and administrative expenses in the accompanying combined
statements of operations.
As of December 31, 1999, future minimum lease payments under noncancelable
capital and operating leases with initial or remaining periods in excess of one
year were as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
-------- ---------
<S> <C> <C>
2000..................................................... $ 33,475 $ 66,419
2001..................................................... 28,701 60,143
2002..................................................... 25,176 32,293
2003..................................................... 11,643 26,142
2004..................................................... 823 20,230
Subsequent years......................................... -- 56,502
-------- --------
Total minimum lease payments........................... 99,818 $261,729
========
Amount representing interest............................. (10,128)
--------
Present value of minimum lease payments................ $ 89,690
========
</TABLE>
GTE guarantees Genuity's existing real estate leases.
Contract Commitments
Genuity has entered into several agreements for indefeasible rights of use
(IRU) for its network infrastructure in the United States. The initial terms of
the IRUs are for 20-25 years, with options to extend the term. As of December
31, 1999 the outstanding commitments under the agreements is approximately
$17.4 million. Genuity is also obligated to pay operating and maintenance costs
under the contract terms.
In addition, Genuity has entered into a number of agreements for IRU to
trans-oceanic cable systems that are either deployed or in the process of being
deployed. The initial terms of the IRU is for 25 years. As of December 31,
1999, outstanding commitments under these agreements total approximately $54.4
million.
Contingencies
Some claims arising in the ordinary course of business are pending against
the Company. In the opinion of management, these claims are without merit and
are not expected to have a material effect on operations.
13.Related Party Transactions
Genuity recorded revenues for transport services that it provided to
affiliates in the amount of $13.6 million, $17.5 million and $24.1 million for
the years ended December 31, 1997, 1998 and 1999, respectively. The transport
services provided are similar to services provided to unaffiliated customers
and are priced at comparable rates.
F-22
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Genuity purchases payroll, purchasing, electronic data processing services
and other general and administrative services from affiliates whose business is
the provision of these services. The cost of these services to Genuity was
$39.6 million, $92.3 million and $84.1 million for the years ended December 31,
1997, 1998 and 1999, respectively, and were based on the cost of providing
these services as determined by cost and time studies performed periodically.
In management's view, the cost of services provided to Genuity by affiliates
reasonably approximates the costs that Genuity would have incurred if it had
performed the services.
Note payable to, and receivable from affiliate include GTE funding of net
cash flows to and from Genuity. Accounts receivable from, and accounts payable
to affiliates represent balances from transactions in the ordinary course of
business between Genuity and affiliates.
Transition Services Agreements
GTE and its affiliates currently provide a range of administrative and
support services to Genuity. After the offering of Genuity's shares of Class A
common stock, Genuity will enter into (1) an Agreement for Transition Services
under which GTESC will continue to provide Genuity with services such as
accounting and cash processing, billing and collection processing, human
resource services and benefits administration and (2) an Agreement for
Information Technology Transition Services under which Genuity and GTESC will
provide each other with transitional information technology services.
In addition, GTESC will provide Genuity with computer programming and
technical services, including the development of software interfaces and
modifications and enhancements to existing systems.
Purchase, Resale and Marketing Agreement
Genuity plans to enter into a Purchase, Resale and Marketing Agreement under
which Verizon will purchase services from Genuity, that will include Internet
access, value-added services and private line and asynchronous transfer mode
transport services. Verizon will be permitted to use the services internally or
resell the services on a stand-alone basis or as part of a bundled solution.
Those services resold by Verizon may be co-branded with Genuity or may be
branded without use of Genuity's marks. Genuity has granted Verizon most
favored customer pricing and volume-based discounts. Under the terms of the
agreement, Verizon will purchase at least $500 million of Genuity's services
over a five year period. In the event that Verizon has not purchased $200
million in services by the end of the third year of the contract, it would be
required to pay to Genuity at that time the difference between the amount of
services purchased to date and $200 million. Similarly, in the event Verizon
has not purchased $500 million in services by the end of the fifth year of the
contract, it would be required to pay to Genuity at that time the difference
between the amount of services purchased to that date, including any shortfall
payment made at the end of the third year, and $500 million.
In conjunction with the Purchase, Resale and Marketing Agreement, Genuity
also plans to provide to Verizon undersea cable capacity in the Americas Region
Caribbean Ring System and has committed to negotiate with Verizon with respect
to obtaining capacity on the Americas III Cable Network currently under
construction.
F-23
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Intellectual Property Agreements
Genuity intends to enter into agreements with GTESC in order to allocate
rights relating to existing and future patents, software, and technical
service.
Network Monitoring Agreement
Under the terms of an existing agreement, Genuity receives continual
monitoring for some elements of Genuity's network infrastructure from GTE
Network Services, including monitoring of network enabling devices and
processes to detect anomalies occurring in the network. The agreement may be
terminated by either party on 90 days notice.
Real Estate Agreements
Genuity plans to enter into several agreements with Verizon under which
Verizon will transfer to or share with Genuity various leased and owned
properties including: (1) leases to Genuity of portions of specified properties
owned by Genuity or Verizon; (2) subleases to Genuity of portions of specified
properties leased by Verizon; and (3) assignments of leases for specified
leased properties. Each agreement provides that the parties will use reasonable
efforts to obtain any landlord consents required for the proposed transfer.
Some of the provisions of each agreement, including the lease/sublease payment
of rent term, vary depending on the underlying lease at the specified property
and the result of negotiations pertaining to specific issues at a specified
property.
Genuity will also enter into real estate guaranty agreements with Verizon.
GTESC has agreed to either issue new or continue existing guaranties in support
of our real estate obligations. The guaranties will continue until six months
following the date of the offering of our shares of Class A common stock or the
date on which both Standard & Poor's and Moody's publish a credit rating for
Genuity, whichever occurs first. In return for the guaranties, Genuity has
agreed to pay GTESC a commercially reasonable fee.
14.Subsequent Events
On Genuity completed a recapitalization. As part of the
recapitalization, Genuity converted 1,000 shares of common stock issued and
outstanding to shares of Class B common stock. In addition, GTE
forgave amounts payable to GTE of $ and contributed additional capital of
$ .
Common Stock
The shares of Genuity's Class A common stock, Class B common stock and Class
C common stock are identical in all respects, except for voting rights,
conversion rights and as otherwise described below.
Voting Rights. Each share of Class A common stock and Class B common stock
entitles the holder to one vote, and each share of Class C common stock
entitles the holder to five votes on each matter submitted to a vote of
Genuity's stockholders. Except as required by applicable law or as discussed
below, the holders of the Class A common stock, Class B common stock and Class
C common stock vote together as a single class on all matters submitted to a
vote of Genuity's stockholders. The Class B common stockholders have the right
to elect a member of Genuity's board of directors.
The affirmative vote of the holders of a majority of the outstanding shares
of Class B common stock, voting separately as a class, is required for:
F-24
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
. any issuance of capital stock, securities convertible into Genuity
capital stock or share equivalents, other than shares of Genuity's
capital stock reserved at the time of the initial public offering for
issuance to employees and directors pursuant to Genuity's stock option
plans;
. any authorization of additional capital stock;
. any material change in the nature or scope of the business;
. any merger, consolidation, sale of all or substantially all of Genuity's
assets or any similar transaction;
. any amendment to Genuity's certificate of incorporation or Genuity's by-
laws that affects the rights of the holders of Genuity's Class B common
stock;
. any action that would make it unlawful for a holder of Class B common
stock to exercise its conversion rights; and
. any filing or declaration of bankruptcy or any full or partial
liquidation.
This class vote will not be required if at any time:
. Verizon controls more than 50% of the then outstanding shares of Class B
common stock and the common stock owned by Verizon and affiliates
constitutes less than 10% of Genuity's outstanding common stock on an as
converted basis; or
. Verizon controls 50% or less of the then outstanding shares of Class B
common stock and the outstanding shares of Class B common stock
constitute 50% or less of Genuity's outstanding common stock on an as
converted basis;
Conversion. The Class A common stock has no conversion rights. The Class B
common stock is convertible by Verizon and its affiliates into shares of Class
C common stock. Prior to any exercise of the underwriters' over-allotment
option, if the shares of Class B common stock were converted into shares of
Class C common stock, the Class C common stock would constitute approximately
82% of Genuity's outstanding common stock, before giving effect to any issuance
of shares of Class A common stock following the exercise of any outstanding
employee options under Genuity's long-term incentive plans or otherwise.
The shares of Class B common stock held by any person other than Verizon or
its affiliates may not be converted into Class C common stock. Instead, such
shares are convertible at any time into shares of Class A common stock.
Only Verizon and its affiliates may hold Class C common stock. The Class C
common stock is convertible into Class A common stock, in whole or part, on the
basis of one share of Class A common stock for each share of Class C common
stock. Each share of Class C common stock will automatically convert into one
share of Class A common stock if at any time (1) the shares are transferred to
any person other than Verizon and its affiliates or (2) the aggregate number of
outstanding shares of Class C common stock, together with any shares of Class C
common stock issuable upon conversion of Class B common stock, and the number
of shares of Class A common stock owned by Verizon and affiliates constitute
less than 10% of Genuity's then outstanding common stock.
Right to Acquire Additional Shares Upon Conversion. In limited
circumstances, if Verizon holds Class A common stock and Class C common stock
that in the aggregate exceed 70% of the total number of common stock
outstanding at that time, Verizon may acquire from Genuity a number of shares
of Class A common stock so that Verizon will own a number of shares equal to
80% of the total number of shares of common stock.
Liquidation. In the event of any dissolution, liquidation, or winding up of
Genuity's affairs, whether voluntary or involuntary, the holders of the Class A
common stock, the Class B common stock and the Class C common stock will be
entitled to share ratably, in proportion to the number of shares they represent
of
F-25
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
Genuity's outstanding common stock, in the assets legally available for
distribution to stockholders, in each case after payment of all of Genuity's
liabilities and subject to preferences that may apply to any series of
preferred stock then outstanding. Genuity may not dissolve, liquidate or wind
up its affairs without obtaining the consent of the holders of the outstanding
shares of its Class B common stock.
Mergers and Other Business Combinations. If Genuity enters into a merger,
consolidation or other similar transaction in which shares of its common stock
are exchanged for or converted into securities, cash or any other property, the
holder of each class of Genuity's common stock will be entitled to receive an
equal per share amount of the securities, cash, or other property, as the case
may be, for which or into which each share of any other class of common stock
is exchanged or converted.
Other Provisions. The holders of Class A common stock, Class B common stock
and Class C common stock are not entitled to preemptive rights. There are no
redemption provisions or sinking fund provisions that apply to the Class A
common stock, the Class B common stock or the Class C common stock.
Immediately following the closing of the initial public offering, Genuity's
authorized capital stock will consist of shares of Class A common stock,
par value $0.01 per share, shares of Class B common stock, par value
$0.01 per share, shares of Class C common stock, par value $0.01 per
share, and shares of preferred stock, par value $0.01 per share.
Immediately following the closing of the initial public offering, there will be
outstanding: (1) shares of Class A common stock; (2) options to purchase
shares of Class A common stock; (3) shares of Class B common
stock, all of which will be held of record by Verizon as of that date; (4) no
shares of Class C common stock; and (5) no shares of preferred stock.
Subscription Agreement
Genuity has entered into a subscription agreement with Verizon in connection
with the Class B common stock. The Subscription Agreement contains provisions
requiring GTE's consent prior to taking the following agreed-upon actions:
. making acquisitions or entering into joint ventures involving cash,
stock, stock equivalents or assets in excess of $100 million individually
or $500 million in the aggregate during any 12-month period;
. making any dispositions of assets outside the ordinary course of business
within the first two years after the initial public offering and,
thereafter, making dispositions of assets in excess of $50 million
individually or $250 million in the aggregate in any 12-month period;
. incurring, during any 12-month period, indebtedness that exceeds an
anticipated debt level for that period to be jointly agreed upon by
Genuity and GTE prior to the completion of the initial public offering;
. entering into agreements or arrangements that contain provisions that
trigger a default or require a material payment when Verizon exercises
its conversion right; and
. declaring extraordinary dividends or making other distributions to the
holders of Genuity's common stock, including Genuity's Class A common
stock.
Genuity will not be required to obtain the consent of the holders of the
Class B common stock to take the above actions if at any time:
. Verizon controls more than 50% of the then outstanding shares of Class B
common stock and the common stock controlled by Verizon and affiliates
constitutes less than 10% of Genuity's outstanding common stock on an as
converted basis; or
F-26
<PAGE>
GENUITY INC.
NOTES TO COMBINED FINANCIAL STATEMENTS--Continued
December 31, 1997, 1998 and 1999
. Verizon controls 50% or less of the outstanding shares of Class B common
stock and the outstanding shares of Class B common stock constitute 50%
or less of Genuity's outstanding common stock on an as converted basis.
2000 Long-Term Incentive Plan
Genuity's employees have historically been granted options to purchase
common stock of GTE. On April , 2000, Genuity's board of directors adopted
the 2000 Long-Term Incentive Plan, effective immediately, which has also been
approved by GTE as sole stockholder. The 2000 Long-Term Incentive Plan provides
for the grant of a variety of stock and stock-based awards and other benefits,
including stock options, restricted and unrestricted shares, deferred stock,
stock-based performance awards and stock appreciation rights; but excluding any
short-term or long-term cash awards. The 2000 Long-Term Incentive Plan will be
administered by the Genuity board of directors or by the compensation committee
of the Genuity board of directors. The administrator has the authority to
determine eligibility, grant awards and make all other determinations under the
plan.
Our 2000 Long-Term Incentive Plan provides for the grant of both incentive
stock options that qualify under Section 422 of the Internal Revenue Code and
nonqualified stock options. Incentive stock options may be granted only to
employees. Non-qualified stock options, and all other awards may be granted to
employees, officers and directors. The option exercise price of each stock
option and the amount, if any, payable by participants under other awards shall
be determined by the administrator, except that stock options will not be
granted with an exercise price that is less than the fair market value of the
Class A common stock on the date of grant. It is anticipated that Genuity will
not grant existing employees any additional awards under the 2000 Long-Term
Incentive Plan during the four-year period following the offering.
Options granted under our 2000 Long-Term Incentive Plan may have a term of
up to 10 years. The awards are transferable to the extent, if any, determined
by the administrator. The period or periods during which an award will be
exercisable or remain outstanding, including any periods following termination
of service, the manner of exercise and other details of awards will be
determined by the administrator consistent with the 2000 Long-Term Incentive
Plan.
Genuity has reserved shares of Class A common stock for issuance under
the 2000 Long-Term Incentive Plan, subject to adjustment for stock splits and
similar events. Concurrently with the initial public offering, the Company
expects to issue options to purchase shares of Genuity's Class A common
stock at an exercise price equal to the initial public offering price. The 2000
Long-Term Incentive Plan will terminate on January , 2010, unless sooner
terminated in accordance with the terms of the plan.
2000 Compensation Plan for Non-Employee Directors
The 2000 Compensation Plan for Non-Employee Directors was approved by the
board of directors on April , 2000 and has been approved by GTE as the sole
stockholder. Pursuant to this plan, non-employee directors who have agreed to
serve on the board of directors will receive, effective upon the completion of
this offering, a $30,000 annual cash fee and one-time option to purchase 30,000
shares of Class A common stock at an exercise price equal to the initial public
offering price. These stock options will vest in three equal installments
commencing on the day of the initial public offering and on the day immediately
preceding the annual meeting of stockholders in each of the next years. The
administrator also has the discretion under this plan to grant options to non-
employee directors in amounts and in terms as it deems is not inconsistent with
the plan. Genuity has reserved a total of shares of Class A common
stock for issuance under the 2000 Compensation Plan for Non-Employee Directors,
of which, after taking into account the grants expected to be effective on
the completion of this offering, remain available for future grants.
F-27
<PAGE>
GENUITY INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended December 31, 1997, 1998 and 1999 for Genuity
and the six months ended June 30, 1997 for the Predecessor
(in thousands)
<TABLE>
<CAPTION>
Column A Column B Column C Column D Column E
-------- ---------- ------------------------- ------------ --------------
Balance at Charged to Charged to
beginning costs and other accts.-- Deductions-- Balance at end
Description of period expenses describe describe of period
----------- ---------- ---------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
PREDECESSOR
1997
Allowance for doubtful
accounts............... $ 948 $1,840 $ 1(a) $ (35)(c) $2,754
- --------------------------------------------------------------------------------
GENUITY
1997
Allowance for doubtful
accounts............... $ 520 $1,898 $2,754(b) $ (850)(c) $4,322
1998
Allowance for doubtful
accounts............... $4,322 $2,256 $ 131(a) $(3,058)(c) $3,651
1999
Allowance for doubtful
accounts............... $3,651 $4,799 $ 201(a) $(3,101)(c) $5,550
</TABLE>
- --------
(a) Represent bad debt recoveries
(b) Represents the impact of acquiring the Predecessor
(c) Represent write-offs of uncollectible receivable balances
<PAGE>
- --------------------------------------------------------------------------------
Shares
Class A Common Stock
LOGO OF GENUITY
$ per Share
Morgan Stanley Dean Witter Salomon Smith Barney
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than the
underwriting discounts and commissions. All amounts shown are estimates, except
the Securities and Exchange Commission Registration Fee and the National
Association of Securities Dealers, Inc. Filing Fee.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee.............. $ 2,640
National Association of Securities Dealers Filing Fee............ 1,500
Listing Fee*................................................ *
Blue Sky Fees and Expenses....................................... 10,000
Transfer Agent and Registrar Fees................................ *
Accounting Fees and Expenses..................................... *
Directors and Officers Liability Insurance....................... *
Legal Fees and Expenses.......................................... *
Printing Expenses................................................ *
Miscellaneous.................................................... *
-------
TOTAL.......................................................... $ *
</TABLE>
- --------
* To Be Included By Amendment
ITEM 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or the board of directors of a corporation to grant, indemnity to
directors and officers in terms sufficiently broad to permit indemnification
under some circumstances for liabilities, including reimbursement for expenses
incurred, arising under the Securities Act of 1933.
As permitted by the Delaware General Corporation Law, the certificate of
incorporation of the Registrant provides that its directors shall not be liable
to the Registrant or its stockholders for monetary damages for breach of
fiduciary duty as a director, except to the extent that the exculpation from
liabilities is not permitted under the Delaware General Corporation Law as in
effect at the time the liability is determined. As permitted by the Delaware
General Corporation Law, the certificate of incorporation of the Registrant
also provides that the Registrant shall indemnify its directors to the full
extent permitted by the laws of the State of Delaware.
The Registrant is in the process of obtaining policies of insurance under
which coverage will be provided (a) to its directors and officers against loss
arising from claims made by reason of breach of fiduciary duty or other
wrongful acts, including claims relating to public securities matters and (b)
to the Registrant with respect to payments which may be made by the Registrant
to these officers and directors pursuant to the above indemnification provision
or otherwise as a matter of law.
The Registrant has also entered into indemnification agreements with its
directors and officers obligating the Registrant to indemnify its directors and
officers against losses incurred in connection with claims in their capacities
as agents of the Registrant. The Underwriting Agreement provides for the
indemnification of officers and directors of the Registrant by the Underwriters
against some types of liability.
ITEM 15. Recent Sales of Unregistered Securities.
In the three fiscal years prior to the effective date of this Registration
Statement, we have issued and sold the following unregistered securities:
II-1
<PAGE>
The sales and issuances of securities listed above, other the sales and
issuances in Item , were deemed to be exempt from registration under Section
4(2) of the Securities Act or Regulation D thereunder as transactions not
involving a public offering. The sales and issuances of securities listed above
in Item were deemed to be exempt from registration under the Securities Act
by virtue of Rule 701 promulgated under Section 3(b) of the Securities Act of
1933 as transactions pursuant to compensation benefit plans and contracts
relating to compensation. All of the foregoing securities are deemed restricted
securities for purposes of the Securities Act.
ITEM 16. Exhibits and Financial Statement Schedules.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation*
3.2 Amended and Restated Certificate of Incorporation (To Be Filed Prior
To Closing Of Offering)*
3.3 By-laws*
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Ropes & Gray*
10.1 2000 Long-Term Incentive Plan*
10.2 2000 Compensation Plan for Non-Employee Directors*
10.3 IRU Agreement dated as of May 2, 1997 by and between Qwest
Communications Corporation and GTE Intelligent Network Services
Incorporated***
10.4 First Amendment to IRU Agreement dated as of August 13, 1997**
10.5 Second Amendment IRU Agreement dated as of May 29, 1998**
10.6 Third Amendment to IRU Agreement dated as of November 16, 1998**
10.7 Fourth Amendment to IRU Agreement dated as of February 5, 1999**
21.1 Subsidiaries*
23.1 Consent of Ropes & Gray (Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Signature Page)
27. Financial Data Schedule
</TABLE>
- --------
* To Be Filed By Amendment.
** There are portions of these agreements that have been omitted pursuant
to a request for confidential treatment.
*** Incorporated by reference to the registration statement of Qwest
Communications International Inc. on Form S-1/A filed with the
Securities and Exchange Commission on May 16, 1997, File No. 333-25391.
There are portions of these agreements that have been omitted pursuant
to a request for confidential treatment.
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
ITEM 17. Undertakings.
(a) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under "Item 14--Indemnification
of Directors and Officers" above, or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission this
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against these liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by the
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether the indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of the issue.
II-2
<PAGE>
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to
be part of this Registration Statement as of the time it was declared
effective.
(2) For the purposes of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of these securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in the denominations and registered in the names required by the
underwriters to permit prompt delivery to each purchaser.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Burlington, State of Massachusetts, on the 7th day of April, 2000.
GENUITY INC.
/s/ Paul R. Gudonis
By __________________________________
Paul R. Gudonis
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each individual whose signature
appears below constitutes and appoints Paul R. Gudonis and Daniel L. O'Brien
and each of them, his or her true and lawful attorneys-in-fact and agents with
full power of substitution, for him or her and in his or her name, place and
stead, in any and all capacities, to sign any and all amendments, including
post-effective amendments, to this Registration Statement, and to sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933, as amended, and all post-
effective amendments thereto, and to file the same, with all exhibits thereto
and all documents in connection therewith, making such changes in this
Registration Statement as such person or persons so acting deems appropriate,
with the Securities and Exchange Commission, granting unto said attorneys-in-
fact and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite and necessary to be done in and about
the premises, as fully to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact
and agents or any of them, or his, her or their substitute or substitutes, may
lawfully do or cause to be done or by virtue hereof. Pursuant to the
requirements of the Securities Act of 1933, as amended, this Registration
Statement has been signed by the following persons in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Paul R. Gudonis
____________________________________ Chief Executive Officer and April 7, 2000
Paul R. Gudonis Director (Principal
Executive Officer)
/s/ Charles J. Gibney
____________________________________ Director April 7, 2000
Charles J. Gibney
/s/ James L. Freeze
____________________________________ Director April 7, 2000
James L. Freeze
/s/ David B. Monaghan
____________________________________ Vice President, Finance April 7, 2000
David B. Monaghan (Principal Financial Officer
and Principal Accounting
Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Title
------- -------------
<C> <S>
1.1 Form of Underwriting Agreement*
3.1 Certificate of Incorporation*
3.2 Amended and Restated Certificate of Incorporation (To Be Filed Prior
To Closing Of Offering)*
3.3 By-laws*
4.1 Specimen Class A Common Stock Certificate*
5.1 Opinion of Ropes & Gray*
10.1 2000 Long-Term Incentive Plan*
10.2 2000 Compensation Plan for Non-Employee Directors*
10.3 IRU Agreement dated as of May 2, 1997 by and between Qwest
Communications Corporation and GTE Intelligent Network Services
Incorporated***
10.4 First Amendment to IRU Agreement dated as of August 13, 1997**
10.5 Second Amendment IRU Agreement dated as of May 29, 1998**
10.6 Third Amendment to IRU Agreement dated as of November 16, 1998**
10.7 Fourth Amendment to IRU Agreement dated as of February 5, 1999**
21.1 Subsidiaries*
23.1 Consent of Ropes & Gray (Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP
24.1 Power of Attorney (Signature Page)
27. Financial Data Schedule
</TABLE>
- --------
* To Be Filed By Amendment.
** There are portions of these agreements that have been omitted pursuant
to a request for confidential treatment.
*** Incorporated by reference to the registration statement of Qwest
Communications International Inc. on Form S-1/A filed with the
Securities and Exchange Commission on May 16, 1997, File No. 333-25391.
There are portions of these agreements that have been omitted pursuant
to a request for confidential treatment.
<PAGE>
CONFIDENTIAL TREATMENT EXHIBIT 10.3
CONFIDENTIAL AND PROPRIETARY
IRU AGREEMENT
DATED AS OF MAY 2, 1997
BY AND BETWEEN
QWEST COMMUNICATIONS CORPORATION ("QWEST")
AND
GTE INTELLIGENT NETWORK SERVICES INCORPORATED ("GTE")
TABLE OF CONTENTS
Page
RECITALS
ARTICLE I. GRANT OF IRU IN QWEST SYSTEM. . . . . . . . . . . . . . . . . .
ARTICLE II. CONSIDERATION FOR GRANT. . . . . . . . . . . . . . . . . . . .
ARTICLE III. CONSTRUCTION OF THE QWEST SYSTEM. . . . . . . . . . . . . . .
ARTICLE IV. ACCEPTANCE AND TESTING OF GTE FIBERS . . . . . . . . . . . . .
ARTICLE V. DOCUMENTATION . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE VI. TERM . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE VII. NETWORK ACCESS; REGENERATION FACILITIES . . . . . . . . . . .
ARTICLE VIII. OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE IX. MAINTENANCE AND REPAIR OF THE QWEST SYSTEM . . . . . . . . . .
ARTICLE X. PERMITS; UNDERLYING RIGHTS; RELOCATION. . . . . . . . . . . . .
ARTICLE XI. USE OF QWEST SYSTEM. . . . . . . . . . . . . . . . . . . . . .
ARTICLE XII. INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XIII. LIMITATION OF LIABILITY. . . . . . . . . . . . . . . . . . .
ARTICLE XIV. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XV. TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS . . . . . . . .
ARTICLE XVI. NOTICE. . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XVII. CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XVIII. DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XIX. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XX. FORCE MAJEURE. . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXI. DISPUTE RESOLUTION. . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXII. WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXIII.GOVERNING LAW. . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXIV. RULES OF CONSTRUCTION. . . . . . . . . . . . . . . . . . . .
ARTICLE XXV. ASSIGNMENT AND TRANSFER RESTRICTIONS. . . . . . . . . . . . .
ARTICLE XXVI. REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS. . . . . . .
ARTICLE XXVII. ENTIRE AGREEMENT; AMENDMENT . . . . . . . . . . . . . . . .
ARTICLE XXVIII. NO PERSONAL LIABILITY. . . . . . . . . . . . . . . . . . .
ARTICLE XXIX. RELATIONSHIP OF THE PARTIES. . . . . . . . . . . . . . . . .
ARTICLE XXX. LATE PAYMENTS . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXXI. SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXXII. COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . . .
ARTICLE XXXIII. CERTAIN DEFINITIONS. . . . . . . . . . . . . . . . . . . .
EXHIBITS
Exhibit A: QWEST System Description
Exhibit A-1: QWEST System Description and Delivery Dates
Exhibit A-2: General Route Map
Exhibit A-3: Detailed Route Maps
Exhibit A-4: Designated Endpoint and Intermediate Point Cities
Exhibit B: IRU Fee Payment Schedule
Exhibit C: Construction Specifications
Exhibit D: Fiber Cable Splicing, Testing, and Acceptance Procedures
Exhibit E: Fiber Specifications
Exhibit E-1: Fiber Deployment Diagram
Exhibit F: Specifications for Regeneration Facilities
Page 1
<PAGE>
CONFIDENTIAL TREATMENT
Exhibit G: Regeneration Facility Sites
Exhibit H: QWEST System Maintenance Specifications and Procedures
Exhibit I: Underlying Rights and Underlying Rights Requirements
IRU AGREEMENT
THIS IRU AGREEMENT (this "Agreement") is made and entered into as of May 2,
1997, by and between QWEST COMMUNICATIONS CORPORATION, a Delaware corporation
("QWEST"), and GTE INTELLIGENT NETWORK SERVICES INCORPORATED, a Delaware
corporation ("GTE").
RECITALS
A. QWEST is planning to construct a continuous fiberoptic communication system,
contiguous from end to end, as described in Exhibit A hereto, and between each
of the city pairs identified in Exhibit A-1 hereto (the fiberoptic communication
system between each such city pair being referred to as a "Segment"), being
referred to herein collectively as the "QWEST System". The route that the QWEST
System shall follow as described in this paragraph is referred to herein as the
"System Route."
B. GTE desires to be granted the right to use certain optical fibers in the
QWEST System.
C. QWEST desires to grant GTE an exclusive, indefeasible right to use certain
fibers and associated property in the QWEST System, all upon the terms and
conditions set forth below. Accordingly, in consideration of the mutual promises
set forth below, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
ARTICLE I.
GRANT OF IRU IN QWEST SYSTEM
1.1 (a) Effective as of the effective date described in Section 6.1 below,
for each particular Segment delivered by QWEST to GTE hereunder and with respect
to which an Acceptance Date (as defined in Section 4.2 below) has occurred,
QWEST hereby grants to GTE, and GTE hereby purchases from QWEST, (i) an
exclusive, Indefeasible Right of Use (as defined in Section 33.1(f), for the
purposes described herein, in twenty-four (24) "Dark Fibers" (as defined in
Section 33.1(c)), to be specifically identified, in the QWEST System in the
Segments and more specifically described in the maps included in Exhibit A-3
hereto and (ii) an associated and non-exclusive Indefeasible Right of Use, for
the purposes described herein, in the tangible and intangible property needed
for the use of such Dark Fibers as Dark Fibers, including, but not limited to,
the associated conduit, QWEST's rights in all "Underlying Rights" (as defined in
Section 10.1), but in any event excluding any electronic or optronic equipment
(collectively, the "Associated Property"), for the Term (as defined in Section
6.1) respecting such Segment, and all on the terms and subject to the covenants
and conditions set forth herein (collectively, the "IRUs"). The Dark Fibers
subject to the IRUs are referred to collectively as the "GTE Fibers."
(b) The parties acknowledge and agree that the specific route of any Segment
that has not been finally designed or engineered, or with respect to which a
right-of-way agreement has not been obtained as of the date hereof is subject to
final determination by QWEST, based on specific engineering, right-of-way,
permitting, authorization and other requirements; provided, however, that (i)
any such Segment route, as finally determined, must include all of the endpoint
and intermediate point cities identified in Exhibit A-4 and all of the junction
points identified in the System Route maps included in Exhibit A; (ii) no
deviation in the route of any Segment as set forth in the maps included in
Exhibit A-3 shall result in a Material Deviation (as defined below) in the
System Route as set forth in Exhibit A, and (iii) once the final route of any
Segment has been so determined, QWEST shall deliver to GTE corresponding
revisions to the relevant maps included in Exhibit A hereto. As used herein, the
term "Material Deviation" shall mean a deviation in the general route
Page 2
<PAGE>
CONFIDENTIAL TREATMENT
of a Segment (A) that modifies the System Route architecture in a manner that
breaks a ring, creates a spur or breaks the contiguous nature of Segments; (B)
that modifies the route of the System Route through any city, identified in
Exhibit A-3 as being the location of a GTE POP site, from the detailed route map
shown in Exhibit A-3 for such city in a manner that materially changes the
proximity of such POP site to the System Route right-of-way (provided that, if
any such detailed city map shows that the POP site is in direct proximity to the
System Route right-of-way, any route modification which does not provide such
direct proximity shall be considered a material change in proximity); (C) that
modifies the route of the System Route through any city, as set forth in the
detailed route map for such city set forth in Exhibit A-3, such that the
location of the route at any point would be moved more than 1,200 feet in any
direction, without the prior written approval of GTE (such approval not to be
unreasonably withheld or delayed); or (D) that modifies any parallel route shown
within any city that is the subject of a detailed map included in Exhibit A-3
such that the distance between such parallel routes is less than 1,200 feet
outside metropolitan areas and less than two city blocks within metropolitan
areas.
(c) If any deviation(s) in the routes of Segments comprising the System
Route cause(s) the aggregate route miles as reflected in Exhibit A estimated for
the System Route to increase by more than ##MATERIAL OMITTED AND SEPARATELY
FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## %) of such estimate such
mileage shall be solely at QWEST's cost and expense and any route mileage in
excess of the applicable ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## %) increase as aforesaid shall not be
included in the route mileage for purposes of determining the IRU Fee as defined
and described in Section 2.1 below.
ARTICLE II.
CONSIDERATION FOR GRANT
2.1 In consideration of the grant of the IRUs hereunder by QWEST to GTE, GTE
agrees to pay to QWEST an IRU fee determined based on the QWEST mileage (and
allocated among the Segments based on Segment Rate mileage as set forth in
Exhibit B. (the "IRU Fee").
The IRU Fee shall be payable with respect to each Segment according to the
payment schedule set forth in Exhibit B.
2.2 QWEST will fax or send by overnight delivery each invoice for payments
to be made by GTE hereunder. GTE shall pay such invoiced amounts, less any
reasonably disputed amounts, for receipt by QWEST within thirty (30) days after
receipt of such invoice by GTE with respect to payments of the IRU Fee and
within thirty (30) days after receipt of such invoice by GTE for any other
amounts owed to QWEST hereunder; provided that GTE shall provide written notice
describing in detail the basis for any disputed amounts; and provided further
that any disputed amounts that are resolved in favor of QWEST shall be due for
payment based on the original invoice date. All payments to be made by GTE
hereunder of the IRU Fee and of any other amounts in excess of $100,000 shall be
made by wire transfer of immediately available funds to the account or accounts
as QWEST shall notify GTE in writing from time to time. Payments of all other
amounts by GTE hereunder may be made by check payable to QWEST. QWEST agrees to
provide GTE from time to time, upon request, with QWEST's estimate of the next
invoice date for a portion of the IRU Fee and the estimated amount of such IRU
Fee payment; provided that failure to provide any such notice shall not in any
way alter or impair GTE's payment obligations hereunder.
2.3 QWEST and GTE acknowledge and agree that with respect to Segment 23,
notwithstanding the fact that Segment 23 has already been constructed and
installed, delivery of Segment 23 shall occur in two installments of twelve (12)
Dark Fibers each as indicated in Exhibit A, and payment of the IRU Fee
established pursuant to Section 2.1 therefor (other than the initial
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
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CONFIDENTIAL TREATMENT
CONFIDENTIAL TREATMENT## % due upon execution of this Agreement), shall be
deferred until each such deferred installment delivery date as set forth in
Exhibit B.
ARTICLE III.
CONSTRUCTION OF THE QWEST SYSTEM
3.1 QWEST shall, at QWEST's sole cost and expense, be responsible for and
shall effect the design, engineering, installation, and construction of those
portions of the QWEST System not already constructed as of the date hereof in
accordance with the System Route (as it may be modified pursuant to Section 1.1)
and in conformity with (i) the construction specifications set forth in Exhibit
C, (ii) industry standards and practices, and (iii) applicable Underlying Rights
Requirements (as defined in Section 11.1). Such responsibilities shall include,
without limitation, preparation of construction drawings, bills of materials,
materials specifications and materials requisitions. Except for the existing
fibers on Segments 11A, 11B, 12A, 12B, 12C and 12D (which are Corning SMF-DS)
and any alternative fibers approved pursuant to the following sentence, all
fiber included in the GTE Fibers shall be Corning SMF-LS non-zero dispersion-
shifted or Lucent Technologies True Wave and shall meet or exceed the applicable
fiber specifications set forth in Exhibit E. QWEST may use alternative types of
fiber equivalent to either of the aforementioned fibers; provided that (i) prior
to any such use, QWEST meets with GTE (and GTE hereby agrees to so meet) to,
cooperatively and in good faith, jointly evaluate the use of any such fiber and
(ii) thereafter, GTE approves the use of such fiber, which approval shall not be
unreasonably withheld or delayed. QWEST agrees that, to the extent possible in
light of the fiber already incorporated in Segments that have been constructed,
in whole or in part, prior to the date hereof and the availability and cost of
the fiber of a particular type and manufacture hereafter, fiber utilized with
respect to the loops, rings and regions of the QWEST System shall be of the same
type and manufacture, as depicted in the fiber deployment diagram set forth in
Exhibit E-1 hereto, indicating the type of fiber QWEST currently plans to use in
each such Segment. Any deviation from the planned fiber use set forth in the
diagram must be approved by GTE, which approval shall not be unreasonably
withheld or delayed.
3.2 Subject to extension for delays described in Article XX, QWEST shall
complete at QWEST's sole cost and expense, all construction, installation, and
satisfactory Fiber Acceptance Testing (as defined in Section 4.1) of each of the
Segments, including the provision of such Regeneration Facilities on such
Segment as may be provided pursuant to Section 7.2(a), by the applicable
"Estimated Delivery Date" (as defined in Section 33.1(d)) respecting such
Segment.
3.3 Except as may be provided herein, QWEST shall, at QWEST's sole cost and
expense, procure all materials to be incorporated in and to become a permanent
part of the QWEST System, including, without limitation, the Regeneration
Facilities provided pursuant to Section 7.2(a).
3.4 QWEST shall, at QWEST's sole cost and expense, obtain all Underlying
Rights and other rights, licenses, permits and authorizations as required
pursuant to Article X hereof.
3.5 QWEST shall perform, at QWEST's sole cost and expense, substantially in
accordance with industry standards and practices and as deemed necessary or
appropriate in QWEST's reasonable business judgment, all supervisory and
inspection services relating to the construction of the QWEST System, including,
without limitation, performing construction inspections to assure that all
construction shall be in material compliance with the specifications, drawings,
Underlying Rights, provisions of this Agreement, and applicable governmental
codes. During the course of construction of each Segment, QWEST shall prepare
and provide to GTE construction schedule and progress reports every two weeks.
GTE shall have the right, but not the obligation, to inspect the construction of
each Segment,
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CONFIDENTIAL TREATMENT
including the installation, splicing and testing of the GTE Fiber incorporated
therein, during the course and at the time of the relevant design, construction
and installation period. No inspection or failure to inspect by GTE shall impair
or invalidate any rights and remedies of GTE under this Agreement or modify,
amend or otherwise affect any of the representations, warranties, covenants or
agreements of QWEST under this Agreement.
3.6 Upon GTE's written request, QWEST shall make available for inspection by
GTE, at QWEST's offices, copies of all information, documents, agreements,
reports, permits, drawings and specifications generated, obtained or acquired by
QWEST in performing its duties pursuant to this Article III that are material to
grant of the IRUs to GTE, including, without limitation, the Underlying Rights,
subject only to the conditions that (i) the terms of each such document or the
legal restrictions applicable to such information or document permits
disclosure; provided that QWEST will use its best efforts (without requiring the
expenditure of money) to obtain a waiver of any existing confidentiality and/or
non-disclosure restrictions, and to exempt GTE from subsequent confidentiality
and/or non-disclosure restrictions, that would restrict QWEST's ability to make
such documents and/or information available to GTE for inspection; (ii)
notwithstanding the existence or non-existence of such restrictions and/or
waivers, QWEST may, in its sole discretion, redact portions of such documents it
deems proprietary business terms prior to GTE's inspection. No inspection or
failure to inspect by GTE shall impair or invalidate any rights and remedies of
GTE under this Agreement or modify, amend or otherwise affect any of the
representations, warranties, covenants or agreements of QWEST under this
Agreement.
ARTICLE IV.
ACCEPTANCE AND TESTING OF GTE FIBERS
4.1 QWEST shall test all GTE Fibers in accordance with the procedures
specified in Exhibit D ("Fiber Acceptance Testing") to verify that the GTE
Fibers are installed and operating in accordance with the specifications
described in Exhibit D. Fiber Acceptance Testing shall progress span by span
along each Segment as cable splicing progresses, so that test results may be
reviewed in a timely manner. QWEST shall provide GTE at least five (5) days
advance notice of the date and time of each Fiber Acceptance Testing such that
GTE shall have the right, but not the obligation, to have a person or persons
present to observe QWEST's Fiber Acceptance Testing. When QWEST has determined
that the results of the Fiber Acceptance Testing with respect to a particular
span show that the GTE Fibers so tested are installed and operating in
conformity with the applicable specifications set forth in Exhibit D, QWEST
shall promptly provide GTE with a copy of such test results.
4.2 When QWEST reasonably determines in good faith that the GTE Fibers with
respect to an entire Segment are installed and operating in conformity with the
applicable specifications set forth in Exhibit D, QWEST shall promptly provide
written notice of same to GTE (a "Completion Notice"). GTE shall, within thirty
(30) days of receipt of the Completion Notice, either reject the Completion
Notice specifying, in good faith, the defect or failure in such Fiber Acceptance
Testing or give QWEST written notice of acceptance of such Fiber Acceptance
Testing (the period from the date of GTE's receipt of the Completion Notice to
the date of QWEST's receipt of GTE's notice of rejection or acceptance being
referred to herein as the "GTE Review Period"). In the event GTE rejects the
Completion Notice, QWEST shall promptly, and not later than seven days, and at
no cost to GTE, commence to remedy the defect or failure. Thereafter QWEST shall
again give GTE a Completion Notice with respect to such GTE Fibers. The
foregoing procedure shall apply again and successively thereafter for a total of
two attempts to remedy the defect or failure. If QWEST fails to adequately
remedy or complete the defect or failure after two attempts, GTE shall have the
right to proceed promptly and in an economically efficient manner to cure such
defects or failures at QWEST's cost and expense, which shall be paid by QWEST to
GTE upon demand, or at the election of GTE, offset from any IRU Fee payable by
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CONFIDENTIAL TREATMENT
GTE to QWEST with respect to such Segment or any other Segment. No acceptance
of, or failure by GTE to reject, the Completion Notice shall be deemed to be a
waiver of any rights or remedies of GTE under this Agreement; provided that, any
failure by GTE to timely reject as set forth above shall operate as a
constructive acceptance for purposes of this Agreement. The date when GTE
accepts or is deemed to have accepted a Completion Notice or cures such defects
at QWEST's cost and expense as provided above with respect to a Segment is
herein defined as the "Acceptance Date".
ARTICLE V.
DOCUMENTATION
5.1 Notwithstanding the conditions and limitations set forth in Section 3.6,
QWEST shall provide GTE with a copy of all Underlying Right Requirements (as
defined in Section 11.1) applicable to each Segment promptly following the grant
to QWEST of the Underlying Right pursuant to which such Underlying Right
Requirements are imposed and, in any event, on or before the date of completion
of conduit installation in such Segment (as defined in Exhibit B, paragraph
3(ii)).
5.2 Not later than ninety (90) days after the Acceptance Date for each
Segment, QWEST shall provide GTE with the following documentation:
(a) As-built drawings for such Segment in accordance with the requirements
described in Exhibit C ("As-Builts").
(b) Technical specifications of the optical fiber cable and associated
splices and other equipment placed in that Segment.
5.3 As a condition to, and effective upon receipt of, each IRU Fee payment
installment that is due upon QWEST's achievement of a construction,
installation, testing or acceptance milestone as set forth in Exhibit B, QWEST
shall deliver to GTE a lien waiver with respect to liens in favor of QWEST
arising out of QWEST's services in accomplishing such milestone. Promptly
following QWEST's receipt of each such payment, QWEST shall use reasonable
efforts to obtain (and in any event on or before the Acceptance Date with
respect to the relevant Segment shall obtain) from each subcontractor that
provided services in accomplishing such milestone a lien waiver with respect to
liens arising out of such services and, upon receipt, deliver a copy of each
such lien waiver to GTE.
ARTICLE VI.
TERM
6.1 The grant of the IRUs hereunder with respect to each Segment shall
become effective on the first day when both (i) the Acceptance Date with respect
to that Segment has occurred and (ii) QWEST has received payment in full of the
IRU Fee with respect to such Segment in accordance with Exhibit B, and, subject
to the provisions of Article X, such grant shall terminate at the end of the
economically useful life of the GTE Fibers, as reasonably determined by GTE
pursuant to Section 6.2 below. The period of each such grant respecting each
such Segment and IRU is herein defined as the "Term".
6.2 In the event that GTE, at any time, reasonably determines that the GTE
Fibers comprising any Segment have reached the end of their economically useful
life and desires to not retain the IRU in such Segment, GTE shall have the right
to abandon the IRU with respect to such Segment by written notice to QWEST. If,
at any time during or after the last year of the Minimum Period (as defined in
Section 10.2(ii) below), with respect to any Segment, GTE fails to use any of
the GTE Fibers comprising such Segment for any period of thirty (30) consecutive
days (except to the extent that such non-use is as a result of any of the events
described in Article XX or as a result of QWEST System maintenance, restoration,
relocation, or reconfiguration or as a result of the failure of QWEST to observe
and perform the terms of this Agreement), QWEST shall have the right to request
GTE to acknowledge that the GTE Fibers comprising such Segment have reached the
end of their economic life and, accordingly, has abandoned the GTE Fibers
comprising such Segment (which acknowledgment shall not be unreasonably withheld
or delayed). Upon any such notice of
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CONFIDENTIAL TREATMENT
abandonment or acknowledgment, the Term shall expire with respect to such
Segment and all rights to the use of such Segment shall revert to QWEST without
reimbursement of any fees or other payments previously made with respect
thereto, and from and after such time GTE shall have no further rights or
obligations hereunder with respect to such Segment (subject to the provisions of
Article XIX).
6.3 It is understood and agreed as between the parties that the grant of the
IRUs hereunder shall be treated for accounting and federal and all applicable
state and local tax purposes as the sale and purchase of the GTE Fibers and a
corresponding interest in QWEST's rights in the Associated Property subject
thereto, and that on and after the Acceptance Date with respect to each Segment,
GTE shall be treated as the owner of the GTE Fibers and an interest in QWEST's
rights in the Associated Property comprising such Segment for such purposes. The
parties agree to file their respective financial reports, income tax returns,
property tax returns, and other returns and reports for their respective
Impositions (as such term is defined in Section 33.1(e)) on such basis and,
except as otherwise required by law, not to take any positions inconsistent
therewith. QWEST shall retain legal title to the entire QWEST System, including
the GTE Fibers and Associated Property subject to the IRUs hereunder. In the
event the grant is not treated as a sale and purchase for tax purposes, the
parties shall pay any taxes arising by reason of such tax treatment on the same
basis as if it had been treated as a sale and purchase. Each party agrees to
indemnify the other with respect to any late filing penalties, interest or fees
incurred as a result of such party's failure to provide the other with such
information solely in such party's possession or control that may be necessary
in order to timely make any such filing.
6.4 This Agreement shall become effective on the date hereof and shall
terminate on the date when, after completion and delivery of all Segments
required to be delivered hereunder, all the Terms of all such Segments shall
have expired; provided that, those provisions of this Agreement which, by their
express terms, are intended to survive such termination, shall survive.
ARTICLE VII.
NETWORK ACCESS; REGENERATION FACILITIES
7.1 (a) QWEST shall provide GTE with access to, and GTE shall have the right
to connect, at GTE's sole cost and expense, its telecommunications system with,
the GTE Fibers at various network access points on the QWEST System right-of-way
in each of the endpoint cities and intermediate point cities along the route of
each Segment and at such additional locations along the QWEST System right-of-
way as may be requested by GTE (each such access point being referred to as a
"Connecting Point"). The specific locations of each such Connecting Point shall
be as mutually reasonably agreed upon by the parties in good faith, subject to
the Underlying Rights Requirements and QWEST obtaining other required permits,
authorizations and approvals (which QWEST agrees to use its best efforts to
obtain). Any such connection will be performed by QWEST, at GTE's sole cost and
expense, in accordance with QWEST's applicable specifications and operating
procedures. GTE shall pay QWEST's Costs for each such connection within thirty
(30) days of the date of GTE's receipt of QWEST's invoice therefor. In order to
schedule a connection of this type, GTE shall request and coordinate such work
not less than ninety (90) days in advance of the date the connection is
requested to be completed. Such work will be restricted to a Planned System Work
Period ("PSWP"), as defined in Section 33.1(i), unless otherwise agreed to in
writing for specific projects. Subject to all applicable Underlying Rights
Requirements, GTE shall also be provided reasonable access by QWEST to any
Connecting Point at all times. GTE shall have no limitations on the types of
electronics or technologies employed to utilize the GTE Fibers, subject to
mutually agreeable safety procedures and so long as such electronics or
technologies do not interfere with the use of or present a risk of damage to any
portion of the QWEST System.
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CONFIDENTIAL TREATMENT
(b) QWEST may route the GTE Fibers through QWEST's separate terminal,
endlink, POP or Regeneration Facilities at its sole discretion so long as such
routing does not have a material adverse effect on the security, the safety or
GTE's use of the GTE Fibers or Associated Property hereunder and QWEST is
responsible for all costs and expenses associated therewith.
7.2 (a) QWEST will provide GTE with regeneration site facilities as
identified on Exhibit F or as mutually agreed by the parties to be located at
approximately sixty (60) mile intervals along the QWEST System right-of-way, in
each case consisting of and providing space of approximately ##MATERIAL OMITTED
AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## square
feet and amenities (except for the operating costs associated therewith
expressly required to be paid by GTE pursuant to Section 8.2), as described in
Exhibit F ("Regeneration Facilities") at the rates set forth below. The parties
acknowledge that (i) the locations of such Regeneration Facilities shall be
coincident with the locations of QWEST's own Regeneration Facilities. In
addition, QWEST shall provide to GTE at GTE's Prorated Cost (as defined below in
this paragraph (a)) POP or terminal facilities of approximately ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
square feet along the QWEST System right-of-way at such locations as may be
mutually determined by GTE and QWEST, subject to space and power availability
and Underlying Rights Requirements. GTE's Occupancy of and access to all such
Regeneration Facility Sites (or POP or terminal facilities) shall include
separate, secured, 24-hour-per-day building access. Any Regeneration Facilities
(or POP or terminal facilities) provided by QWEST to GTE shall be at GTE's
Prorated Cost. For purposes of the foregoing two sentences, GTE's Prorated Cost
for Regeneration facilities means $ ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## per facility and for POP or
terminal facilities means $ ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## per facility.
(b) Except as provided in Section 8.2 or as otherwise agreed upon, in
writing, by the parties, all amounts payable under this Section 7.2 shall be due
upon the date that the subject facility is available for occupancy by GTE and
shall be paid in the manner specified in Section 2.2.
7.3 Notwithstanding any qualifications or limitations on QWEST's obligations
under this Article or elsewhere in this Agreement, including but not limited to
the qualification that any obligation of QWEST is subject to the Underlying
Rights Requirements, QWEST is obligated to use its best efforts to obtain and
provide any requisite consents, approvals, permits, authorizations and rights as
may be necessary in order for GTE to be able to install necessary equipment
and/or facilities, to have access to and to maintain its equipment and
facilities, to fully utilize the GTE Fibers, Associated Property, and the IRU
granted or to be granted to GTE under the Agreement, and to provide maintenance
on the Qwest System should QWEST not provide the maintenance services set out in
Exhibit H. QWEST agrees that in the event GTE's ability to utilize and maintain
the GTE Fibers as herein described is impeded in a material way as a result of
the Underlying Rights Requirements, QWEST agrees to use all commercially
reasonable efforts to amend the Underlying Rights or secure additional rights in
order to provide GTE with full access to the GTE Fibers.
ARTICLE VIII.
OPERATIONS
8.1 Each party shall have full and complete control and responsibility for
determining any network and service configuration or designs, routing
configurations, regrooming, rearrangement or consolidation of channels or
circuits and all related functions with regard to the use of that party's Dark
Fiber.
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8.2 GTE shall reimburse QWEST for GTE's proportionate share of all
reasonable and necessary operating costs incurred by QWEST in connection with
the Regeneration Facilities (or alternatively requested POP or terminal
facilities) provided pursuant to Section 7.2(a), including its proportionate
share of any monthly lease costs for any such facilities and/or underlying
property that QWEST leases (including, to the extent included in such lease
costs, base rent, maintenance, insurance, security and taxes), maintenance of
such facilities, and all power and utility fees and charges, excluding any lease
costs for underlying rights on the right-of-way. GTE's proportionate share of
such operating costs, including a proportionate share of common area costs,
shall be the ratio that the floor space provided to GTE in any such facility
(including a proportionate share of the common area) bears to (i) in the case of
lease costs, the total space in such facility, and (ii) in the case of all other
costs (including common area costs), the total utilized space in such facility.
QWEST shall submit invoices to GTE on an annual basis for GTE's pro rata share
of such operating costs during the preceding twelve months. GTE's reimbursement
obligations for insurance and taxes pursuant to this Section 8.2 shall in no
event be duplicative of GTE's payment obligations for insurance or taxes,
respectively, as provided in Article XIV and XV hereof, and in no event shall
relieve QWEST of its payment obligations for insurance costs or taxes,
respectively, as provided in Article XIV and XV hereof.
8.3 GTE acknowledges and agrees that, except to the extent expressly
provided pursuant to Section 7.2, QWEST is not supplying nor is QWEST obligated
to supply to GTE any optronics or electronics or optical or electrical equipment
or other facilities, including without limitation, generators, batteries, air
conditioners, fire protection and monitoring and testing equipment, all of which
are the sole responsibility of GTE, nor is QWEST responsible for performing any
work other than as specified in this Agreement.
8.4 Upon not less than one hundred twenty (120) days' written notice from
QWEST to GTE, QWEST may, subject to GTE's prior written approval (which approval
shall not be unreasonably delayed or withheld) substitute for the GTE Fibers on
the QWEST System, or any Segment or Segments comprising a portion of said QWEST
System, an equal number of alternative fibers along the same or an alternative
route; provided that in any such event, such substitution (i) shall be in
accordance with GTE's applicable specifications and operating procedures, (ii)
shall be effected at the sole cost of QWEST, including, without limitation, all
disconnect and reconnect costs, fees and expenses, (iii) shall be constructed
and tested in accordance with the specifications and drawings set forth in
Exhibits C and D and Section 4.2, and incorporate fiber meeting the
specifications set forth in Exhibit E, and (iv) shall not interrupt or adversely
affect the use, operation or performance of GTE's network or business, or change
any Connecting Points or endpoints of any Segment or change the location of any
Regeneration Facilities (or POPs or terminal facilities) used by GTE hereunder
or any other GTE POP, node or switch facilities, all as determined by GTE, in
its sole discretion.
ARTICLE IX.
MAINTENANCE AND REPAIR OF THE QWEST SYSTEM
9.1 From and after the Acceptance Date with respect to each Segment, the
maintenance of the QWEST System comprising such Segment shall be provided in
accordance with the maintenance requirements and procedures set forth in Exhibit
H hereto.
ARTICLE X.
PERMITS; UNDERLYING RIGHTS; RELOCATION
10.1 QWEST covenants and agrees that it shall obtain, during the course of
construction of, and in any event on or before the completion of conduit
installation with respect to, each Segment of conduit to be delivered hereunder
all Underlying Rights (as defined below) and such other rights, licenses,
permits, authorizations, consents and approvals (including, without limitation,
any necessary local, state, federal or tribal authorizations and environmental
permits) that are necessary in order to permit QWEST to construct,
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install and maintain the conduit and the GTE Fibers to be encompassed in such
Segment in accordance with the terms and conditions hereof. QWEST further
covenants and agrees that it shall obtain, during the course of construction of
and in any event on or before the Acceptance Date with respect to each Segment
to be delivered hereunder, any and all rights-of way, easements, licenses and
other agreements relating to the grant of rights and interests in and/or access
to the real property underlying the QWEST System (collectively, the "Underlying
Rights") and such other rights, licenses, permits, authorizations, consents and
approvals (including without limitation, any necessary local, state, federal or
tribal authorizations and environmental permits) that are necessary in order to
permit QWEST to grant the IRUs, and otherwise to perform its obligations
hereunder, in accordance with the terms and conditions hereof, and to (and all
of which Underlying Rights shall) permit GTE to use the GTE Fibers and
Associated Property as provided and permitted hereunder and in accordance with
the terms and conditions hereof. QWEST shall use its best efforts to cause the
terms of each such Underlying Right to provide GTE with notice of any default on
the part of QWEST and to permit GTE to cure, on behalf of QWEST, any such
default by QWEST and, thereafter, to continue the use of such Underlying Right
in accordance with QWEST's rights and interests thereunder and, if GTE at any
time cures such default by QWEST, QWEST shall reimburse GTE for any and all
amounts reasonably paid by GTE promptly upon demand.
10.2 QWEST further covenants and agrees that, with respect to each Underlying
Right that is necessary in order to continue and maintain the IRUs granted
hereunder, and to permit GTE to exercise its rights to use the GTE Fibers and
Associated Property, in each case in accordance with the terms and conditions
hereof:
(i) QWEST shall, for a period of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
years from the date hereof (or until the earlier to occur of
(A) the expiration of the economically useful life of the GTE Fibers,
as determined pursuant to Section 6.2, or (B) the expiration or
termination of the term of a particular Underlying Right, so long as
any such termination is not effected as a result of any failure of
QWEST (not caused as a result of GTE's failure to observe and perform
its obligations hereunder) to observe and perform its duties,
obligations and responsibilities under such Underlying Right or under
this Agreement, including under this Article X), observe and perform
each and every of its obligations under each document, agreement or
instrument granting or conveying to QWEST such an Underlying Right if
the failure to observe and perform any such obligation or obligations
would permit the grantor of such Underlying Right to terminate such
Underlying Right prior to its stated expiration date, or would
otherwise materially, adversely impair or affect GTE's ability to use
the GTE Fibers and Associated Property, or exercise its rights with
respect thereto, as provided and permitted hereunder; and
(ii) QWEST shall either require that the initial stated
term of each such Underlying Right be for a period that does not
expire, in accordance with its ordinary terms, prior to the last day
of the Minimum Period (as hereinafter defined with respect to each
Segment) or, if the initial stated term of any such Underlying Right
expires, in accordance with its ordinary terms, on a date earlier than
the last day of the Minimum Period, QWEST shall at its cost exercise
any renewal rights thereunder, or otherwise acquire such extensions,
additions and/or replacements as may be necessary, in order to cause
the stated term thereof to be continued until a date that is not
earlier than the last day of the Minimum Period. The "Minimum Period"
shall be, with respect to each Segment, the period from the date on
which construction of such Segment commences until the
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anniversary of such date; and
(iii) From and after the last day of the Minimum Period, QWEST at its sole cost
shall use its best efforts (without being required to expend commercially
unreasonably amounts therefor) to obtain such extensions and/or renewals as may
be necessary in order to cause the stated term of each such Underlying Right to
be continued for an additional period or periods of, in the aggregate,
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years following the Minimum Period or until the earlier expiration of the
economically useful life of the GTE Fibers, as determined pursuant to Section
6.2; provided that QWEST shall not be required to expend, as consideration for
any such renewal or extension, more than the fair market rate payable at such
time for similar rights and terms except to the extent that GTE agrees at its
option to pay directly or reimburse QWEST for any amounts required to be paid in
excess of such fair market rate to renew or extend such an Underlying Right; and
(iv) Throughout the term of each such Underlying Right, QWEST shall at its
reasonable cost and expense defend and protect QWEST's rights in and interests
under the Underlying Rights and GTE's right to use the GTE Fibers and Associated
Property as provided and permitted hereunder against interfering or infringing
rights, interests or claims of third parties.
10.3 Upon the expiration or termination of any Underlying Right that is
necessary in order to grant, continue or maintain an IRU granted hereunder in
accordance with the terms and conditions hereof, so long as QWEST shall have
fully observed and performed its obligations under this Article X with respect
thereto, the Term of the IRUs hereunder with respect to any Segment or Segments
affected thereby shall automatically expire upon such expiration or termination.
10.4 If, after the Acceptance Date with respect to a Segment, QWEST is required
by a third party with legal authority to so require (including, without
limitation, the grantor of an Underlying Right, but only to the extent that such
relocation is not required as a result of a failure by QWEST to observe and
perform its obligations under such Underlying Right or this Agreement), or if
GTE agrees, to relocate any portion of such Segment including any of the
facilities used or required in providing the IRUs in such Segment hereunder,
QWEST shall proceed with such relocation, including, but not limited to, the
right, in good faith, to reasonably determine the extent of, the timing of, and
methods to be used for such relocation; provided that (i) the route of any such
relocation shall be subject to the good faith agreement of the parties with a
bona fide interest therein, (ii) GTE shall be kept fully informed of all other
determinations made by QWEST in connection with such relocation, and (iii) any
such relocation shall be constructed and tested in accordance with the
specifications and drawings set forth in Exhibits C and D, and incorporate fiber
meeting the specifications set forth in Exhibit E. GTE shall reimburse QWEST for
its proportionate share of the Costs of such relocation of the portion of the
Segment so relocated, reduced by such amount, if any, of the portion of such
Costs as are reimbursed to QWEST by the party requiring such relocation, as
follows: (i) if the affected portion of the Segment includes any conduit other
than the conduit housing the GTE Fibers for which QWEST is responsible for
relocation costs, the total Costs of relocation of the conduits (i.e.,
relocation of the conduits only without regard to whether the conduits contain
fibers) shall be allocated based on the overall number of conduits relocated;
(ii) such Costs allocated to the conduit carrying the GTE Fibers plus the Costs
specifically associated with the
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relocation of the fiber (i.e., relocation of the fiber only without regard to
relocation of conduit) shall be further allocated to GTE based on GTE's
proportionate share of (A) all Costs of fiber acquisitions, splicing and
testing, prorated based on the total fiber count in the affected Cable, as so
relocated, and (B) all other Costs associated with the relocation of the conduit
housing the affected Cable, prorated based on the total number of owners
(including QWEST) and holders of IRUs or equivalent interests (including long-
term lessees) (each, an "Interest Holder") in the affected Cable, as so
relocated. GTE shall have the right to review and audit all Costs incurred in
connection with such relocation. QWEST shall deliver to GTE updated As-Builts
with respect to the relocated Segment not later than sixty (60) days following
the completion of such relocation. Any condemnation or taking under the power of
eminent domain of all or any portion of a Segment shall be deemed a relocation
required by a third party with legal authority to so require, and such affected
Segment, or portion thereof, shall be relocated in accordance with this Section
10.4 and any condemnation proceeds received by QWEST shall be applied to such
relocation as provided above.
ARTICLE XI.
USE OF QWEST SYSTEM
11.1 The requirements, restrictions, and/or limitations upon GTE's right to use
the GTE Fibers and Associated Property as provided and permitted under this
Agreement imposed under, and associated safety, operational and other rules and
regulations imposed in connection with, the Underlying Rights are referred to
collectively as the "Underlying Rights Requirements." QWEST represents and
warrants that, it has made available to GTE for its review and inspection a copy
of certain documents, agreements, or instruments pursuant to which QWEST has
been granted an Underlying Right as of the date hereof (the "Existing Underlying
Rights"), and certain associated safety, operational and other rules and
regulations imposed in connection with the exercise of its rights thereunder
(all of which are identified on Exhibit I hereto). GTE hereby accepts the
Existing Underlying Rights and the Underlying Rights Requirements associated
therewith. QWEST represents that it is not in default under any of the Existing
Underlying Rights that would permit the grantor of such Underlying Right to
terminate such Underlying Right prior to its stated expiration date, or would
otherwise materially, adversely impair or affect GTE's ability to use the GTE
Fibers and Associated Property, or exercise its rights with respect thereto, as
provided and permitted hereunder, and, to the best of its knowledge, none of the
grantors are in default under the Existing Underlying Rights. With respect to
each Underlying Right (other than the Existing Underlying Rights) obtained after
the date hereof by QWEST (or an Underlying Right existing on the date hereof
under any document, agreement or instrument delivered after the date hereof) in
carrying out its obligations hereunder from the same type of grantor as a
grantor of any Existing Underlying Right, QWEST represents and warrants that the
terms and conditions thereof, and rules and regulations imposed in connection
therewith, shall not impose materially more onerous limitations and restrictions
on the rights of GTE to use the GTE Fibers and Associated Property as permitted
and provided hereunder than those imposed by such type of grantor under and in
connection with the Existing Underlying Rights and Underlying Rights
Requirements associated therewith. To the extent that any such Underlying Right
documents, agreements or instruments were or hereafter are provided in a
redacted format to protect confidential and proprietary business terms, QWEST
represents and warrants that no language or information so redacted constitutes
an Underlying Rights Requirement nor otherwise imposes material requirements,
restrictions and/or limitations upon GTE's right to use the GTE Fibers and
Associated Property as provided and permitted hereunder. QWEST represents to GTE
that the map heretofore provided to GTE delineating the general location of
rights of way, easements and other rights held by QWEST under the principal
agreements evidencing the Existing Underlying Rights is a true and complete
depiction, in all material respects, with respect to the general
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CONFIDENTIAL TREATMENT
location of such Existing Underlying Rights that relate to the GTE Fibers to be
installed along the QWEST System as contemplated by this Agreement.
11.2 GTE represents, warrants and covenants that it will use the GTE Fibers and
Associated Property in compliance with (i) all applicable government codes,
ordinances, laws, rules, regulations and/or restrictions, and (ii) subject to
QWEST's obligations under Section 11.1, the Underlying Rights Requirements.
11.3 In addition to the other rights provided hereunder, but subject to the
provisions of Article VII, the IRUs granted hereunder shall include the right at
GTE's cost to install additional equipment, or replace existing equipment, in
the facility space provided to GTE pursuant to Article VII, subject to the
Underlying Rights Requirements.
11.4 QWEST agrees and acknowledges that it has no right to use the GTE Fibers
during the Term hereof, and that, from and after the effective date of the grant
of each IRU hereunder, QWEST shall keep the GTE Fibers, the Associated Property
and the IRUs granted hereunder free from (i) any liens of any third party
attributable to QWEST, and (ii) any rights or claims of any third party
attributable to QWEST, as and to the extent required pursuant to Article X
hereof. In addition, QWEST agrees that, from and after the execution of this
Agreement and until the effective date of the grant of each IRU hereunder with
respect to any Segment, it shall obtain from any entity in favor of which QWEST
in its discretion shall have granted a security interest or lien on all or part
of such Segment a written nondisturbance agreement substantially to the effect
that such lienholder acknowledges GTE's rights and interests in and to the GTE
Fibers, the Associated Property and the IRU's hereunder and agrees that the same
shall not be diminished, disturbed, impaired or interfered with by such
lienholder.
11.5 Subject to the provisions of Article XXV and this Article XI, GTE may use
the GTE Fibers, the Associated Property and the IRUs for any lawful
telecommunications purpose. For purposes of this Section 11.5
"telecommunications" shall have the meaning as used and interpreted in 47 U.S.C.
Sec.153(2)(43). GTE agrees and acknowledges that it has no right to use any of
the fibers, other than the GTE Fibers, included in the Cable or otherwise
incorporated in the QWEST System, and that GTE shall keep any and all of the
QWEST System, other than the IRU in the GTE Fibers or in the Associated
Property, free from any liens, rights or claims of any third party attributable
to GTE.
11.6 GTE and QWEST shall promptly notify each other of any matters pertaining
to, or the occurrence (or impending occurrence) of, any event which could give
rise to any damage or impending damage to or loss of the QWEST System that are
known to such party. Without limiting the generality of the foregoing, QWEST
shall promptly forward to GTE a copy of any notice of default received by QWEST
with respect to its obligations under any Underlying Right if such default is
not promptly cured by QWEST.
11.7 GTE shall not use the GTE Fibers or any related facilities or equipment in
a way which physically interferes in any way with or adversely affects the use
of the fibers or cable of any other person using the QWEST System, it being
expressly acknowledged that the QWEST System includes or will include other
participants, including QWEST and other owners and holders of Dark Fiber IRUs
and telecommunication system operations. QWEST shall not use any other fibers in
the QWEST System in a way which physically interferes with or adversely affects
the use of the GTE Fibers, and shall obtain a similar agreement from any person
that acquires the right to use fibers in the QWEST System after the date hereof.
11.8 GTE and QWEST each agree to cooperate with and support the other in
complying with any requirements applicable to their respective rights and
obligations hereunder by any governmental or regulatory agency or authority.
11.9 QWEST agrees, so long as any such action would not violate the terms of any
Underlying Right, upon request of GTE, to execute,
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file and/or record such documents or instruments as GTE shall deem reasonably
necessary or appropriate to evidence or safeguard the IRUs granted to GTE
hereunder. GTE agrees to reimburse QWEST for all reasonable costs and out-of-
pocket expenses (including, without limitation, reasonable fees and expenses of
legal counsel) incurred by QWEST in fulfilling its obligations under this
Section 11.9.
ARTICLE XII.
INDEMNIFICATION
12.1 Subject to the provisions of Articles XIII and XVIII, QWEST hereby releases
and agrees to indemnify, defend, protect and hold harmless GTE and its
employees, officers and directors, from and against, and assumes liability for:
(a) Any injury, loss or damage to any person (including GTE), tangible property
or facilities of any person or entity (including reasonable attorneys' fees and
costs) to the extent arising out of or resulting from the acts or omissions,
negligent or otherwise, of QWEST, its officers, employees, servants, affiliates,
agents, contractors, licensees, invitees or vendors arising out of or in
connection with a default (other than a default caused by a failure of GTE to
perform or comply with its obligations hereunder) by QWEST in the performance of
its obligations or breach of its representations under this Agreement
(including, without limitation, any default by QWEST in the performance of its
obligations under Article X with respect to the Underlying Rights and under
Article XI with respect to its use of the QWEST System); and
(b) Any claims, liabilities or damages, including reasonable attorneys' fees and
costs, arising out of any violation by QWEST of any regulation, rule, statute or
court order of any local, state or federal governmental agency, court or body in
connection with the performance of its obligations under this Agreement.
12.2 Subject to the provisions of Articles XIII and XVIII, GTE hereby releases
and agrees to indemnify, defend, protect and hold harmless QWEST, and its
employees, officers and directors, from and against, and assumes liability for:
(a) Any injury, loss or damage to any person (including QWEST), tangible
property or facilities of any person or entity (including reasonable attorneys'
fees and costs) to the extent arising out of or resulting from the acts or
omissions, negligent or otherwise, of GTE, its officers, employees, servants,
affiliates, agents, contractors, licensees, invitees or vendors arising out of
or in connection with a default (other than a default caused by a failure of
QWEST to perform or comply with its obligations hereunder) by GTE in the
performance of its obligations or breach of its representations under this
Agreement (including, without limitation, any default by GTE in the performance
of its obligations under Article XI with respect to its use of the QWEST
System); and
(b) Any claims, liabilities or damages, including reasonable attorneys' fees and
costs, arising out of any violation by GTE of any regulation, rule, statute or
court order of any local, state or federal governmental agency, court or body in
connection with its use of the IRUs and/or the GTE Fibers and Associated
Property hereunder.
12.3 The parties agree to promptly provide each other with notice of any
lawsuit, judicial, administrative or other dispute resolution action or
proceeding, or claim of which it becomes aware and which it believes may result
in an indemnification obligation hereunder (each, an "Action"); provided that
the failure to provide any such notice shall not affect the indemnifying party's
indemnification obligation unless the indemnifying party is actually prejudiced
by the failure to receive such notice. After receipt of any such notice, if the
indemnifying party shall acknowledge in writing to the indemnified party that
the indemnifying party shall be obligated under the terms of this indemnity
hereunder in connection with such Action, then the indemnifying party shall be
entitled, if it so elects (i) to take control of the defense and investigation
of such Action, (ii) to employ and engage attorneys of its own choice to handle
and defend the same, at the indemnifying party's cost, risk and expense unless
the named parties to such action or proceeding include
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both the indemnifying party and the indemnified party and the indemnified party
has been advised in writing by counsel that there may be one or more legal
defenses available to such indemnified party that are different from or
additional to those available to the indemnifying party, in which case the
indemnified party shall also have the right to employ its own counsel in any
such case with the reasonable fees and expenses of such counsel being borne by
the indemnifying party, and (iii) to compromise or settle such Action, which
compromise or settlement shall be made only with the written consent of the
indemnified party, such consent not to be unreasonably withheld. Notwithstanding
anything in this Section 12.3 to the contrary, (i) if there is a reasonable
probability that an indemnifiable claim may materially adversely affect the
indemnified party, other than as a result of money damages or other money
payments, the indemnified party shall have the right to participate in such
defense, compromise or settlement and the indemnifying party shall not, without
the indemnified party's written consent (which consent shall not be unreasonably
withheld), settle or compromise any indemnifiable claim or consent to entry of
any judgment in respect thereof unless such settlement, compromise or consent
includes as an unconditional term thereof the giving by the claimant or the
plaintiff to the indemnified party a release from all liability in respect of
such indemnifiable claim.
12.4 The parties hereby expressly recognize and agree that each party's said
obligation to indemnify, defend, protect and save the other harmless is not a
material obligation to the continuing performance of the parties' other
obligations, if any, hereunder. In the event that a party shall fail for any
reason to so indemnify, defend, protect and save the other harmless, the injured
party hereby expressly recognizes that its sole remedy in such event shall be
the right to bring legal proceedings against the other party for its damages as
a result of the other party's said failure to indemnify, defend, protect and
save harmless. The obligations of the parties under this Article XII shall
survive the expiration or termination of this Agreement.
12.5 Nothing contained herein shall operate as a limitation on the right of
either party hereto to bring an action for damages against any third party,
including indirect, special or consequential damages, based on any acts or
omissions of such third party as such acts or omissions may affect the
construction, operation or use of the GTE Fibers or the QWEST System; provided,
however, that each party hereto shall assign such rights or claims, execute such
documents and do whatever else may be reasonably necessary to enable the other
party to pursue any such action against such third party.
ARTICLE XIII.
LIMITATION OF LIABILITY
13.1 Notwithstanding any provision of this Agreement to the contrary, except to
the extent caused by its own willful misconduct, neither party shall be liable
to the other party for any special, incidental, indirect, punitive or
consequential damages, whether foreseeable or not, arising out of, or in
connection with such party's failure to perform its respective obligations or
breach of its respective representations hereunder, including, but not limited
to, loss of profits or revenue (whether arising out of transmission
interruptions or problems, any interruption or degradation of service or
otherwise), cost of capital, or claims of customers, in each case whether
occasioned by any construction, reconstruction, relocation, repair or
maintenance performed by, or failed to be performed by, the other party or any
other cause whatsoever, including breach of contract, breach of warranty,
negligence, or strict liability, all claims with respect to which such special,
incidental, indirect, punitive or consequential damages are hereby specifically
waived. Nothing contained herein shall be construed to prohibit or reduce the
payment by QWEST of the amounts described in Section 18.2 and which the parties
acknowledge are the sole rights and remedies of GTE to the extent provided in
Section 18.2(e).
ARTICLE XIV.
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INSURANCE
14.1 During the construction period with respect to any Segment, and until the
Acceptance Date with respect thereto, QWEST shall procure and maintain in force
the following insurance coverage from companies lawfully approved to do business
in the state where the construction will be performed:
(a) not less than $5,000,000 combined single-limit liability insurance, on an
occurrence basis, for personal injury and property damage, including, without
limitation, injury or damage arising from the operation of vehicles or equipment
and liability for completed operations;
(b) workers' compensation insurance in amounts required by applicable law and
employers' liability insurance with a limit of at least $1,000,000 per
occurrence;
(c) automobile liability insurance covering death or injury to any person or
persons, or damage to property arising from the operation of vehicles or
equipment, with limits of not less than $2,000,000 per occurrence; and
(d) any other insurance coverages required pursuant to QWEST's right-of-way
agreements with railroads or other third parties. QWEST shall require its
subcontractors who are engaged in connection with the construction of the QWEST
System to maintain insurance in the types and amounts as would be obtained by a
prudent person to provide adequate protection against loss. In all
circumstances, QWEST shall require its subcontractors to carry a minimum of
$1,000,000 in commercial general liability; and
(e) GTE shall be listed as an additional insured on all policies set forth
above, except workers' compensation. QWEST shall provide to GTE a certificate of
insurance evidencing such insurance coverage. Evidence of insurance furnished
shall contain a clause stating GTE "shall be notified in writing at least thirty
(30) days prior to any cancellation of, or any material change or new exclusions
in the policy."
14.2 Following the Acceptance Date with respect to each Segment, and throughout
the remaining term of the IRU with respect to such Segment, each party shall
procure and maintain in force, at its own expense:
(a) not less than $5,000,000 combined single limit liability insurance, on an
occurrence basis, for personal injury and property damage, including, without
limitation, injury or damage arising from the operation of vehicles or equipment
and liability for completed operations;
(b) workers' compensation insurance in amounts required by applicable law and
employers' liability insurance with a limit of at least $1,000,000 per
occurrence;
(c) automobile liability insurance covering death or injury to any person or
persons, or damage to property arising from the operation of vehicles or
equipment, with limits of not less than $2,000,000 per occurrence; and
(d) any other insurance coverages specifically required of such party pursuant
to QWEST's right-of-way agreements with railroads or other third parties.
14.3 Both parties expressly acknowledge that a party shall be deemed to be in
compliance with the provisions of this Article if it maintains an approved self
insurance program providing for a retention of up to $1,000,000. If either party
provides any of the foregoing coverages on a claims-made basis, such policy or
policies shall be for at least a three-year extended reporting or discovery
period. Unless otherwise agreed, GTE's and QWEST's insurance policies shall be
obtained and maintained with companies rated "A" or better by Best's Key Rating
Guide and each party shall provide the other with an insurance certificate
confirming compliance with this requirement for each policy providing such
required coverage.
14.4 In the event either party fails to obtain the required insurance or to
obtain the required certificates from any contractor and a claim is made or
suffered, such party shall indemnify and hold harmless the other party from any
and all claims for which the
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required insurance would have provided coverage. Further, in the event of any
such failure which continues after seven (7) days' written notice thereof by the
other party, such other party may, but shall not be obligated to, obtain such
insurance and will have the right to be reimbursed for the cost of such
insurance by the party failing to obtain such insurance.
14.5 In the event coverage is denied or reimbursement of a properly presented
claim is disputed by the carrier for insurance provided above, the party
carrying such coverage shall make good-faith efforts to pursue such claim with
its carrier.
14.6 GTE and QWEST shall each obtain from the insurance companies providing the
coverages required by this Agreement the permission of such insurers to allow
such party to waive all rights of subrogation and such party does hereby waive
all rights of said insurance companies to subrogation against the other party,
its parent corporation, affiliates, subsidiaries, assignees, officers,
directors, and employees or any other party entitled to indemnity under this
Agreement.
ARTICLE XV.
TAXES, FEES AND OTHER GOVERNMENTAL IMPOSITIONS
15.1 The parties acknowledge and agree that it is their mutual objective and
intent to (i) minimize, to the extent feasible, the aggregate Impositions (as
defined in Section 33.1(e)) payable with respect to the QWEST System and (ii)
share such Impositions according to their respective interests in the QWEST
System , and that they will cooperate with each other and coordinate their
mutual efforts to achieve such objectives in accordance with the provisions of
this Article XV.
15.2 (a) QWEST shall be responsible for and shall timely pay any and all
Impositions with respect to the construction or operation of the QWEST System
which Impositions are (i) imposed or assessed prior to the Acceptance Date, (ii)
imposed or assessed with respect to events which occurred or property rights or
obligations of QWEST which existed prior to the acceptance date; or (iii)
imposed or assessed (regardless of the time) with respect to the QWEST System in
exchange for the approval of construction in the original agreement which
resulted in the granting of an Underlying Right. Notwithstanding the foregoing
obligations, QWEST shall have the right to challenge any such Impositions so
long as the challenge of such Impositions does not materially, adversely affect
the title, rights or property to be delivered to GTE pursuant hereto.
(b) Real and/or personal property or ad valorem taxes shall be prorated
between QWEST and GTE based on the period the Property was owned by each
respective party during the fiscal period for which such taxes were imposed by
the taxing jurisdiction (as such fiscal period is reflected on the bill rendered
by such taxing jurisdiction). If the fiscal period is not identified on the tax
bill, proration between QWEST and GTE shall be calculated based on the privilege
period of the taxing jurisdiction. QWEST and GTE shall pay or be reimbursed for
real and/or personal property taxes (including instances in which such property
taxes have been paid before the Acceptance Date) prorated on this basis.
15.3 Except as to Impositions described in paragraphs (ii) and (iii) of Section
15.2, which are clearly for QWEST's account following the Acceptance Date, QWEST
shall timely pay any and all Impositions imposed upon or with respect to the
QWEST System to the extent such Impositions may not feasibly be separately
assessed or imposed upon or against the respective ownership interests of QWEST
and GTE in the QWEST System; provided that, upon receipt of a notice of any such
Imposition, QWEST shall promptly notify GTE of such Imposition and following
payment of such Imposition by QWEST, GTE shall promptly reimburse QWEST for its
proportionate share of such Imposition, which share shall be determined (i) to
the extent possible, based upon the manner and methodology used by the
particular authority imposing such Impositions (e.g., on the cost of the
relative property interests, historic or projected revenue derived therefrom, or
any combination thereof) and, if based upon projected revenue or gross receipts,
then
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based on the relative number of GTE Fibers in the affected portion of the QWEST
System compared to the total number of fibers in the affected portion of the
QWEST System during the relevant tax period which are subject to an indefeasible
right of use or are otherwise in use; or (ii) if the same cannot be so
determined, then based upon GTE's proportionate share of the total fiber count
in the affected portion of the QWEST System. If QWEST's assessed value, for
property tax purposes, is based on its entire operation in any state (i.e.,
central assessment), QWEST and GTE shall work together in good faith to allocate
a proper portion n of said assessment to the QWEST System and GTE's ownership
interest in the QWEST System. If GTE's assessed value, for property tax
purposes, is based on a duplicate assessment of the same property as QWEST,
QWEST and GTE shall work together in good faith to allocate a portion of this
duplicate assessment to each party. QWEST and GTE shall work together in good
faith to aggressively defend against such duplicate assessment in any state
which attempts to impose a duplicate assessment. QWEST shall provide GTE with
reasonable supporting documentation for Impositions for which QWEST seeks
reimbursement. Any reimbursement made under this Section 15.3 shall be in an
amount that, after deductions of all Impositions required to be paid by QWEST in
respect of the receipt or accrual of such reimbursement and after consideration
of any deduction to which QWEST may be entitled with respect to the payment or
accrual of the Impositions which have been reimbursed shall be equal to the
amount otherwise required to be paid by QWEST hereunder. Hereafter, such
additional amount or amounts shall be referred to as the "Gross-up Amount."
QWEST shall, upon request, provide GTE with documentation in support of any
Gross-up Amount so as to ensure that both parties are made whole in a manner
that is consistent with the mutual objectives set forth in section 15.1 of the
Agreement. If such Gross-up Amount exceeds $
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
, GTE may elect to engage the services of an independent consultant, at GTE's
sole cost and expense, to review QWEST's computation of such Gross-up Amount.
Any independent consultant selected by GTE shall be subject to approval by
QWEST, which such approval shall not be unreasonably withheld, and such
independent consultant shall be subject to confidentiality restrictions as may
be determined in QWEST's sole discretion. Further, if, after review of such
documentation or otherwise, in the event the parties are unable to agree upon
the amount of the Gross-up Amount, such dispute shall be resolved pursuant to
Article XXI of the Agreement.
15.4 Upon notice of the assertion or proposed assertion of any Imposition
described in Section 15.3 (including Impositions that trigger a Gross-up Amount)
QWEST shall promptly and in good faith consult with GTE concerning the
underlying facts and whether to contest or continue to contest such assertion or
proposed assertion. Notwithstanding any provision herein to the contrary, QWEST
shall have the right to contest any Imposition described in Section 15.3, above,
(including Impositions which trigger a Gross-up Amount), provided that such
contest does not materially adversely affect GTE. Such contest may be pursued by
any lawful means including by non-payment of such Imposition provided such non-
payment contest does not materially, adversely affect the title, rights or
property to be delivered to GTE pursuant hereto. The out-of-pocket costs and
expenses (including reasonable attorneys' fees) incurred by QWEST in any such
contest shall be shared by QWEST and GTE in the same proportion as to which the
parties shared in any such Imposition, as it was originally assessed. Any
refunds or credits resulting from a contest brought pursuant to this Section
15.4 shall be divided between QWEST and GTE in the same proportion as to which
such refunded or credited Impositions were borne by QWEST and GTE. In any such
event, QWEST shall provide timely notice of such challenge to GTE. If QWEST
chooses to proceed with such challenge after receipt of a written objection to
the challenge from GTE, QWEST shall conduct such challenge at its own costs and
expense, provided that GTE shall not
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receive the benefit of any refund or credit, if any, obtained as a result of a
successful challenge. Further, where QWEST does not contest an Imposition, GTE
shall have the right, after notice to QWEST, to contest such Imposition as long
as such contest does not materially, adversely affect the title property or
rights of QWEST. The out-of-pocket costs and expenses (including reasonable
attorneys' fees) incurred by GTE in any such contest shall be shared by GTE and
QWEST in the same proportion as to which the parties shared in such Imposition,
as it was originally assessed. Any refunds or credits resulting from a contest
shall be divided between GTE and QWEST in the same proportion as to which such
refunded or credited Imposition was borne by GTE and QWEST. If GTE chooses to
proceed with such contest after receipt of written objection to the challenge
from QWEST, GTE shall conduct such challenge at its own costs and expense,
provided that QWEST shall not receive the benefit of any refund or credit, if
any, obtained as a result of a successful challenge. Provided, however, that
notwithstanding anything to the contrary in this Article XV, QWEST shall have
complete authority over and discretion to control (including the authority to
dismiss or not pursue) any contests relating to Impositions based upon the
computation of QWEST's taxable income under the Federal Internal Revenue Code or
state income or franchise tax laws (hereinafter "Net Income Based Impositions").
GTE shall, however, be consulted on the conduct and status of such contest.
QWEST shall have no obligation to disclose to GTE its income or franchise tax
returns and records except as to the discrete portion of such return or record
that directly relates to the computation and payment of such Net Income Based
Impositions. Provided further, however, that in the event QWEST shall determine
in its own discretion not to pursue a contest of any Net Income Based Imposition
as to which GTE has requested a contest pursuant to the provisions described
above in this Section 15.4, then GTE shall have no obligation to provide any
reimbursement for such amount if GTE shall have obtained and provided to QWEST
an opinion of nationally recognized legal counsel confirming that a meritorious
defense exists to such Net Income Based Imposition.
15.5 Except as to Impositions described in paragraph (iii) of Section 15.2,
following the Acceptance Date QWEST and GTE, respectively, shall be separately
responsible for any and all Impositions (i) expressly or implicitly imposed
upon, based upon, or otherwise measured by the gross receipts, gross income, net
receipts or net income received by or accrued to such party due to its
respective ownership or use of the QWEST System and/or the GTE Fibers, or (ii)
which have been separately assessed or imposed upon the respective ownership
interest of such party in the QWEST System and/or the GTE Fibers. If the GTE
Fibers are the only fibers located in the Cable from the point where the Cable
leaves the QWEST System right-of-way to a GTE POP, GTE shall be solely
responsible for any and all Impositions imposed on or with respect to such
portion of the QWEST System.
15.6 Notwithstanding any provision herein to the contrary, GTE shall have the
right to protest by appropriate proceedings any Imposition described in Section
15.5, above. In such event, GTE shall indemnify and hold QWEST harmless from any
expense, legal action or cost, including reasonable attorneys' fees, resulting
from GTE's exercise of its rights hereunder. In the event of any refund, rebate,
reduction or abatement to GTE of any such Imposition imposed upon and/or paid by
GTE, GTE shall be entitled to receive the entire benefit of such refund, rebate,
reduction or abatement attributable to GTE's use of the QWEST System. In the
event GTE has exhausted all its rights of appeal in protesting any Imposition
and has failed to obtain the relief sought in such proceedings or appeals
("Finally Determined Taxes and Fees"), GTE and QWEST may jointly agree (with the
consent and participation of the other Interest Holders in the affected portion
of the QWEST System) to relocate a portion of the QWEST System so as to bypass
the jurisdiction which had imposed or assessed such Finally Determined Taxes and
Fees with the total Costs thereof to be shared proportionately as follows: (i)
if the affected portion of the QWEST System includes any conduit other than the
conduit in which the
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GTE Fibers are located, the total Costs of relocation of the conduits (i.e.,
relocation of the conduits only without regard to whether the conduits contain
fibers) shall be allocated based on the overall number of conduits in the QWEST
System which are relocated; and (ii) such Costs allocated to the conduit
carrying the GTE Fibers plus the Costs specifically associated with the
relocation of the fiber (i.e., relocation of the fiber only without regard to
relocation of conduit) to be further allocated to GTE based upon GTE's
proportionate share of (A) all Costs of fiber acquisitions, splicing and
testing, prorated based on the total fiber count in the Cable, as so relocated;
and (B) all other Costs associated with the relocation of the conduit housing
the affected Cable, prorated based upon the total number of Interest Holders in
the affected Cable, as so relocated. QWEST shall deliver to GTE updated As-
Builts with respect to the relocated QWEST System not later than sixty (60) days
following the completion of such relocation. If GTE and QWEST do not determine
to relocate the affected portion of the QWEST System, GTE shall have the right
to terminate its use of the GTE Fibers in the affected portion of the QWEST
System. Such termination shall be effective on the date specified by GTE in a
notice of termination, which date shall be at least ninety (90) days after the
notice. Upon such termination, the IRU in the affected portion of the QWEST
System shall immediately terminate, and the GTE Fibers in the affected portion
of the QWEST System shall thereupon revert to QWEST without reimbursement of any
of the IRU Fee or other payments previously made with respect thereto.
15.7 Notwithstanding the provisions of Section 15.6, with respect to any
Impositions relating to the QWEST System which are imposed upon both QWEST and
GTE (or both of their respective interests therein), QWEST, at its option and at
its own expense, shall have the right to direct and manage in good faith any
such contest; subject, however, to reasonable and appropriate consultation with
GTE which hereby agrees to reasonably cooperate with QWEST in any such contest.
The right of QWEST to contest any Imposition pursuant to this Section 15.7 shall
be contingent upon reasonable and appropriate assurances that any such contest
will not adversely affect the title, property or rights of GTE hereunder.
15.8 QWEST and GTE agree to cooperate fully in the preparation of any returns or
reports relating to the Impositions. QWEST and GTE further acknowledge and agree
that the provisions of this Article XV are intended to allocate the Impositions
expected to be assessed against or imposed upon the parties with respect to the
QWEST System based upon the procedures and methods of computation by which
Impositions generally have been assessed and imposed to date, and that material
changes in the procedures and methods of computation by which such assessments
are assessed and imposed could significantly alter the fundamental economic
assumptions underlying the transactions hereunder to the parties. Accordingly,
the parties agree that, if in the future the procedures or methods of
computation by which Impositions are assessed or imposed against the parties
change materially from the procedures or methods of computation by which they
are imposed as of the date hereof, the parties will negotiate in good faith an
amendment to the provisions of this Article XV in order to preserve, to the
extent reasonably possible, the economic intent and effect of this Article XV as
of the date hereof.
ARTICLE XVI.
NOTICE
16.1 Unless otherwise provided herein, all notices and communications concerning
this Agreement shall be addressed to the other party as follows:
If to QWEST: QWEST Communications Corporation
ATTENTION: President
555 Seventeenth Street
Denver, Colorado 80202
Telephone No.: (303) 291-1400
Facsimile No.: (303) 291-1724
with a copy to: QWEST Communications Corporation
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ATTENTION: General Counsel
555 Seventeenth Street
Denver, Colorado 80202
Telephone No.: (303) 291-1400
Facsimile No.: (303) 291-1724
If to GTE: GTE Intelligent Network Services Incorporated
ATTENTION: President
600 Hidden Ridge
P.O. Box 152092
Irving, Texas 75038
Telephone No.:
Facsimile No:
with a copy to:
or at such other address as either party may designated from time to time in
writing to the other party.
16.2 Unless otherwise provided herein, notices shall be hand delivered, sent
by registered or certified U.S. mail, postage prepaid, or by commercial
overnight delivery service, or transmitted by facsimile, and shall be deemed
served or delivered to the addressee or its office when received at the address
for notice specified above when hand delivered, upon confirmation of sending
when sent by fax, on the day after being sent when sent by overnight delivery
service, or three (3) days after deposit in the mail when sent by U.S. mail.
16.3 All invoices concerning payment obligations due to QWEST pursuant to
this Agreement shall be addressed to GTE as follows:
GTE Intelligent Network Services Incorporated
600 Hidden Ridge
P.O. Box 152092
Irving, Texas 75038
ATTENTION: Accounts Payable
with a copy to:
ARTICLE XVII.
CONFIDENTIALITY
17.1 QWEST and GTE hereby agree that if either party provides (or, prior to
the execution hereof, has provided) confidential or proprietary information to
the other party ("Proprietary Information"), such Proprietary Information shall
be held in confidence, and the receiving party shall afford such Proprietary
Information the same care and protection as it affords generally to its own
confidential and proprietary information (which in any case shall be not less
than reasonable care) in order to avoid disclosure to or unauthorized use by any
third party. The parties acknowledge and agree that this Agreement, including
all of the terms, conditions and provisions hereof, and all drafts hereof,
constitutes Proprietary Information. In addition, all information disclosed by
either party to the other in connection with or pursuant to this Agreement,
including prior to the date hereof, shall be deemed to be Proprietary
Information. All Proprietary Information, unless otherwise specified in writing,
shall remain the property of the disclosing party, shall be used by the
receiving party only for the intended purpose, and such written Proprietary
Information, including all copies thereof, shall be returned to the disclosing
party or destroyed after the receiving party's need for it has expired or upon
the request of the disclosing party. Proprietary Information shall
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not be reproduced except to the extent necessary to accomplish the purpose and
intent of this Agreement, or as otherwise may be permitted in writing by the
disclosing party.
17.2 The foregoing provisions of Section 17.1 shall not apply to any
Proprietary Information which (i) becomes publicly available other than through
the recipient; (ii) is required to be disclosed by a governmental or judicial
law, order, rule or regulation; (iii) is independently developed by the
disclosing party; (iv) becomes available to the disclosing party without
restriction from a third party; or (v) becomes relevant to the settlement of any
dispute or enforcement of either party's rights under this Agreement in
accordance with the provisions of this Agreement, in which case appropriate
protective measures shall be taken to preserve the confidentiality of such
Proprietary Information as fully as possible within the confines of such
settlement or enforcement process. If any Proprietary Information is required to
be disclosed pursuant to the foregoing clause (ii), the party required to make
such disclosure shall promptly inform the other party of the requirements of
such disclosure.
17.3 Notwithstanding Sections 17.1 and 17.2 of this Article, either party may
disclose Proprietary Information to its employees, agents, and legal, financial,
and accounting advisors and providers (including its lenders and other
financiers) to the extent necessary or appropriate in connection with the
negotiation and/or performance of this Agreement or its obtaining of financing,
provided that each such party is notified of the confidential and proprietary
nature of such Proprietary Information and is subject to or agrees to be bound
by similar restrictions on its use and disclosure.
17.4 Notwithstanding the foregoing sections of this Article 17, the parties
may provide public statements concerning their participation in this Agreement
that do not disclose Proprietary Information of the other party. Any news
release, public announcement, advertising or any form of publicity pertaining to
this Agreement, provision of services pursuant to it, or association of the
parties with respect to the subject of this Agreement shall be subject to prior
written approval of both parties which approval shall not be unreasonably
withheld.
17.5 The provisions of this Article XVII shall survive expiration or
termination of this Agreement.
ARTICLE XVIII.
DEFAULT
18.1 With respect to all payments required to be made by GTE hereunder,
including, without limitation, payment of the IRU Fee and all other amounts
payable by GTE hereunder, in the event GTE shall fail to make a payment by the
date due and payable hereunder, from and after such date, (i) such unpaid amount
shall bear interest until paid at a rate equal to the rate set forth in Article
XXX and (ii) if such payment is due with respect to a Segment on or prior to the
Acceptance Date of such Segment, the Estimated Delivery Date for such Segment
shall be extended by a number of days equal to the number of days that elapse
from the date such payment is due until paid. In the event any amount or amounts
due and payable hereunder remain unpaid for a period of eighty (80) days after
written notice from QWEST to GTE, and the amount thereof is not in bona fide
dispute, then QWEST may, in its sole and absolute discretion and in addition to
its other rights and remedies hereunder, after ten (10) days prior written
notice to GTE and the failure of GTE to pay such amount within such ten-day
period, terminate any and all of its obligations hereunder with respect to any
Segment or Segments as to which the Acceptance Date has not yet occurred or the
grant of the IRU with respect to which has not yet become effective, and to
apply any and all amounts previously paid by GTE hereunder with respect to such
Segment or Segments toward the payment of any other amounts then or thereafter
payable by GTE hereunder. With respect to all of its other obligations
hereunder, in the event GTE shall fail to perform a non-payment obligation and
such failure shall continue for a period of thirty (30) days after QWEST shall
have given GTE written notice of such failure, GTE shall be in
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default hereunder unless GTE shall have cured such failure or such failure is
otherwise waived in writing by QWEST within such thirty (30) days; provided,
however, that where such failure cannot reasonably be cured within such 30-day
period, if GTE shall proceed promptly to cure the same and prosecute such cure
with due diligence, the time for curing such failure shall be extended for such
period of time as may be necessary to complete such cure; and provided further
that if GTE certifies in good faith to QWEST in writing that a non-payment
failure has been cured, such failure shall be deemed to be cured unless QWEST
otherwise notifies GTE in writing within fifteen (15) days of receipt of such
notice from GTE. GTE shall be in default hereunder (i) automatically upon the
making by GTE of a general assignment for the benefit of its creditors, the
filing by GTE of a voluntary petition in bankruptcy or the filing by GTE of any
petition or answer seeking, consenting to, or acquiescing in reorganization,
arrangement, adjustment, composition, liquidation, dissolution, or similar
relief; (ii) one hundred twenty (120) days after the filing of an involuntary
petition in bankruptcy or other insolvency protection against GTE which is not
dismissed within such one hundred twenty (120) days, or (iii) upon any default
by GTE under the Guaranty, which default is not cured within the relevant cure
period, if any, provided with respect thereto under the Guaranty. Except as
otherwise provided in this Section 18.1, upon any default by GTE, after written
notice thereof from QWEST, QWEST may (i) take such action as it determines, in
its sole discretion, to be necessary to correct the default and, subject to
Section 13.1, recover from GTE its reasonable costs incurred in correcting such
default, and (ii) pursue any legal remedies it may have under applicable law or
principles of equity relating to such default, including specific performance.
Notwithstanding any other provision of this Agreement, QWEST acknowledges and
agrees that QWEST shall have no right to terminate the IRU or any of the rights
and interests of GTE hereunder with respect to any Segment for which the IRU Fee
relating thereto has been fully paid.
18.2 (a) With respect to its obligation to complete the construction,
installation, and satisfactory Fiber Acceptance Testing of the GTE Fibers
comprising a particular Segment by the Estimated Delivery Date with respect to
such Segment pursuant to Section 3.2, the parties acknowledge and agree that it
is in their mutual best interest to work together in a cooperative effort to
determine whether and to what extent any event or occurrence that is reasonably
likely to cause a delay in the delivery of a Segment hereunder, as a result of
any force majeure event or other occurrence described in Article XX or
otherwise, can be terminated, resolved or avoided, and to cause the
construction, installation and delivery of the Segment to be completed in the
most expeditious and practical manner feasible under the circumstances.
Accordingly, within three (3) months following its discovery of an event or
occurrence that QWEST reasonably believes is likely to cause (i) an extension of
the Estimated Delivery Date of one hundred twenty (120) days or more pursuant to
Article XX or (ii) a Delivery Default (as defined pursuant to Section 18.2(d)
below), QWEST shall give written notice to GTE of such event or occurrence.
Thereupon, each of QWEST and GTE (i) will designate a senior executive officer
with decision-making authority and familiarity with this Agreement and the
relevant issue hereunder, and (ii) may designate one technical representative
and one financial representative, to participate in the following resolution
efforts. Each of such designees shall participate in such meetings, promptly
scheduled at mutually agreed upon times and places, as may be necessary or
appropriate to discuss in good faith the status of construction of the affected
Segment, the reason or reasons for the anticipated Estimated Delivery Date
extension or Delivery Default, various possible and practical means by which the
event(s) or occurrence(s) causing such anticipated Estimated Delivery Date
extension or Delivery Default might be terminated, avoided or resolved,
including, without limitation, possible modifications to the route, selection of
right-of-way, or manner of construction of the affected Segment, and
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(iii) use their best efforts to settle upon and implement a procedure by which
such event(s) or occurrence(s) may be terminated, avoided or resolved and the
construction, installation and delivery of the affected Segment completed in an
expeditious and economically practical and feasible manner under the
circumstances. The parties acknowledge and agree that, because the QWEST System
includes or will include other participants, including owners and holders of
Dark Fiber IRUs and telecommunication system operations, such meetings may, and
likely will, involve designees and representatives of such other participants,
and the resolution of any matters so acted upon will require the cooperative
efforts of, and have to be structured, to the extent feasible, in an effort to
meet the needs of all such participants. The parties hereto further acknowledge
and agree that no failure of the parties hereto to resolve, or to agree upon a
manner in which they might resolve, any issue addressed hereunder shall impair,
adversely affect or invalidate any of their respective rights, claims or
remedies under this Agreement.
(b) If, notwithstanding the efforts of the parties pursuant to Section
18.2(a): (i) (A) a force majeure event or occurrence described in Article XX
causing an anticipated Estimated Delivery Date extension has not been
terminated, avoided or resolved by the date that is twelve (12) months following
QWEST's discovery of such event or occurrence, and
(B) there is no "Reasonably Apparent Probability" (either as mutually
determined by QWEST and GTE or, if QWEST and GTE are unable to make such a
mutual determination, as determined by an independent third party mutually
selected by QWEST and GTE and familiar with large-scale fiberoptic system
constructions projects or, if QWEST and GTE are unable to make such a mutual
selection, each of QWEST and GTE shall designate such an independent third
party, the two of which shall designate such an independent third party to make
such determination) that the Acceptance Date with respect to any such affected
Segment will occur within (1) twelve (12) months following the Estimated
Delivery Date (without extension for any delay pursuant to Article XX) with
respect to any Segment designated as a "priority" Segment on Exhibit A-1, or (2)
eighteen (18) months following the Estimated Delivery Date (without extension
for any delay pursuant to Article XX) with respect to any other Segment (such
date with respect to each Segment being referred to as the "Outside Force
Majeure Date"); or
(ii) notwithstanding a determination pursuant to the foregoing clause (i) that
there was a Reasonably Apparent Probability that the Acceptance Date with
respect to the affected Segment would occur by the applicable Outside Force
Majeure Date, nonetheless the event or occurrence described in Article XX
causing such delay is continuing on such applicable Outside Force Majeure Date;
or
(iii) notwithstanding such a determination that there was a Reasonably Apparent
Probability that the Acceptance Date with respect to the affected Segment would
occur by the applicable Outside Force Majeure Date, nonetheless, on the
applicable Outside Force Majeure Date, although the event or occurrence
described in Article XX has been terminated, avoided or resolved and QWEST has
resumed its construction, installation, splicing, and/or testing efforts, QWEST
is unable to demonstrate to GTE's reasonable satisfaction that the Acceptance
Date for such Segment will occur, in all reasonable probability, by the date
that is six (6) months following such Outside Force Majeure Date, then, in any
such event described in foregoing clauses (i), (ii), and (iii), GTE may elect,
in its sole discretion, by written notice to QWEST, to delete such Segment from
the System Route otherwise to be delivered pursuant to this Agreement, and
recover from QWEST (1) the amount of the IRU Fee previously paid by GTE
hereunder with respect to such Segment, plus (2) interest at the prime rate
interest published by The Wall Street Journal as the base rate on corporate
loans posted by a substantial percentage of the nation's largest banks on such
date, plus (3) an amount equal to ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR
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CONFIDENTIAL TREATMENT##
of the IRU Fee for such Segment, as determined pursuant to Section 2.1 (with
such aggregate amount payable to GTE promptly following QWEST's receipt of such
election notice or, at the election of GTE, offset against the unpaid amount of
the IRU Fee payable hereunder with respect to any other Segment or Segments).
Upon any such election and payment (or offset), neither party shall have any
further rights or obligations with respect to such Segment hereunder. (c) If,
notwithstanding the efforts of the parties pursuant to Section 18.2(a):
(i) (A) an event or occurrence causing an anticipated Delivery Default (as
defined in Section 18.2(d) below) has not been terminated, avoided, resolved or
waived by the date that is twelve (12) months following QWEST's discovery of
such event or occurrence; and
(B) there is no Reasonably Apparent Probability that the Acceptance Date
with respect to any such affected Segment will occur within (x) twelve (12)
months following the Estimated Delivery Date with respect to each Segment
designated as a "Priority" Segment on Exhibit A-1, or (y) eighteen (18) months
following the Estimated Delivery Date with respect to any other Segment (such
dates being referred to collectively as the "Outside Delivery Default Date"); or
(ii) notwithstanding a determination pursuant to the foregoing clause (i)
that there was a Reasonably Apparent Probability that the Acceptance Date with
respect to the affected Segment would occur by the applicable Outside Delivery
Default Date, nonetheless, on the applicable Outside Delivery Default Date, the
Acceptance Date for such Segment has not occurred; then, in any such event
described in the foregoing clauses (i) and (ii), GTE may elect, in its sole
discretion, by written notice to QWEST, to delete such Segment from the System
Route otherwise to be delivered pursuant to this Agreement, and recover from
QWEST (1) the amount of the IRU Fee previously paid by GTE hereunder with
respect to such Segment, plus (2) interest thereon at the rate of interest
applicable to late payments set forth in Article XXX, plus (3) an amount equal
to
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT##
of the IRU Fee for such Segment, as determined pursuant to Section 2.1, but
without reduction of such IRU fee under Section 18.2(d) (with such aggregate
amount payable to GTE promptly following QWEST's receipt of such election notice
or, at the election of GTE, offset against the unpaid amount of the IRU Fee
payable hereunder with respect to any other Segment or Segments). Upon any such
election and payment (or offset), neither party shall have any further rights or
obligations with respect to such Segment hereunder. (d) In addition to the
specific rights and remedies provided pursuant to the foregoing paragraphs (b)
and (c) in connection with delays and anticipated delays in the delivery of
Segments hereunder, QWEST shall be in default under this Agreement if the
Acceptance Date with respect to any Segment has not occurred within one hundred
twenty (120) days after the Estimated Delivery Date (a "Delivery Default"). From
the date of any such Delivery Default, and until the Acceptance Date with
respect to such Segment occurs, the IRU Fee with respect to such Segment, as
determined or redetermined pursuant to Section 2.1 hereof, shall be reduced by
an amount equal to
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT##
% of such IRU Fee for each thirty (30) days (or a pro rata percentage of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT##
% for any period of less than thirty (30) days) that elapse between such date of
Delivery Default and the Acceptance Date. (e) The rights and remedies set forth
in the foregoing Sections 18.2(c) and 18.2(d) shall be the sole remedies
available to GTE with respect to any failure by QWEST to construct, install, and
conduct satisfactory Fiber Acceptance Testing with respect to the GTE
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Fibers comprising any Segment by the relevant Estimated Delivery Date (it being
expressly acknowledged and agreed that the rights provided to GTE pursuant to
Section 18.2(b) are provided only as an accommodation in the event of lengthy
force majeure delays pursuant to Article XX, and that the events described in
Section 18.2(b) do not constitute defaults hereunder). With respect to all of
QWEST's other obligations hereunder, in the event that QWEST shall fail to
perform an obligation and such failure shall continue for a period of thirty
(30) days after GTE shall have given QWEST written notice of such failure, QWEST
shall be in default hereunder unless QWEST shall have cured such failure or such
failure is otherwise waived in writing by GTE within such thirty (30) days;
provided however, that where such failure cannot reasonably be cured within such
30-day period, if QWEST shall proceed promptly to cure the same and prosecute
such cure with due diligence, the time for curing such failure shall be extended
for such period of time as may be necessary to complete such cure; and provided
further, that if QWEST certifies in good faith to GTE in writing that failure
has been cured, such failure shall be deemed to be cured unless GTE otherwise
notifies QWEST in writing within fifteen (15) days of receipt of such notice
from QWEST. QWEST shall be in default hereunder automatically upon the making by
QWEST of a general assignment for the benefit of its creditors, the filing by
QWEST of a voluntary petition in bankruptcy or the filing by QWEST of any
petition or answer seeking, consenting to, or acquiescing in reorganization,
arrangement, adjustment, composition, liquidation, dissolution, or similar
relief, or (ii) one hundred twenty (120) days after the involuntary filing of a
petition in bankruptcy or other insolvency protection against QWEST which is not
dismissed within such 120-day period. Except as otherwise provided in this
Section 18.2, upon any default by QWEST, after notice thereof from GTE, GTE may
(i) take such action as it determines, in its sole discretion, to be necessary
to correct the default, and, subject to Section 13.1, recover from QWEST its
reasonable costs in correcting such default, and (ii) pursue any legal remedies
it may have under applicable law or principles of equity relating to such
default including specific performance.
ARTICLE XIX.
TERMINATION
19.1 This Agreement automatically shall terminate with respect to a Segment
upon the expiration or termination of the Term of the IRU respecting such
Segment pursuant to Article VI or Section 18.2 hereof.
19.2 Upon the expiration or termination of this Agreement with respect to a
Segment, the IRU in such Segment shall immediately terminate and all rights of
GTE to use the QWEST System, the GTE Fibers, the Associated Property or any part
thereof relating to such Segment, shall cease and QWEST shall owe GTE no
additional duties or consideration with respect to such Segment. Promptly
thereupon, GTE shall remove all of GTE's electronics, equipment, separate
Regeneration Facilities (as provided pursuant to Section 7.2) and other
associated GTE property from such Segment and any related QWEST facilities at
its sole cost under QWEST's supervision (which supervision shall be without cost
to GTE).
19.3 Notwithstanding the foregoing, no termination or expiration of this
Agreement shall affect the rights or obligations of any party hereto (i) with
respect to any then existing defaults or the obligation to make any payment
hereunder for services rendered prior to the date of termination or expiration
or (ii) pursuant to Article XII, Article XIII, Article XV or Article XVII
herein, which shall survive the expiration or termination hereof.
ARTICLE XX.
FORCE MAJEURE
20.1 Neither party shall be in default under this Agreement if and to the
extent that any failure or delay in such party's performance of one or more of
its obligations hereunder is caused by any of the following conditions, and such
party's performance of such obligation or obligations shall be excused and
extended for and during the period of any such delay: act of God; fire; flood;
fiber, Cable,
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or other material failures, shortages or unavailability or other delay in
delivery not resulting from the responsible party's failure to timely place
orders therefor (it being expressly acknowledged that the Cable that is being
acquired for and installed in the QWEST System and that will include the GTE
Fibers must include higher fiber counts than that necessary solely for the GTE
Fibers in order to permit completion of the entire QWEST System); lack of or
delay in transportation; government codes, ordinances, laws, rules, regulations
or restrictions (collectively, "Regulations"); war or civil disorder; strikes or
other labor disputes; failure of a third party to grant or recognize an
Underlying Right, or any other cause beyond the reasonable control of such
party; provided that any delay caused by the failure of a third party to grant
an Underlying Right shall constitute a force majeure delay hereunder only to the
extent that such delay does not extend beyond a period of six months (such that
the Estimated Delivery Date with respect to any Segment affected by such delay
shall be extended only up to a period of six months of any such delay, and shall
not be further extended if such delay extends beyond a period of six months).
The party claiming relief under this Article shall notify the other in writing
of the existence of the event relied on and the cessation or termination of said
event.
ARTICLE XXI
DISPUTE RESOLUTION
21.1 Except as provided in Sections 18.1 and 18.2, if the parties are unable
to resolve any disagreement or dispute arising under or related to this
Agreement, including without limitation, the failure to agree upon any item
requiring a mutual agreement of the parties hereunder, they shall resolve the
disagreement or dispute as follows:
(a) Officers. Either party may refer the matter to the Chief Executive
Officers or the Chief Operating Officers (the "Officers") of the parties by
giving the other party written notice (a "Notice"). Within fifteen (15) days
after delivery of a Notice, the Officers of both parties shall meet at a
mutually acceptable time and place to exchange relevant information and to
attempt to resolve the dispute.
(b) Negotiation. If the matter has not been resolved within thirty (30) days
after delivery of such Notice, or if the Officers fail to meet within fifteen
(15) days after delivery of such Notice, either party may initiate mediation
and, if applicable, arbitration in accordance with the procedure set forth in
subsections (c) and (d) below. All negotiations conducted by the Officers
pursuant to this clause are confidential and shall be treated as compromise and
settlement negotiations for purposes of the Federal Rules of Evidence and State
Rules of Evidence.
(c) Mediation. In the event a dispute exists between the parties and the
respective Officers are unable to resolve the dispute, the parties agree to
participate in a non-binding mediation procedure as follows:
(i) A mediator will be selected by having counsel for each party agree on a
single person to act as mediator. The parties' counsel as well as the
Officers of each party and not more than two other participants from each
party will appear before the mediator at a time and place determined by the
mediator, but not more than sixty (60) days after delivery of a Notice. The
fees of the mediator and other costs of mediation will be shared equally by
the parties. (ii) Each party's counsel will have forty-five (45) minutes to
present a review of the issue and argument before the mediator. After each
counsel's presentation, the other counsel may present specific counter-
arguments not to exceed ten (10) minutes. The 45-minute and 10-minute periods
will be exclusive of the time required to answer questions from the mediator
or attendees. (iii) After both presentations, the Officers may ask questions
of the other side. At the conclusion of both presentations and the question
periods, the Officers and their
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counsels will meet together to attempt to resolve the dispute. The length of
the meeting will be as agreed between the parties. Either party may abandon
the procedure at the end of the presentations and question periods if they
feel it is not productive to go further. The mediation procedure is not
binding on either party.
(iv) The duties of the mediator are to be sure that the above set-out
time periods are adhered to and to ask questions so as to clarify the issues
and understandings of the parties. The mediator may also offer possible
resolutions of the issues but has no duty to do so.
(d) Arbitration. If the matter is not resolved after applying the mediation
procedures set forth above, or if either party refuses to take part in the
mediation process, the parties hereby agree to submit all controversies, claims
and matters of difference that are unresolved to arbitration in Denver,
Colorado, according to the commercial rules and practices of the American
Arbitration Association ("AAA") from time to time in force, and in accordance
with the following provisions of this subsection (d), and unless otherwise
agreed by the parties and subject to the rights of the parties as provided in
Section 18.1 and Section 18.2 hereof (including the right not to continue to
perform under this Agreement), they shall continue to perform under this
Agreement during arbitration.
(i) Arbitration discovery shall be conducted in accordance with the
Federal Rules of Civil Procedure, with any disputes over the scope of
discovery to be determined by the arbitrators, it being intended that the
arbitrators shall allow limited, reasonable discovery prior to any hearing on
the merits.
(ii) Arbitration hereunder shall be by three independent and impartial
arbitrators. Each of the parties shall appoint one arbitrator within thirty
(30) days after initiation of arbitration and the two arbitrators so
appointed shall select a third arbitrator within forty-five (45) days after
initiation of arbitration. In the event that the parties or the arbitrators
fail to select arbitrators as required above, the AAA shall select such
arbitrators.
(iii) The AAA shall have the authority to disqualify any arbitrator who it
determines not to be independent and impartial. The arbitrators shall be
entitled to a fee commensurate with their fees for professional services
requiring similar time and effort.
(iv) The arbitrators shall conduct a hearing no later than sixty (60)
days after initiation of the matter to arbitration, and a decision shall be
rendered by the arbitrators within thirty (30) days of the hearing. At the
hearing, the parties shall present such evidence and witnesses as they may
choose, with or without counsel. Adherence to formal rules of evidence shall
not be required but the arbitration panel shall consider any evidence and
testimony that it determines to be relevant, in accordance with procedures
that it determines to be appropriate. The arbitration determination shall be
in writing and shall specify the factual and legal bases for the
determination. The arbitrators may award legal or equitable relief, including
but not limited to specific performance. (v) The parties agree that this
submission and agreement to arbitrate shall be governed by and specifically
enforceable in accordance with the laws of the State of Colorado. Arbitration
may proceed in the absence of any party if prior written notice of the
proceedings has been given to such party. The parties agree to abide by all
decisions and determinations rendered in such proceedings. Such decisions and
determinations shall be final and binding on all parties. All decisions and
determinations may be filed with the clerk of one or more courts, state,
federal or foreign having jurisdiction over the party against whom it is
rendered or its property, as a basis of judgment.
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(vi) The arbitrators' fees and other costs of the arbitration shall be
borne by the party against whom the award is rendered, except as the
arbitration panel may otherwise provide in its written opinion.
ARTICLE XXII.
WAIVER
22.1 The failure of either party hereto to enforce any of the provisions of
this Agreement, or the waiver thereof in any instance, shall not be construed as
a general waiver or relinquishment on its part of any such provision, but the
same shall nevertheless be and remain in full force and effect.
ARTICLE XXIII.
GOVERNING LAW
23.1 This Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Colorado, without reference to its choice of law
principles. Any litigation based hereon, or arising out of or in connection with
a default by either party in the performance of its obligations hereunder, shall
be brought and maintained exclusively in the courts of the State of Colorado or
in the United States District Court for the District of Colorado, and each party
hereby irrevocable submits to the jurisdiction of such courts for the purpose of
any such litigation and irrevocably agrees to be bound by any judgment rendered
thereby in connection with such litigation.
ARTICLE XXIV.
RULES OF CONSTRUCTION
24.1 The captions or headings in this Agreement are strictly for convenience
and shall not be considered in interpreting this Agreement or as amplifying or
limiting any of its content. Words in this Agreement which import the singular
connotation shall be interpreted as plural, and words which import the plural
connotation shall be interpreted as singular, as the identity of the parties or
objects referred to may require.
24.2 Unless expressly defined herein, words having well known technical or
trade meanings shall be so construed. All listing of items shall not be taken to
be exclusive, but shall include other items, whether similar or dissimilar to
those listed, as the context reasonably requires.
24.3 Except as set forth to the contrary herein, any right or remedy of GTE
or QWEST shall be cumulative and without prejudice to any other right or remedy,
whether contained herein or not.
24.4 Except as expressly provided in Section
28.1, nothing in this Agreement is intended to provide any legal rights to
anyone not an executing party of this Agreement.
24.5 This Agreement has been fully negotiated between and jointly drafted by
the parties.
24.6 All actions, activities, consents, approvals and other undertakings of
the parties in this Agreement shall be performed in a reasonable and timely
manner, it being expressly acknowledged and understood that time is of the
essence in the performance of obligations required to be performed by a date
expressly specified herein. Except as specifically set forth herein, for the
purpose of this Agreement the standards and practices of performance within the
telecommunications industry in the relevant market shall be the measure of a
party's performance.
ARTICLE XXV.
ASSIGNMENT AND TRANSFER RESTRICTIONS
25.1 Except as provided below, QWEST shall not assign, encumber or otherwise
transfer this Agreement or all or any portion of its rights or obligations
hereunder to any other party without the prior written consent of GTE, which
consent will not be unreasonably withheld or delayed. Notwithstanding the
foregoing, QWEST shall have the right, without GTE's consent, to (i) subcontract
any of its construction or maintenance obligations hereunder, or (ii) assign or
otherwise transfer this Agreement in whole or in part (A) as collateral to any
institutional lender to QWEST (or institutional lender to any permitted
transferee or assignee of QWEST) subject to
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the prior rights and obligations of the parties hereunder, (B) to any parent,
subsidiary or affiliate of QWEST, (C) to any person, firm or corporation which
shall control, be under the control of or be under common control with QWEST, or
(D) any corporation or other entity into which QWEST may be merged or
consolidated or which purchases all or substantially all of the stock or assets
of QWEST, or (E) any partnership, joint venture or other business entity of
which QWEST or any wholly owned subsidiary of QWEST HOLDING CORPORATION owns at
least 50 percent of the equity interests thereof and which cannot make major
decisions without the consent of QWEST (or subsidiary of QWEST HOLDING
CORPORATION); provided that the assignee or transferee in any such circumstance
shall continue to be subject to all of the provisions of this Agreement,
including without limitation, this Section 25.1 (except that any lender referred
to in clause (A) above shall not incur any obligations under this Agreement nor
shall it be restricted from exercising any right of enforcement or foreclosure
with respect to any related security interest or lien, so long as the purchaser
in foreclosure is subject to the provisions of this Agreement, including,
without limitation, this Section 25.1); and provided further that promptly
following any such assignment or transfer, QWEST shall give GTE written notice
identifying the assignee or transferee. In the event of any permitted partial
assignment of any rights hereunder, QWEST shall remain the sole point of contact
with GTE. No permitted partial or complete assignment shall release or discharge
QWEST from its duties and obligations hereunder.
25.2 Except as provided in this Section 25.2 and the following Section 25.3,
GTE shall not assign, encumber or otherwise transfer this Agreement or all or
any of portion of its rights or obligations hereunder to any other party without
the prior written consent of QWEST, which consent will not be unreasonably
withheld or delayed. Subject to the provisions of Section 25.3 (which provision
shall be binding upon any permitted assignee or transferee hereunder), GTE shall
have the right, without QWEST's consent, to assign or otherwise transfer this
Agreement in whole or in part (i) as collateral to any institutional lender to
GTE (or institutional lender to any permitted transferee or assignee of GTE)
subject to the prior rights and obligations of the parties hereunder, (ii) to
any parent, subsidiary or affiliate of GTE, (iii) to any person, firm or
corporation which shall control, be under the control of or be under common
control with GTE, or (iv) any other entity into which GTE may be merged or
consolidated or which purchases all or substantially all of the stock or assets
of GTE or (v) any partnership, joint venture or other business entity of which
GTE or any wholly owned subsidiary of GTE owns at least 50 percent of the equity
interests thereof and which cannot make major decisions without the consent of
GTE (or subsidiary of GTE); provided that no assignment or other transfer under
this clause (v) shall be permitted hereunder if its purpose or effect would
constitute, directly or indirectly, a Restricted Transaction (as defined in
Section 25.3) or otherwise violate the provisions of Section 25.3; provided that
the assignee or transferee in any such circumstance shall continue to be subject
to all of the provisions of this Agreement, including without limitation this
Section 25.2 and the following Section 25.3 (except that any lender referred to
in clause (i) above shall not incur any obligations under this Agreement, nor
shall it be restricted from exercising any right of enforcement or foreclosure
with respect to any related security interest or lien, so long as the purchaser
in foreclosure is subject to the provisions of this Agreement, including,
without limitation, this Section 25.2 and the following Section 25.3); and
provided further that in any of circumstances described in clauses (ii), (iii)
or (iv) all of the payment obligations of GTE hereunder for the remainder of the
Term shall be fully guaranteed by GTE or shall be paid in full as a condition to
such transfer or assignment; and provided further that promptly following any
such assignment or transfer, GTE shall give QWEST written notice identifying the
assignee or transferee. In the event of any permitted partial assignment of any
rights hereunder, GTE shall remain the sole party and point of contact with
QWEST hereunder.
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No permitted partial or complete assignment shall release or discharge GTE from
its duties and obligations hereunder.
25.3 Notwithstanding the provisions of Article XI, except as expressly permitted
in Section 25.2(i)-(v), inclusive, without the prior written consent of QWEST,
which consent may be withheld in QWEST's sole discretion, for a period of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
following the date that the last Segment of the QWEST System is accepted by GTE:
(a) GTE shall not sell, assign, lease, grant an IRU with respect to, exchange,
encumber, or otherwise in any manner transfer or make available in any manner to
any third party the ownership, right to use, use of, or access in any manner to,
any of GTE's rights in the whole or discrete GTE Fibers which at the time of
such transaction are Dark Fibers, or engage in substantive discussions or
negotiations with respect thereto, or otherwise engage in a similar transaction
with respect to any GTE Fibers in a manner designed or intended to circumvent
the foregoing limitations.
(b) GTE shall not sell, assign, lease, grant an IRU with respect to, exchange,
encumber, or otherwise in any manner transfer or make available in any manner to
a Capacity Reseller (as defined below) any of GTE's rights in the whole or
discrete GTE Fibers at a capacity in excess of OC-12, or engage in substantive
discussions or negotiations with respect thereto, or otherwise engage in a
similar transaction with respect to any GTE Fibers in a manner designed or
intended to circumvent the foregoing limitations. As used in this subparagraph,
a Capacity Reseller is any person or entity which, in whole or in part, seeks to
obtain such capacity for the purpose of reselling or otherwise providing access
thereto to third parties for profit, whether or not such person or entity
actually realizes a profit as a result of such transaction.
(c) Each transaction prohibited in subparagraphs (a) or (b) of this Section
25.3 shall constitute a "Restricted Transaction." Except as provided in
subparagraph (b) of this Section 25.3, nothing contained herein shall restrict
or prohibit GTE from creating telecommunications capacity along or through the
GTE Fibers by the addition of GTE's electronic and optronic equipment and
selling or otherwise permitting third parties to use such telecommunications
capacity.
25.4 QWEST and GTE recognize that QWEST may desire to obtain tax-deferred
exchange treatment pursuant to Section 1031 of the Internal Revenue Code, as
amended, with respect to certain of the Dark Fibers and Associated Property in
which the IRUs are to be granted hereunder and which are used or held for use by
QWEST in its business as of the date hereof (the "Existing Properties"), and GTE
agrees to reasonably cooperate as provided herein in obtaining such treatment
(at no cost or expense to GTE). Accordingly, notwithstanding any provision
contained in this Agreement to the contrary, QWEST may, at its sole option, on
or prior to the Acceptance Date for any relevant Segment, appoint a third party
(the "Intermediary") as agent for QWEST with respect to the transfer of the
Existing Properties to GTE, and assign its rights under this Agreement (insofar
as they relate to the Existing Properties) to such Intermediary. If QWEST so
elects to appoint an Intermediary, QWEST shall notify GTE, in writing, on or
prior to the Acceptance Date with respect to the relevant Segment, and shall
provide GTE with copies of all agreements between QWEST and the Intermediary. If
QWEST appoints an Intermediary, QWEST shall transfer the Existing Properties or
such portion thereof as designated by QWEST to the Intermediary, and GTE shall
pay the IRU Fee with respect to the
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Existing Properties (as designated by QWEST) to the Intermediary; provided that
QWEST agrees that such transfer shall be expressly subject to this Agreement,
and that QWEST shall remain liable for performance under this Agreement to the
same extent as if it had not appointed an Intermediary; provided that in such
event QWEST shall indemnify and hold harmless GTE from and against any and all
loss, damage, cost or expense suffered, sustained or incurred by GTE in
connection with any such cooperation and/or payment of such IRU Fee to such
Intermediary.
25.5 This Agreement and each of the parties' respective rights and
obligations under this Agreement, shall be binding upon and shall inure to the
benefit of the parties hereto and each of their respective permitted successors
and assigns.
ARTICLE XXVI.
REPRESENTATIONS, WARRANTIES AND ACKNOWLEDGMENTS
26.1 Each party represents and warrants that:
(a) it has the full right and authority to enter into, execute, deliver and
perform its obligations under this Agreement;
(b) this Agreement constitutes a legal, valid and binding obligation
enforceable against such party in accordance with its terms, subject to
bankruptcy, insolvency, creditors' rights and general equitable principles; and
(c) its execution of and performance under this Agreement shall not violate
any applicable existing regulations, rules, statutes or court orders of any
local, state or federal government agency, court or body.
26.2 QWEST represents and warrants that the Segments of the QWEST System that
it has heretofore constructed or will construct pursuant hereto have been or
shall be designed, engineered, installed, and constructed in compliance with the
terms and provisions of this Agreement and in material compliance with any and
all applicable building, construction and safety codes for such construction and
installation, as well as any and all other applicable governmental laws, codes,
ordinances, statutes and regulations.
26.3 With respect to each of the Segments that has been constructed prior to
the date hereof, QWEST represents and warrants that such Segment, when
constructed, generally was constructed substantially in accordance with the
specifications set forth in Exhibit C hereto, and QWEST has no actual knowledge
on the date hereof of any material deviation in the construction of such Segment
from such specifications. If, within twelve (12) months from the respective
Acceptance Date for each of the Segments referred to in this Section 26.3 ,
there is an event or occurrence that is caused by a material deviation in the
construction or installation of any of such Segments from such specifications,
and which has a material adverse affect on the operation or performance of the
GTE Fibers in such Segment, then, promptly following receipt of written notice
thereof from GTE, QWEST, at its sole cost and expense, shall undertake to repair
the affected portion of such Segment to the relevant specifications.
26.4 QWEST represents and warrants that the Segments of the QWEST System that
it constructs pursuant hereto shall be constructed in all material respects in
accordance with the specifications set forth in Exhibit C hereto; provided that
GTE's sole rights and remedies with respect to any failure to so construct shall
be (i) to inspect the construction, installation and splicing, and participate
in the acceptance testing, of the GTE Fibers incorporated in each such Segment,
during the course and at the time of the relevant construction, installation and
testing periods for each Segment, as provided in Articles III and IV, (ii) if,
during the course of such construction, installation and testing any material
deviation from the specifications set forth in Exhibit C is discovered, the
construction or installation of the affected portion of the Segment shall be
repaired to such specification by QWEST at QWEST's sole cost and expense, and
(iii) if, at any time prior to the date that is twelve (12) months after the
Acceptance Date, GTE shall notify QWEST in writing of its discovery of a
material deviation from the
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specifications set forth in Exhibit C with respect to any such Segment (which
notice shall be given within thirty (30) days of such discovery) the
construction or installation of the affected portion of such Segment shall be
repaired to such specification by QWEST at QWEST's sole cost and expense. For
purposes hereof, "material deviation" means a deviation which is reasonably
likely to have a material adverse affect on the operation or performance of the
GTE Fibers affected thereby.
26.5 EXCEPT AS SET FORTH IN THE FOREGOING PARAGRAPHS 26.2, 26.3 AND 26.4, AND
EXCEPT AS MAY BE SET FORTH SPECIFICALLY AND EXPRESSLY ELSEWHERE IN THIS
AGREEMENT, QWEST MAKES NO WARRANTY, EXPRESS OR IMPLIED, WITH RESPECT TO THE GTE
FIBERS OR THE SEGMENTS DELIVERABLE HEREUNDER, INCLUDING ANY WARRANTY OF
MERCHANTABILITY OR FITNESS FOR PARTICULAR PURPOSE, AND ALL SUCH WARRANTIES ARE
HEREBY EXPRESSLY DISCLAIMED.
26.7 The parties acknowledge and agree that on and after the relevant
Acceptance Date GTE's sole rights and remedies with respect to any defect in or
failure of the GTE Fibers to perform in accordance with the applicable vendor's
or manufacturer's specifications with respect to the GTE Fibers shall be limited
to the particular vendor's or manufacturer's warranty with respect thereto,
which warranty, to the extent permitted by the terms thereof, shall be assigned
to GTE upon its request. In the event any maintenance or repairs to the QWEST
System are required as a result of a breach of any warranty made by any
manufacturers, contractors or vendors, unless GTE shall elect to pursue such
remedies itself, QWEST shall pursue all remedies against such manufacturers,
contractors or vendors on behalf of GTE, and QWEST shall reimburse GTE's costs
for any maintenance GTE has incurred as a result of any such breach of warranty
to the extent the manufacturer, contractor or vendor has paid such costs.
26.8 QWEST and GTE acknowledge and agree:
(a) that each grant of the IRU in the GTE Fibers and Associated Property for
a Segment hereunder (each herein called a "Grant") will be treated by each of
them, vis-a-vis the other, as of and after the relevant effective date thereof
as described in Section 6.1, an executed grant to GTE of an interest in real
property with respect to such Segment; and
(b) that, from and after the effective date of a Grant with respect to a
Segment, no material obligation of either QWEST or GTE will remain to be
performed with respect to such Grant or Segment; and
(c) that, with respect to each such Grant, this Agreement is not intended as
an executory contract or unexpired lease subject to assumption, rejection, or
assignment by the trustee in bankruptcy of any party to this Agreement,
including, without limitation, assumption, rejection, or assignment under
Bankruptcy Code Section 365.
ARTICLE XXVII.
ENTIRE AGREEMENT; AMENDMENT
27.1 This Agreement, together with any Confidentiality Agreement entered into
in connection herewith constitutes the entire and final agreement and
understanding between the parties with respect to the subject matter hereof and
supersedes all prior agreements relating to the subject matter hereof, which are
of no further force or effect. The Exhibits referred to herein are integral
parts hereof and are hereby made a part of this Agreement. To the extent that
any of the provisions of any Exhibit hereto are inconsistent with the express
terms of this Agreement, the terms of this Agreement shall prevail. This
Agreement may only be modified or supplemented by an instrument in writing
executed by a duly authorized representative of each party and delivered to the
party relying on the writing.
ARTICLE XXVIII.
NO PERSONAL LIABILITY
28.1 Each action or claim against any party arising under or relating to this
Agreement shall be made only against such party as a corporation, and any
liability relating thereto shall be enforceable only against the corporate
assets of such party. No party shall seek to pierce the corporate veil or
otherwise seek to impose any liability
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relating to, or arising from, this Agreement against any shareholder, employee,
officer or director of the other party. Each of such persons is an intended
beneficiary of the mutual promises set forth in this Article and shall be
entitled to enforce the obligations of this Article.
ARTICLE XXIX.
RELATIONSHIP OF THE PARTIES
29.1 The relationship between GTE and QWEST shall not be that of partners,
agents, or joint venturers for one another, and nothing contained in this
Agreement shall be deemed to constitute a partnership or agency agreement
between them for any purposes, including, but not limited to federal income tax
purposes. GTE and QWEST, in performing any of their obligations hereunder, shall
be independent contractors or independent parties and shall discharge their
contractual obligations at their own risk subject, however, to the terms and
conditions hereof.
ARTICLE XXX.
LATE PAYMENTS
30.1 In the event a party shall fail to make any payment under this Agreement
when due, such amounts shall accrue interest, from the date such payment is due
until paid, including accrued interest compounded monthly, at an annual rate
equal to
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
of the prime rate of interest published by The Wall Street Journal as the base
rate on corporate loans posted by a substantial percentage of the nation's
largest banks on the date any such payment is due or, if lower, the highest
percentage allowed by law.
ARTICLE XXXI.
SEVERABILITY
31.1 If any term, covenant or condition contained herein shall, to any
extent, be invalid or unenforceable in any respect under the laws governing this
Agreement, the remainder of this Agreement shall not be affected thereby, and
each term, covenant or condition of this Agreement shall be valid and
enforceable to the fullest extent permitted by law.
ARTICLE XXXII.
COUNTERPARTS
32.1 This Agreement may be executed in one or more counterparts, all of which
taken together shall constitute one and the same instrument.
ARTICLE XXXIII.
CERTAIN DEFINITIONS
33.1 The following terms shall have the stated definitions in this Agreement.
(a) "Cable" means the fiberoptic cable and the fibers contained therein, and
associated splicing connections, splice boxes, and vaults to be installed by
QWEST as part of the QWEST System.
(b) "Costs" means actual, direct costs paid or payable in accordance with
the established accounting procedures generally used by QWEST and which it
utilizes in billing third parties for reimbursable projects which costs shall
include, without limitation, the following: (i) internal labor costs, including
wages and salaries, and benefits and overhead allocable to such labor costs
(with the overhead allocation percentage equal to
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
), and (ii) other direct costs and out-of-pocket expenses on a pass-through
basis (e.g., equipment, materials, supplies, contract services, etc.).
(c) "Dark Fiber" means fiber provided without electronics or optronics, and
which is not "lit" or activated; provided that such fiber may be used in any
manner and for any purpose permitted under Article XI.
(d) "Estimated Delivery Date" means, with respect to each Segment of the
QWEST System to be delivered hereunder, the date set forth in Exhibit A hereto
with respect to such Segment, as any such
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date may be extended for and during (A) the period of any delay described in
Article XX and/or (B) the period of any payment default pursuant to Section 18.1
with respect to any Segment and/or (C) the aggregate number of days of the GTE
Review Period or Periods (in the event of multiple remedy attempts) under
Section 4.2 with respect to such Segment.
(e) "Impositions" means all taxes, fees, levies, imposts, duties, charges or
withholdings of any nature (including, without limitation, gross receipts taxes
and franchise, license and permit fees), together with any penalties, fines or
interest thereon (except for penalties or interest imposed as a direct result of
acts or failures to act on the part of QWEST) arising out of the transactions
contemplated by this Agreement and/or imposed upon the QWEST System by any
federal, state or local government or other public taxing authority.
(f) "Indefeasible Right of Use" or "IRU" means (i) an exclusive,
indefeasible right of use, for the purposes described herein, in the GTE Fibers,
as granted in Article II, and (ii) an associated non-exclusive, indefeasible
right of use, for the purposes described herein, in the Associated Property;
provided that the IRUs granted hereunder do not provide GTE with any ownership
interest in or other rights to physical access to, control of, modification of,
encumbrance in any manner of, or other use of the QWEST System except as
expressly set forth herein.
(g) This item left blank intentionally.
(h) "POP" means the GTE point of presence at locations along the QWEST
System route.
(i) "PSWP" means Planned System Work Period, which is a prearranged period
of time reserved for performing certain work on the QWEST System that may
potentially impact traffic. Generally, this will be restricted to weekends,
avoiding the first and last weekend of each month and high-traffic weekends. The
PSWP shall be agreed upon pursuant to Exhibit H.
(j) "QWEST System" shall have the meaning ascribed thereto in Recital A.
(k) When used herein in connection with a covenant of a party to this
Agreement "best efforts" shall not obligate such party, unless otherwise
specifically required by the operative covenant, to make unreimbursed
expenditures (other than costs or expenditures that would have been required of
such party in the absence of the requirements of such covenant) that are
material in amount, in light of the circumstances to which the requirement to
use best efforts applies. In confirmation of their consent and agreement to the
terms and conditions contained in this IRU Agreement and intending to be legally
bound hereby, the parties have executed this IRU Agreement as of the date first
above written.
"QWEST":
QWEST COMMUNICATIONS CORPORATION, a
Delaware corporation
By:_/s/___________________________________________________
Name:
Title:
"GTE":
GTE INTELLIGENT NETWORK SERVICES INCORPORATED, a
Delaware corporation
By:___/s/_________________________________________________
Name:
Title:
EXHIBIT A
Page 35
<PAGE>
CONFIDENTIAL TREATMENT
QWEST System Description
EXHIBIT A-1: QWEST System Description and Delivery Dates
GTE - Exhibit A-1
System Description and Delivery Dates
<TABLE>
<CAPTION>
Estimated Estimated
Segment System Route Delivery
No. Segment Miles Date
<S> <C> <C> <C>
1A Chicago - Detroit 305 1/31/98
1B Detroit - Cleveland 165 2/15/98
1C Cleveland - Pittsburgh 162 3/1/98
1D Pittsburgh - Philadelphia 356 3/31/98
1E Philadelphia - Washington, D.C. 138 4/30/98
Chicago - Detroit - Cleveland -
1 Washington DC Total 1,126 4/30/98
2A Cleveland - Columbus 133 10/31/97
2B Columbus - Cincinnati 125 10/31/97
2 Cleveland - Columbus Total 258 10/31/97
3 Cincinnati - Louisville 107 7/30/98
4 Indianapolis - Chicago 215 12/31/97
5 Indianapolis - St. Louis 248 10/31/97
6 St. Louis - Kansas City 297 10/31/97
7 Kansas City - Topeka 75 10/31/97
8 Denver - Topeka 565 10/31/97
9A Denver - Grand Junction 271 10/31/97
9B Grand Junction - Salt Lake City 295 10/31/97
9 Denver - Salt Lake Total 566 10/31/97
10A Salt Lake City - Reno 575 10/31/97
10B Reno - Roseville 136 10/31/97
10 Salt Lake - Roseville Total 711 10/31/97
11A Roseville - Oakland 111 10/31/97
11B Oakland - San Jose 43 10/31/97
11 Roseville - San Jose Total 154 10/31/97
12A San Jose - Salinas 71 10/31/97
12B Salinas - San Luis Obispo 132 10/31/97
12C San Luis Obispo - Santa Barbara 119 10/31/97
12D Santa Barbara - Los Angeles 107 10/31/97
12 San Jose - Los Angeles Total 429 10/31/97
13A Los Angeles - Anaheim 32 10/31/97
13B Anaheim - San Diego 132 10/31/97
13C San Diego - Yuma 235 12/31/97
13D Yuma - Phoenix 187 1/31/98
13 LA - San Diego - Phoenix Total 586 1/31/98
14A Phoenix - Tucson 123 2/29/98
14B Tucson - El Paso 310 3/31/98
14 Phoenix - Tucson - El Paso Total 433 3/31/98
</TABLE>
Page 36
<PAGE>
CONFIDENTIAL TREATMENT
<TABLE>
<CAPTION>
<S> <C> <C> <C>
15A El Paso - San Antonio 586 5/31/98
15B San Antonio - Austin 85 1/31/98
15C Austin - Houston 221 12/31/97
15 El Paso - San Antonio - Houston Total 892 5/31/98
16 Houston - Dallas 269 10/31/97
17A Dallas - Oklahoma City 264 1/31/98
17B Oklahoma City - Tulsa 119 1/31/98
17C Tulsa - Kansas City 256 1/31/98
17 Dallas - Kansas City Total 639 1/31/98
18 Cincinnati - Indianapolis 117 10/31/97
19A Louisville - Nashville 189 9/30/98
19B Nashville - Chattanooga 147 10/31/98
19C Chattanooga - Atlanta 137 10/31/98
19 Louisville - Nashville - Atlanta Total 473 10/31/98
20A Atlanta - Charlotte 261 10/31/98
20B Charlotte - Raleigh 174 8/31/98
20C Raleigh - Richmond 301 10/31/98
20D Richmond - Washington D.C. 110 10/31/98
20 Atlanta - Raleigh - Washington Total 846 10/31/98
21A Chicago - Milwaukee 84 10/31/98
21B Milwaukee - Green Bay 118 10/31/98
21C Green Bay - Minneapolis 295 10/31/98
21D Minneapolis - Des Moines 281 10/31/98
21 Chicago - Des Moines Total 778 10/31/98
22C Des Moines - Omaha 140 10/31/98
22D Omaha - Topeka 224 10/31/98
22 Des Moines - Topeka Total 364 10/31/98
23 Denver - El Paso Total 746 3/31/98
24A Roseville - Chico 98 1/31/98
24B Chico - Redding 75 1/31/98
24C Redding - Medford 177 1/31/98
24D Medford - Eugene 206 1/31/98
24E Eugene - Portland 123 1/31/98
24 Roseville - Portland Total 679 1/31/98
25 Portland - Seattle 182 1/31/98
27 San Jose - San Francisco 56 10/31/97
28A Boston - Albany 208 12/31/97
28B Albany - Buffalo 298 12/31/97
28C Buffalo - Cleveland 197 12/31/97
28 Boston - Cleveland Total 703 12/31/97
29 Albany - New York City 157 5/31/98
30 New York City - Philadelphia 95 5/31/98
Total 12,766 10/31/98
</TABLE>
EXHIBIT A-2: General Route Map
[MAP APPEARS HERE]
EXHIBIT A-3: Detailed Route Maps
[MAPS APPEAR HERE]
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<PAGE>
CONFIDENTIAL TREATMENT
EXHIBIT A-4: Designated End Point and Intermediate Point
Cities
Exhibit A-4
DESIGNATED ENDPOINT and INTERMEDIATE CITIES
<TABLE>
<CAPTION>
CITY ST LATA LATA NAME
<S> <C>
Base Phoenix AZ 666 PHOENIX
Tucson AZ 668 TUCSON
Yuma AZ 666 PHOENIX
Anaheim CA 730 LOS ANGELES
Chico CA 724 CHICO
Los Angeles CA 730 LOS ANGELES
Oakland CA 722 SAN FRANCISCO
Redding CA 724 CHICO
Roseville CA 726 SACRAMENTO
Sacramento CA 726 SACRAMENTO
Salinas CA 736 MONTEREY
San Diego CA 732 SAN DIEGO
San Francisco CA 722 SAN FRANCISCO
San Jose CA 722 SAN FRANCISCO
San Luis Obispo CA 740 SAN LUIS OBISPO
Santa Barbara CA 730 LOS ANGELES
Colorado Springs CO 658 COLORADO SPR.
Denver CO 656 DENVER
Grand Junction CO 656 DENVER
Pueblo CO 658 COLORADO SPR.
Washington DC 236 WASH DC
Atlanta GA 438 ATLANTA
Des Moines IA 632 DES MOINES
Chicago IL 358 CHICAGO
Indianapolis IN 336 INDIANAPOLIS
South Bend IN 332 SOUTH BEND
Topeka KS 534 TOPEKA
Bowling Green KY 464 OWENSBORO
Louisville KY 462 LOUISVILLE
Boston MA 128 EAST MASS
Baltimore MD 238 BALTIMORE
Battle Creek MI 348 GRAND RAPIDS
Detroit MI 340 DETROIT
Minneapolis MN 628 MINNEAPOLIS
Owatonna MN 620 ROCHESTER
Kansas City MO 524 KANSAS CITY
St. Louis MO 520 ST.LOUIS
Charlotte NC 422 CHARLOTTE
Greensboro NC 424 GREENSBORO
Raleigh NC 426 RALEIGH
Rocky Mount NC 951 ROCKY MOUNT
Lincoln NE 958 LINCOLN
Omaha NE 644 OMAHA
Newark NJ 224 NORTH JERSEY
Trenton NJ 222 DELAWARE VALLEY
Albuquerque NM 664 NEW MEXICO
Santa Fe NM 664 NEW MEXICO
Reno NV 720 RENO
Albany NY 134 ALBANY
Buffalo NY 140 BUFFALO
New York NY 132 NEW YORK METRO
Poughkeepsie NY 133 POUGHKEEPSIE
Rochester NY 974 ROCHESTER
Syracuse NY 136 SYRACUSE
Utica NY 136 SYRACUSE
</TABLE>
Page 38
<PAGE>
CONFIDENTIAL TREATMENT
<TABLE>
<S> <C>
White Plains NY 132 NEW YORK METRO
Akron OH 325 AKRON
Cincinnati OH 922 CINCINNATI
Cleveland OH 320 CLEVELAND
Columbus OH 324 COLUMBUS
Dayton OH 328 DAYTON
Toledo OH 326 TOLEDO
Youngstown OH 322 YOUNGSTOWN
Oklahoma City OK 536 OKLAHOMA CITY
Tulsa OK 538 TULSA
Eugene OR 670 EUGENE
Medford OR 670 EUGENE
Portland OR 672 PORTLAND
Salem OR 672 PORTLAND
Harrisburg PA 226 CAPITOL,PA
Philadelphia PA 228 PHILADELPHIA
Pittsburgh PA 234 PITTSBURGH
Greenville SC 430 GREENVILLE
Chattanooga TN 472 CHATTANOOGA
Nashville TN 470 NASHVILLE
Austin TX 558 AUSTIN
Bryan TX 570 HEARNE
Dallas TX 552 DALLAS
El Paso TX 540 EL PASO
Ft. Worth TX 552 DALLAS
Houston TX 560 HOUSTON
Mexia TX 556 WACO
San Antonio TX 566 SAN ANTONIO
Provo UT 660 UTAH
Salt Lake City UT 660 SALT LAKE CITY
Fredericksburg VA 246 CULPEPER
Portsmouth VA 252 NORFOLK
Richmond VA 248 RICHMOND
Seattle WA 674 SEATTLE
Eau Claire WI 352 NORTHWEST WI
Green Bay WI 350 NORTHEAST WI
Milwaukee WI 356 SOUTHEAST WI
</TABLE>
EXHIBIT B
IRU Fee Payment Schedule
1. The IRU fee for each Segment shall be paid in accordance with the following
schedule:
i)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon execution of the IRU Agreement.
ii)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon commencement of the construction of a Segment.
iii)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon completion of conduit installation of such Segment.
iv)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon completion of fiber cable placement in such Segment.
v)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon completion of fiber splicing and completion of civil
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<PAGE>
CONFIDENTIAL TREATMENT
construction in such Segment.
vi)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% on the Acceptance Date for such Segment.
2. The IRU fee for Segment 23 shall be paid in accordance with the
following schedule:
i)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon execution of the IRU agreement.
ii)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon the Acceptance Date for the first 12 Dark Fibers delivered
in accordance with Exhibit A.
iii)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
% upon the Acceptance Date for the second 12 Dark Fibers
delivered in accordance with Exhibit A.
3. For purposes of determining the occurrence of the construction
milestones triggering payment obligations hereunder, the
following shall apply:
i) Commencement of construction of a Segment shall mean
the establishment of a field office followed promptly by
mobilization of either in-house crews or the subcontract of
a construction manager.
ii) Completion of conduit installation shall mean the
completion of installation of the conduit system for the
Segment, with handholds and manholes, ready for Cable
pulling.
C. Completion of fiber cable placement shall mean the
fiber cable is either pulled into the conduit or completely
installed in aerial installation, but without splicing. In
the event of aerial construction, the IRU Fee installment
otherwise due upon completion of conduit installation shall
be due and payable at the same time as the installment due
upon completion of fiber cable placement.
D. Completion of fiber splicing and civil construction
shall mean all fibers are spliced and ready for testing and
civil facilities are ready for the customer to occupy and
install their equipment.
E. Acceptance Date shall have the meaning established in
the IRU Agreement.
IV. The IRU Fee shall be calculated at the rate of $
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
per mile.
V. Upon execution of the IRU Agreement, GTE shall pay QWEST an
amount equal to the sum of all payments due pursuant to Section 1
clauses (ii), (iii), (iv), (v), and (vi) of this Exhibit B for
each Segment for which construction has commenced.
EXHIBIT C
Construction Specifications
1.0 General.
The intent of this document is to outline the specifications for
construction of a fiber optic cable system. In all cases, the
standards contained in this document or the standards of the
federal, state, local or private agency having jurisdiction,
whichever is stricter, shall be followed.
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<PAGE>
CONFIDENTIAL TREATMENT
2.0 Material.
Steel or PVC conduit shall be minimum schedule ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## wall
thickness.
Any exposed steel conduit, brackets or hardware (i.e., bridge attachments)
shall be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##.
Handholes shall have a minimum ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## loading rating or ##MATERIAL OMITTED
AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## with
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT## to ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## inches of cover.
Manholes shall have a minimum ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## loading rating.
Innerducts used shall be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## or ##MATERIAL OMITTED AND SEPARATELY
FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##.
Buried cable warning tape shall be ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## wide and display ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##.
Warning signs will display ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT##.
Fiber optic cable shall be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT##.
3.0 Minimum Depths.
Minimum cover required in the placement of conduit shall be ##MATERIAL OMITTED
AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## inches,
except in the following instances:
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<PAGE>
CONFIDENTIAL TREATMENT
(a) The minimum cover in borrow ditches adjacent to roads, highways, railroads
and interstate highways is ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## inches below the cleanout line or
existing grade, whichever is greater.
(b) The minimum cover across streams, river washes and other waterways is
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT## inches below the cleanout line or existing grade, whichever is
greater. Steel conduit will be placed at all such crossings unless the crossing
is directional bored.
(c) At locations where conduit crosses other subsurface utilities or other
structures, the conduit shall be installed to provide a minimum of ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
inches of vertical clearance and applicable minimum depth can be maintained;
otherwise, the conduit will be installed under the existing utility or other
structure. If, however, ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## inches cannot be obtained, the cable
shall be encased in steel pipe rather than conduit. No fiber optic cable shall
be buried without being surrounded by conduit or steel pipe.
(d) In rock, the conduit shall be placed to provide a minimum of ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
inches below the surface of the solid rock, or provide a minimum of ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
inches of total cover, whichever requires the least rock excavation. PVC or HDPE
conduit will be backfilled with ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## inches of select materials (padding) in
rock areas.
(e) In the case of the use/conversion of existing steel pipelines or salvaged
conduit systems, the existing depth shall be considered adequate.
4.0 Buried Cable Warning Tape.
All conduit will be installed with buried cable warning tape except where
existing steel pipelines or salvaged conduit systems are used. The warning tape
shall generally be placed at a depth of ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## inches below grade and
directly above the conduit.
5.0 Conduit Construction.
Conduits may be placed by means of trenching, plowing, jack and bore, or
directional bore. Conduits will generally be placed on a level grade parallel to
the surface, with only gradual changes in grade elevation.
Steel conduit will be joined with ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR
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<PAGE>
CONFIDENTIAL TREATMENT
CONFIDENTIAL TREATMENT##.
All paved city, state, federal and interstate highways and railroad crossings
will be encased in steel conduit. If the crossing is at grade, steel is not
required if the cable is placed with ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## feet of cover or more, and the
crossing is directional bored. All crossings of major streams, rivers, bays and
navigable waterways will be placed in ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## conduit.
At all foreign utility/underground obstacle crossings, ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## conduit will
be placed and will extend at least ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR CONFIDENTIAL TREATMENT## feet beyond the outer limits of the
obstacle in both directions.
All jack and bores will use steel conduit.
All directional bores will use ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## conduit.
Any cable placed in rock will be placed in ##MATERIAL OMITTED AND SEPARATELY
FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## conduit.
Any cable placed in swamp or wetland areas will be placed in ##MATERIAL OMITTED
AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## conduit.
All conduits placed on bridges will be ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##.
All conduits placed on bridges shall have expansion joints placed ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
or at least every ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR
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<PAGE>
CONFIDENTIAL TREATMENT
CONFIDENTIAL TREATMENT## feet, whichever is the shorter distance.
6.0 Innerduct Installation.
Innerduct(s) shall be installed in all steel conduits. No cable will be placed
directly in any split/solid steel conduit without innerduct.
Innerduct(s) shall extend beyond the end of all conduits a minimum of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT## inches.
7.0 Cable Installation.
The fiber optic cable shall be installed using a powered pulling winch and
hydraulic-powered assist pulling wheels. The maximum pulling force to be applied
to the fiber optic cable shall be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR CONFIDENTIAL TREATMENT## pounds.
Bends of small radii (less than 20 times the outside diameter of the cable) and
twists that may damage the cable shall be avoided during cable placement.
The cable shall be lubricated and placed in accordance with the cable
manufacturer specifications.
A pulling swivel break-away rated at ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## pounds shall be used at all
times.
All splices will be contained in a handhole or manhole.
A minimum of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## meters of slack cable will be left in all intermediate
handholes or manholes.
A minimum of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## meters of slack cable will be left in all splice
locations.
A minimum of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## meters of slack cable will be left in all facility
locations (i.e., POP sites, switch sites, regens or CEVs).
8.0 Manholes and Handholes.
Manholes shall be placed in traveled surface streets and shall have locking
lids.
Handholes shall be placed in all other areas and be installed with a minimum of
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CONFIDENTIAL TREATMENT
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT## inches of soil covering the lid.
9.0 EMS Markers.
EMS markers shall be placed 6 inches directly above the lid of all buried
handholes and assist points. EMS markers fabricated into the lids of handholes
are acceptable.
10.0 Cable Markers (Warning Signs).
Cable markers (with the same information as buried cable warning tape) shall be
installed at all changes in cable running line direction, splices, waterways,
subsurface utilities, handholes and at both sides of street, highway, bridge or
railroad crossings. At no time shall any markers be spaced more than ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
feet apart in metro areas and ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## feet apart in non-metro areas. Markers
shall be positioned so that they can be seen from the location of the cable and
generally set facing perpendicular to the cable running line.
11.0 Compliance.
All work will be done in strict accordance with federal, state, local and
applicable private rules and laws regarding safety and environmental issues,
including those set forth by OSHA and the EPA. In addition, all work and the
resulting fiber system will comply with the current requirements of all
governing entities (FCC, NEC, DEC and other national, state and local codes).
12.0 As Built Drawings.
As built drawings will contain a minimum of the following:
1) Information showing the location of running line, relative to permanent
landmarks, including but not limited to, railroad mileposts, boundary
crossings and utility crossings.
2) Splice locations
3) Manhole and handhole locations
4) Conduit information (type, length, expansion joints, etc.)
5) Cable information (manufacturer, type of fiber, type of cable, fiber
assignments, final cable lengths)
6) Notation of all deviations from specifications (depth, etc.)
7) ROW detail (type, centerline distances, boundaries, waterways, road
crossings, known utilities and obstacles)
8) Cable marker locations and stationing
9) Regeneration locations and floorplans to include FDP
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<PAGE>
CONFIDENTIAL TREATMENT
assignments (also labeled on site)
Drawings will be updated with actual field data during and after construction.
Metro areas scale shall not exceed 1 inch = 200 feet.
Rural areas scale shall not exceed 1 inch = 500 feet.
As-builts will be provided within ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR CONFIDENTIAL TREATMENT## days after acceptance, in both hard
copy and electronic format (Auto-CAD version 13.0 or later). Updates to the as-
builts will be provided within ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## days of completion of change, like a
relocation project.
13.0 Aerial Construction.
Subject to prior approval by both parties (which approval shall not be
unreasonably withheld), aerial construction methods will only be used when
buried construction techniques are impractical due to environmental conditions,
schedule or economic considerations, right-of-way issues, or code restrictions.
The parties acknowledge that aerial construction on utility towers (not utility
poles) using optical groundwire or all dielectric self-support methods may be
used without GTE approval provided QWEST agrees to give GTE reasonable prior
notice of its decision to use such aerial methods.
Aerial design standards and construction techniques will conform with industry-
accepted practices for aerial fiber optic cable systems. All aerial plant must
comply with applicable national (NEC, NESC, etc.), state and local codes.
The fiber optic cable placed on an aerial system shall be armored and designed
for aerial applications.
The cable will be placed in accordance with manufacturer specifications. Cable
tension will be monitored during placement. Cable rollers will be placed at a
maximum interval of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR CONFIDENTIAL TREATMENT## feet. Cable expansion loops will be placed at every
pole. Cable identification/warning tags will be placed at every pole. All cable
splices will be buried in handholes or manholes.
Cable sheath to suspension strand bonds and grounding will be performed at the
first and last pole of the system and at ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## mile intervals.
Fiber optic cable at all riser poles will be protected with galvanized steel U-
guard from ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## inches below grade to a point
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<PAGE>
CONFIDENTIAL TREATMENT
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL
TREATMENT## inches below the suspension strand. Conduit sweeps will be used to
transition from the U-guard to either a handhole or manhole.
All aerial plant will be designed and constructed with 10M EHS (Class A
galvanized) suspension strand unless otherwise dictated by the pole owners or
field conditions. The fiber optic cable will be double lashed to the suspension
strand using 45 mil stainless lashing wire.
Span length shall account for storm loading (wind and ice) in accordance with
zones outlined in NESC code. Sags and tensions will be calculated in accordance
with industry accepted practices and account for strand size, span length,
ambient temperature at placement and loading. The suspension strand will be
tensioned with a strand dynamometer. A catenary suspension system may be used if
the system exceeds maximum span length specifications.
Prior to attachment to any existing pole line, the system will be inspected for
compliance with applicable codes and standards, as well as the physical
condition of the poles and existing hardware. Any make-ready work will be
reviewed with the pole owner and specifically addressed prior to construction.
If a pole line need be constructed, the preferred poles will be Class 4 (40
feet) and Class 5 (35 feet). Use of the preferred poles will make it unnecessary
to calculate pole loading (horizontal, vertical and bending moments) in most
field conditions. Some unusual conditions may require the use of a stronger
class pole. Depth of placement will be dictated by soil conditions, slope of
terrain and length of pole. Poles will be guyed in accordance with industry-
accepted standards. All pole attachment hardware will be galvanized steel.
Aerial cable will be placed below power attachments and above all other
attachments unless otherwise dictated by the pole owner. Pole contact clearances
and locations will be dictated by current NESC code and the presence of existing
attachments; however, the following minimum objective clearances will apply:
a) Power line -##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR CONFIDENTIAL TREATMENT## inches (below)
b) Non-current carrying power line -##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## inches
c) Telephone, CATV and other signal lines -##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## inches
(above) Verticle clearances for crossings or parallel lines will be dictated by
current NESC code; however, the objective clearance for most objects (roads,
alleys, etc.) Is ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR CONFIDENTIAL TREATMENT## feet (at 100 F) with the exception of railroad
tracks and waterways which have an objective of ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## feet (at
100 F).
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CONFIDENTIAL TREATMENT
14.0 Approval of Deviations From Specifications.
QWEST will seek the approval of GTE, which approval shall not be unreasonably
withheld or delayed, prior to undertaking any construction which will deviate
from the Construction Specifications set forth in this Exhibit C.
EXHIBIT D
Fiber Cable Splicing, Testing and Acceptance Procedures
1. All splices will be performed with an industry-accepted fusion splicing
machine. Qwest will perform two stages of testing during the construction of a
new fiber cable route. Initially, OTDR tests will be taken from one direction.
As soon as fiber connectivity has been achieved to both regen sites, Qwest will
verify and record the continuity of all fibers. Qwest will take and record power
level readings on all fibers in both directions. Qwest will bi-directional OTDR
test all fibers.
2. During the initial construction, it is only possible to measure the fiber
from one direction. Because of this, splices will be qualified during initial
construction with an OTDR from only one direction. The profile alignment system
or light injection detection system on the fusion splicer may be used to qualify
splices as long as a close correlation to OTDR data is established. The pigtails
will also be qualified at this stage using an OTDR and a minimum 1 km launch
reel. All measurements at this stage in construction will be taken at ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
nm.
3. After Qwest has provided end-to-end connectivity on the fibers, bi-
directional span testing will be done. These measurements must be made after the
splice manhole or handhole is closed in order to check for macro-bending
problems. Continuity tests will be done to verify that no fibers have been
"frogged" or crossed in any of the splice points. Once the pigtails have been
spliced, loss measurements will be recorded using an industry-accepted laser
source and a power meter. OTDR traces will be taken and splice loss measurements
will be recorded. Qwest will also store OTDR traces on diskette and on data
sheets. Laser Precision format will be used on all traces. Qwest will provide
three copies of all data sheets and tables, and one set of diskettes with all
traces.
a. The power loss measurements shall be made at ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## nm, and
performed bi-directionally.
b. OTDR traces shall be taken in both directions at ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## nm.
4. The splicing standards are as follows:
a. The loss value of the pigtail connector and its associated splice will not
exceed ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## dB. This value does not include the insertion loss from
its connection to the FDP. For values greater than this, the splice will be
broken and respliced
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until an acceptable loss value is achieved. If, after five attempts, Qwest is
not able to produce a loss value less than ##MATERIAL OMITTED AND SEPARATELY
FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## dB, the splice will be
marked as Out-of-Spec ("OOS") on the data sheet. Each splicing attempt shall be
documented on the data sheet.
b. During initial uni-directional OTDR testing, the objective for each splice
is a loss of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## or less. If, after three attempts, Qwest is not able to
produce a loss value of less than ##MATERIAL OMITTED AND SEPARATELY FILED UNDER
AN APPLICATION FOR CONFIDENTIAL TREATMENT## dB, then ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## dB will be
acceptable. If, after two additional attempts, a value of less than ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
dB is not achievable, then the splice will be marked as OOS on the data sheet.
Each splicing attempt shall be documented on the data sheet.
c. During end-to-end testing of a span (a span shall be FDP to FDP), the
objective for each splice is a bi-directional average loss of ##MATERIAL OMITTED
AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## dB or
less.
d. The standard for each fiber within a span shall be an average bi-
directional loss of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR CONFIDENTIAL TREATMENT## dB or less for each splice. For example, if a given
span has 10 splices, each fiber shall have total bi-directional loss (due to the
10 splices) of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## or less. Each individual splice may have a bi-
directional loss of ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION
FOR CONFIDENTIAL TREATMENT## dB or less, but the average bi-directional splice
loss across the span must be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## dB or less.
5. The entire fiber optic cable system shall be properly protected from
foreign voltage and grounded with an industry-accepted system. The current
system in use by Qwest is depicted in the attached schematic-DWG No. SAH-1
(typical for Surge Arrestor HH Placement).
6. Customer fiber assignments will be consecutive in count and in a separate
buffer tube (or ribbon or fiber bundles) from others. The maximum number of
fibers within a single buffer tube (or ribbon or fiber bundles) shall be 12.
7. The fibers shall be terminated to the FDP with Ultra FC-PC connectors,
unless another type of connector is specified. The pigtails shall be
manufactured with the same glass as the backbone cable to minimize splice loss.
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EXHIBIT E
Fiber Specifications
[This exhibit contains product specification information that is
largely set forth in graphic format]
EXHIBIT E-1
Fiber Deployment Diagram
[Exhibit E-1 is a map of the United States with the heading "Fiber Deployment
Diagram" showing state lines and routes of the fiber optic network upon
completion.]
EXHIBIT F
Specifications for Regeneration Facilities
Qwest will install modular, prefabricated, conditioned space along the right-
of-way to house regenerations and other electronic equipment (supplied by User)
necessary for the operation of the Qwest System.
Regeneration site facilities consist of ##MATERIAL OMITTED AND SEPARATELY FILED
UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## square feet of caged space in
such facilities with separate, lockable, secured 24 hour access. The buildings
will be ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT## feet wide by approximately ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## feet interior
length to provide such square footage. Also included is access to ##MATERIAL
OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT##
amps of DC power provided from a common source backed up by a standby generator
as described below. To the extent provided in the Agreement, any additional
space and/or power required may be made available, with User responsible for
QWEST'S incremental cost. Following are the general specifications of the
buildings and support equipment.
Standard production, metal-framed buildings with steel substructure or
concrete; bullet resistant to 30-06 slugs from 15 feet; walls and ceilings R-19
insulated.
Security-type weatherproof exterior light fixtures, equipped with motion
sensors.
Building is equipped with Marvair Compact II or equivalent redundant HVAC units.
The building platform comes equipped with an external ##MATERIAL OMITTED AND
SEPARATELY FILED UNDER AN APPLICATION FOR CONFIDENTIAL TREATMENT## kw backup
generator designed to provide power during emergency periods. The generator fuel
tanks will have a minimum ##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN
APPLICATION FOR CONFIDENTIAL TREATMENT## gallon capacity. As part of the normal
maintenance, the generator will be exercised twice monthly, running on a load
bank for a minimum
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of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
.
Fire extinguishers are provided one inside the main door, and one
located near the HVAC systems.
A fire suppression system (FM-200) will be in place as the main
overall fire protection coverage.
The building will have an earth ground termination bar (safety
green wire ground) terminated to building steel and/or driven
ground rod.
The building will be equipped with A/C duplex isolated outlets
for testing and miscellaneous equipment. Such outlets shall be
national electronic code and placed every 6 feet around perimeter
walls.
The building will have sufficient lighting.
Two properly sized cable racks will be installed, one from the DC
power source and once from the FDP. Qwest will run properly
sized cables from the common DC power plant to the User-supplied
fuse panel in the User space.
DC power in the amount of
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
amps shall be provided based upon a one (1) for N rectifier format
(i.e.,
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
amp units or
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
amp units). A battery plant capable of handling the load for a
minimum of four (4) hours to ensure uninterruptable power will be
installed in the building. At remote regeneration locations,
QWEST will also provide a battery plant designed to provide at
least
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
, and
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
at all other locations, in both cases with sufficient generator fuel
to provide
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
backup in the event of a power outage. The battery plant shall
incorporate load disconnect protection and batteries capable of
recharging in 12 hours. The battery plant shall also include
dual battery strings with battery disconnects for maintenance
purposes.
Power will be monitored twenty-four (24) hours per day, seven (7)
days a week.
Each party's fibers will be terminated in a separate bulkhead
module within the QWEST fiber distribution panel.
Upon execution of the IRU Agreement, the parties will finalize
the locations of the regeneration facilities in accordance with
Section 7.2 of the IRU Agreement.
Estimated Points
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Segment Route of
Amplifier
No. Segment Miles Presence
Sites
Exhibit G
POP/Regeneration Facility Sites
Segment Estimated Points
Route of Amplifier
No. Segment Miles Presence Sites
1A Chicago to Detroit 305
Chicago to South Bend 2 1
South Bend to Battle Creek 1 1
Battle Creek to Detroit 1 2
1B Detroit to Cleveland 165
Detroit to Toledo 1 0
Toledo to Cleveland 1
1C Cleveland to Pittsburgh 162 1 0
Akron to Youngstown 1 0
Youngstown to Pittsburgh 1 0
1D Pittsburgh to Philadelphia 356
Pittsburgh to Harrisburg 1 3
Harrisburg to Philadelphia 1 1
1E Philadelphia to Washington 138
Philadelphia to Baltimore 2 0
Baltimore to Washington 1 0
2A Cleveland to Columbus 133 1 2
2B Columbus to Cincinnati 125
Columbus to Dayton 1 1
Dayton to Cincinnati 1 0
4 Indianapolis to Chicago 215 1 3
5 Indianapolis to St. Louis 248 1 4
6 St. Louis to Kansas City 297 1 4
7 Kansas City to Topeka 75 1 0
8 Topeka to Denver 565 1 9
9A Denver to Grand Junction 271 1 4
9B Grand Junction to Salt Lake City 295
Grand Junction to Provo 1 4
Provo to Salt Lake City 1 0
10A Salt Lake City to Reno 575 1 9
10B Reno to Roseville 136 1 2
11A Roseville to Oakland 111
Roseville to Sacramento 1 0
Sacramento to Oakland 1 1
11B Oakland to San Jose 43 1 0
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12A San Jose to Salinas 71 1 1
12B Salinas to San Luis Obispo 132 1 2
12C San Luis Obispo to Santa Barbara 119 1 1
12D Santa Barbara to Los Angeles 107 1 1
13A Los Angeles to Anaheim 32 1 0
13B Anaheim to San Diego 132 1 2
13C San Diego to Yuma 235 1 3
13D Yuma to Phoenix 187 1 3
14A Phoenix to Tucson 123 1 1
14B Tucson to El Paso 310 1 5
15A El Paso to San Antonio 586 1 9
15B San Antonio to Austin 85 1 1
15C Austin to Houston 221 1 3
16 Houston to Dallas 269
Houston to Bryan 1 1
Bryan to Dallas 1 2
17A Dallas to Oklahoma City 264 1 0
Ft. Worth to Oklahoma City 1 3
17B Oklahoma City to Tulsa 119 1 1
17C Tulsa to Kansas City 256 1 4
18 Cincinnati to Indianapolis 117 0 1
23 Denver to El Paso 746
Denver to Colorado Springs 1 0
Colorado Springs to Pueblo 1 0
Pueblo to Lamy 1 4
Lamy to Albuquerque 1 0
Albuquerque to El Paso 0 4
Lamy to Santa Fe 1 0
24A Sacramento to Chico 98 1 1
24B Chico to Redding 75 1 0
24C Redding to Medford 177 1 2
24D Medford to Eugene 206 1 3
24E Eugene to Portland 123
Eugene to Salem 0
Salem to Portland 1 0
25 Portland to Seattle 182 1 2
27 San Jose to San Francisco 56 1 0
28A Boston to Albany 208 2 3
28B Albany to Buffalo 298
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Albany to Syracuse 2 1
Syracuse to Rochester 1 1
Rochester to Buffalo 1 0
28C Buffalo to Cleveland 197 0 3
29 Albany to New York City 157 3 1
30 New York City to Philadelphia 95 2 0
21A Chicago to Milwaukee 84 1 1
21B Milwaukee to Green Bay 118 1 1
21C Green Bay to Minneapolis 295
Green Bay to Eau Claire 1 3
Eau Claire to Minneapolis 1 1
21D Minneapolis to Des Moines 281
Minneapolis to Owatonna 1 1
Owatonna to Des Moines 1 3
22C Des Moines to Omaha 140 1 2
22D Omaha to Topeka 224
Omaha to Lincoln 1 1
Lincoln to Topeka 0 2
3 Cincinnati to Louisville 107 0 1
19A Louisville to Nashville 189
Louisville to Bowling Green 1 1
Bowling Green to Nashville 1 0
19B Nashville to Chattanooga 147 1 2
19C Chattanooga to Atlanta 137 1 2
20A Atlanta to Charlotte 261
Atlanta to Greenville 1 2
Greenville to Charlotte 1 1
20B Charlotte to Raleigh 174
Charlotte to Greensboro 1 1
Greensboro to Raleigh 1 1
20C Raleigh to Richmond 301
Raleigh to Rocky Mount 1 0
Rocky Mount to Portsmouth 1 1
Portsmouth to Richmond 1 1
20D Richmond to Washington 110
Richmond to Fredericksburg 1 0
Fredericksburg to Washington 0 0
Total 12,766 93 149
EXHIBIT H
Qwest System Maintenance Specifications and Procedures
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Any party responsible for providing maintenance of the Qwest
System hereunder shall be referred to herein as the "Service
Provider". The Party receiving maintenance services from the
Service Provider hereunder shall be referred to herein as the
"Service Recipient". All other capitalized terms not otherwise
defined herein shall have their respective meanings as set forth
in the IRU Agreement of which this Exhibit forms a part.
1. Maintenance.
(a) Scheduled Maintenance. Routine maintenance and
repair of the Qwest System described in this section ("Scheduled
Maintenance") shall be performed by or under the direction of
Service Provider, at Service Provider's reasonable discretion or
at Service Recipient's request. Scheduled Maintenance shall
commence with respect to each Segment upon the effective date of
the grant of the IRU therein, as provided in the IRU Agreement.
Scheduled Maintenance shall include the following activities:
(i) Patrol of Qwest System route on a regularly
scheduled basis, which will be weekly unless hyrail access is
necessary, in which case, it will be quarterly;
(ii) Maintenance of a "Call-Before-You-Dig"
program and all required and related cable locates;
(iii) Maintenance of sign posts along the
Qwest System right-of-way with the number of the local "Call-Before-
You-Dig" organization and the "800" number for Qwest's
"Call-Before-You-Dig" program; and
(iv) Assignment of fiber maintenance technicians
to locations along the route of the Qwest System at approximately
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
intervals dependent upon terrain and accessability.
(b) Unscheduled Maintenance. Non-routine maintenance
and repair of the Qwest System which is not included as Scheduled
Maintenance ("Unscheduled Maintenance"), shall be performed by or
under the direction of Service Provider. Unscheduled Maintenance
shall commence with respect to each Segment upon the effective
date of the grant of the IRU therein, as provided in the IRU
Agreement. Unscheduled Maintenance shall consist of:
(i) "Emergency Unscheduled Maintenance" in
response to an alarm identification by Service Provider's
Operations Center, notification by Service Recipient or
notification by any third party of any failure, interruption or
impairment in the operation of the Qwest System, or any event
imminently likely to cause the failure, interruption or
impairment in the operation of the Qwest System.
(ii) "Non-Emergency Unscheduled Maintenance" in
response to any potential service-affecting situation to prevent
any failure, interruption or impairment in the operation of the
Qwest System.
Service Recipient shall immediately report the need for
Unscheduled Maintenance to Service Provider in accordance with
procedures promulgated by Service Provider from time to time.
Service Provider will log the time of Service Recipient's report,
verify the problem and dispatch personnel immediately to take
corrective action.
2. Operations Center.
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Service Provider shall operate and maintain an
Operations Center ("OC") staffed twenty-four (24) hours a day,
seven (7) days a week by trained and qualified personnel.
Service Provider's maintenance employees shall be available for
dispatch twenty-four (24) hours a day, seven (7) days a week.
Service Provider shall have its first maintenance employee at the
site requiring Emergency Unscheduled Maintenance activity within
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
after the time Service Provider becomes aware of an event requiring
Emergency Unscheduled Maintenance, unless delayed by
circumstances beyond the reasonable control of Service Provider.
Service Provider shall maintain a toll-free telephone number to
contact personnel at the OC. Service Provider's OC personnel
shall dispatch maintenance and repair personnel along the system
to handle and repair problems detected in the Qwest System, (i)
through the Service Recipient's remote surveillance equipment and
upon notification by Service Recipient to Service Provider, or
(ii) upon notification by a third party.
3. Cooperation and Coordination.
(a) Service Recipient shall utilize an Operations
Escalation List, as updated from time to time, to report and seek
immediate initial redress of exceptions noted in the performance
of Service Provider in meeting maintenance service objectives.
(b) Service Recipient will, as necessary, arrange for
unescorted access for Service Provider to all sites of the Qwest
System, subject to applicable contractual, underlying real
property and other third-party limitations and restrictions.
(c) In performing its services hereunder, Service
Provider shall take workmanlike care to prevent impairment to the
signal continuity and performance of the Qwest System. The
precautions to be taken by Service Provider shall include
notifications to Service Recipient. In addition, Service
Provider shall reasonably cooperate with Service Recipient in
sharing information and analyzing the disturbances regarding the
cable and/or fibers. In the event that any Scheduled or
Unscheduled Maintenance hereunder requires a traffic roll or
reconfiguration involving cable, fiber, electronic equipment, or
regeneration or other facilities of the Service Recipient, then
Service Recipient shall, at Service Provider's reasonable
request, make such personnel of Service Recipient available as
may be necessary in order to accomplish such maintenance, which
personnel shall coordinate and cooperate with Service Provider in
performing such maintenance as required of Service Provider
hereunder.
(d) Service Provider shall notify Service Recipient at
least ten (10) business days prior to the date in connection with
any PSWP of any Scheduled Maintenance and as soon as possible
after becoming aware of the need for Unscheduled Maintenance.
Service Recipient shall have the right to be present during the
performance of any Scheduled Maintenance or Unscheduled
Maintenance so long as this requirement does not interfere with
Service Provider's ability to perform its obligations under this
Agreement. In the event that Scheduled Maintenance is canceled
or delayed for whatever reason as previously notified, Service
Provider shall notify Service Recipient at Service Provider's
earliest opportunity, and will comply with the provisions of the
previous sentence to reschedule any delayed activity.
4. Facilities.
(a) Service Provider shall maintain the Qwest System
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in a manner which will permit Service Recipient's use, in
accordance with the terms and conditions of the IRU Agreement, of
the IRU, the User Fibers and the Associated Property required to
be provided under the terms of the IRU Agreement.
(b) Except to the extent otherwise expressly provided
in the IRU Agreement, Service Recipient will be solely
responsible for providing and paying for any and all maintenance
of all electronic, optronic and other equipment, materials and
facilities used by Service Recipient in connection with the
operation of the Dark Fibers, none of which is included in the
maintenance services to be provided hereunder.
5. Cable/Fibers.
(a) Service Provider shall perform appropriate
Scheduled Maintenance on the Cable contained in the Qwest System
in accordance with Service Provider's then current preventative
maintenance procedures as agreed to by Service Recipient, which
shall not substantially deviate from standard industry practice.
(b) Service Provider shall have qualified
representatives on site any time Service Provider has reasonable
advance knowledge that another person or entity is engaging in
construction activities or otherwise digging within five (5) feet
of the Cable.
(c) Service Provider shall maintain sufficient
capability to teleconference with Service Recipient during an
Emergency Unscheduled Maintenance in order to provide regular
communications during the repair process. When correcting or
repairing Cable discontinuity or damage, including but not
limited to in the event of Emergency Unscheduled Maintenance,
Service Provider shall use reasonable efforts to repair traffic-
affecting discontinuity within
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
after the Service Provider maintenance employee's arrival at the
problem site. In order to accomplish such objective, it is
acknowledged that the repairs so effected may be temporary in
nature. In such event, within
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
after completion of any such Emergency Unscheduled Maintenance,
Service Provider shall commence its planning for permanent
repair, and thereafter promptly shall notify Service Recipient of
such plans, and shall implement such permanent repair within an
appropriate time thereafter. Restoration of open fibers on fiber
strands not immediately required for service shall be completed
on a mutually agreed-upon schedule. If the fiber is required for
immediate service, the repair shall be scheduled for the next
available Planned Service Work Period (PSWP).
(d) In performing repairs, Service Provider shall
comply with the splicing specifications as set forth in Exhibit
D. Service Provider shall provide to Service Recipient any
modifications to these specifications as may be necessary or
appropriate in any particular instance for Service Recipient's
approval, which approval shall not be unreasonably withheld.
(e) Service Provider's representatives that are
responsible for initial restoration of a cut Cable shall carry on
their vehicles the typically appropriate equipment that would
enable a temporary splice, with the objective of restoring
operating capability in as little time as possible. Service
Provider shall maintain and supply an inventory of spare Cable in
storage facilities supplied and maintained by Service Provider at
Page 57
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strategic locations to facilitate timely restoration.
6. Planned Service Work Period (PSWP).
Scheduled Maintenance which is reasonably expected to
produce any signal discontinuity must be coordinated between the
parties. Generally, this work should be scheduled after midnight
and before 6:00 a.m. local time. Major system work, such as
fiber rolls and hot cuts, will be scheduled for PSWP weekends. A
calendar showing approved PSWP will be agreed upon in the last
quarter of every year for the year to come. The intent is to
avoid jeopardy work on the first and last weekends of the month
and high-traffic holidays.
7. Restoration.
(a) Service Provider shall respond to any interruption
of service or a failure of the Dark Fibers to operate in
accordance with the specifications set forth in Exhibit D (in any
event, an "Outage") as quickly as possible (allowing for delays
caused by circumstances beyond the reasonable control of Service
Provider) in accordance with the procedures set forth herein.
(b) When restoring a cut Cable in the Qwest System,
the parties agree to work together to restore all traffic as
quickly as possible. Service Provider, promptly upon arriving on
the site of the cut, shall determine the course of action to be
taken to restore the Cable and shall begin restoration efforts.
Service Provider shall splice fibers tube by tube or ribbon by
ribbon or fiber bundle by fiber bundle, rotating between tubes or
ribbons operated by the separate Interest Holders (as defined in
paragraph 9(a)), including Service Recipient, in accordance with
the following described priority and rotation mechanics; provided
that, lit fibers in all buffer tubes or ribbons or fiber bundles
shall have priority over any dark fibers in order to allow
transmission systems to come back on line; and provided further
that, Service Provider will continue such restoration efforts
until all lit fibers in all buffer tubes or ribbons are spliced
and all traffic restored. In general, priority among Interest
Holders affected by a cut shall be determined on a rotating
restoration-by-restoration and Segment-by-Segment basis, to
provide fair and equitable restoration priority to all Interest
Holders, subject only to such restoration priority to which Qwest
is contractually obligated prior to the date of the Agreement.
Service Provider shall use all reasonable efforts to implement a
Qwest System-wide rotation mechanism on a Segment-by-Segment
basis so that the initial rotation order of the Interest Holders
in each Segment is varied (from earlier to later in the order),
such that as restorations occur, each Interest Holder has
approximately equivalent rotation order positions across the
Qwest System. Additional participants in the Qwest System that
become Interest Holders after the date hereof shall be added to
the restoration rotation mechanism.
(c) The goal of emergency restoration splicing shall
be to restore service as quickly as possible. This may require
the use of some type of mechanical splice, such as the "3M Fiber
Lock" to complete the temporary restoration. Permanent
restorations will take place as soon as possible after the
temporary splice is complete.
8. Subcontracting.
Service Provider may subcontract any of the maintenance
services hereunder; provided that Service Provider shall require
the subcontractor(s) to perform in accordance with the
requirement and procedures set forth herein. The use of any such
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subcontractor shall not relieve Service Provider of any of its
obligations hereunder.
9. Fees and Costs.
(a) Scheduled Maintenance Fees. The fees payable for
any and all Scheduled Maintenance hereunder shall be determined
in accordance with the following provisions. During any time
after the Acceptance Date for any Segment but subject to
paragraph 10 below, Qwest shall be the Service Provider and
provide Scheduled Maintenance at a cost not to exceed $
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
per route mile per year, subject to the CPI adjustment described below
(the "Qwest Fixed Fee") and Unscheduled Maintenance as provided
in subparagraph 9 below. The Scheduled Maintenance fee payable
by Service Recipient shall be equal to a pro rata share of
Qwest's Costs based first upon the number of conduits so
maintained by Qwest and included in such Costs and second upon
the number of Interest Holders (as defined in Section 10.4 of the
Agreement) in the portion of the Qwest System so maintained by
Qwest and included in such Costs; provided however, the total fee
shall in no event exceed the amount of the Qwest Fixed Fee as
adjusted by the CPI-U Adjustment.
A quarter of the first such Scheduled Maintenance fee with
respect to each Segment will be due and payable thirty (30) days
after the Acceptance Date with respect to such Segment.
Thereafter, one quarter of such fee shall be due quarterly. All
fees shall be paid by Service Recipient within thirty (30) days
of receipt of invoice therefor. The Qwest Fixed Fee, if
applicable, may be adjusted annually, in Qwest's Sole discretion,
beginning with the first anniversary date of the execution date
of this Agreement, for increases in the United States Bureau of
Labor Statistics, CPI-U All Services Index (unadjusted), as
originally published. Said adjustment shall be hereinafter
referred to as "CPI-U Adjustment". Such fee, as adjusted by the
CPI-U Adjustment, shall be equal to the product of the fee
specified herein multiplied by the fraction (i) whose numerator
is the CPI-U All Services for March of the previous calendar year
for which the adjustment to the fee is being made, and (ii) whose
denominator is the CPI-U All Services for March of the preceding
year. The adjusted fee shall remain in effect until the next
annual fee is due, when a new adjusted fee fixed pursuant to this
provision shall become effective. In no event shall the amount
of the fee as adjusted pursuant to this provision be less than
the amount of fee in effect for the immediately-preceding year.
The parties agree that the Index for March 1995 is defined as
151.4. In the event that the Bureau of Labor Statistics (or any
successor organization) changes the current base of the CPI-U
from 1982-84 = 100, the calculation of a fee under this provision
shall be adjusted to ensure that Qwest receives the same amount
as it would have had, had the base not been changed. In the
event the Bureau of Labor Statistics (or any successor
organization) no longer publishes the CPI-U, Qwest may, subject
to Service Recipient's agreement (which shall not be unreasonably
withheld), designate the statistical index it deems most
appropriate for collocation of adjustments to a fee and, from the
date the CPI-U ceased to be published, such index shall be used
to make adjustments in a fee under this provision.
(b) Unscheduled Maintenance Fees. If the aggregate
amount of the Costs of Unscheduled Maintenance required as a
result of any single event or multiple, closely-related events is
less than
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
Page 59
<PAGE>
CONFIDENTIAL TREATMENT
, such Costs shall be borne by Service Provider. For any other
Unscheduled Maintenance, the Costs thereof shall be allocated
among the various Interest Holders in the conduit, cable an/or
fibers affected thereby as follows: (i) Costs of Unscheduled
Maintenance solely to or affecting a conduit or cable which
houses fibers of a single Interest Holder shall be borne 100% by
such Interest Holder; (ii) Costs of Unscheduled Maintenance to or
affecting a conduit which houses multiple innerduct conduits, not
including such Costs attributable to the repair or replacement of
fiber therein, shall be borne proportionately by the Interest
Holds in each of the affected innerduct conduits based on the
ratio that such affected conduit bears to the total number of
affected innerduct conduits, and (iii) Costs of Unscheduled
Maintenance attributable to the repair or replacement of fiber,
including the acquisition, installation, inspection, testing and
splicing thereof, shall be borne proportionately by the Interest
Holders in the affected fiber, based on the ratio that the number
of affected fibers subject to the interest of each such Interest
Holder bears to the total number of affected fibers. All such
Costs which are allocated to Service Recipient pursuant to the
foregoing provisions shall be the responsibility of and paid by
Service Recipient within thirty (30) days after its receipt from
Service Provider of an invoice therefor.
(c) Costs. "Costs" means the actual, direct costs
paid or payable in accordance with the established accounting
procedures generally used by each party, as the case may be, and
which it utilizes in billing third parties for reimbursable
projects, which costs shall include, without limitation, the
following: (i) labor costs, including wages and salaries, and
benefits and overhead allocable to such labor costs (overhead
allocation percentage shall not exceed the lesser of (x) the
percentage Service Provider typically allocates to its internal
projects or (y)
##MATERIAL OMITTED AND SEPARATELY FILED UNDER AN APPLICATION FOR
CONFIDENTIAL TREATMENT##
, and (ii) other direct costs and out-of-pocket expenses on a pass-
through basis (e.g., equipment, materials, supplies, contract
services, etc.).
10. Term.
(a) Service Provider's obligation to perform
maintenance on the relevant portion of the Qwest System shall be
for an initial term expiring June 30, 2006. Qwest shall be the
Service Provider. Thereafter, Qwest shall have no obligation to
provide Scheduled or Unscheduled Maintenance hereunder, but shall
be entitled to continue to provide maintenance under the terms
and conditions of this agreement.
(b) Notwithstanding Section 10(a) above, Qwest
represents and warrants that it shall either (1) make a proposal
not later than June 30, 2004, to the several Service Recipients
to continue to serve as the Service Provider for the services
described in this Exhibit H under commercially reasonable terms
for the remainder of the Minimum Period following June 30, 2006,
or (2) provide notice to the Service Recipients that Qwest shall
not continue to provide those services beyond June 30, 2006.
Should Qwest make a proposal under clause (1), the Service
Recipients and Qwest shall negotiate in good faith toward
reaching agreement on those services. If the parties have not
concluded an agreement for continuing services by December 31,
2004, the Service Recipients shall be entitled to solicit
proposals from other vendors and may select whichever vendor or
vendors they jointly agree to use for all or separate portions of
the Qwest System and Service Recipient's fibers and Associated
Property, to include Qwest or separate vendors as each Service
Page 60
<PAGE>
CONFIDENTIAL TREATMENT
Recipient individually selects for its portion of the Qwest System and for its
own fibers and Associated Property. Should Qwest provide notice under clause
(2), the Service Recipients may solicit proposals from other vendors and may
select another vendor or vendors to assume after June 30, 2006, the Service
Provider responsibilities, and Qwest agrees to cooperate fully in the
negotiations and transition period.
EXHIBIT I
UNDERLYING RIGHTS AND
---------------------
UNDERLYING RIGHTS REQUIREMENTS
------------------------------
Note: Prior to April 6, 1995 Qwest Communications Corporation was known as
"Southern Pacific Telecommunications Company," and the documents listed
below that predate April 6, 1995 are in that former name.
Pueblo Easements:
Easement Agreement dated October 25, 1995 between the Pueblo of Santa Ana and
Qwest Communications Corporation.
Easement Agreement dated February 2, 1996 between the Pueblo of Santo Domingo
and Qwest Communications Corporation.
Easement Agreement dated February 26, 1996 between the Pueblo of San Felipe and
Qwest Communications Corporation.
Easement Agreement dated April 12, 1996 between the Pueblo of Isleta and Qwest
Communications Corporation.
Easement Agreement dated June 6, 1996 between the Pueblo of Sandia and Qwest
Communications Corporation.
SPTCo Easement:
Easement Agreement dated September 30, 1991 between Southern Pacific
Transportation Company, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Fifth Amendment to Easement Agreement dated August 9, 1996 between Southern
Pacific Transportation Company, as Grantor, and Qwest Communications
Corporation, as Grantee.
D&RGW Easement:
Easement Agreement dated September 30, 1991 between Denver and Rio Grande
Western Railroad Company, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
First Amendment to Easement Agreement dated July 14, 1993 between Denver and Rio
Grande Western Railroad Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
Second Amendment to Easement Agreement dated May 1, 1995 between Denver and Rio
Grande Western Railroad Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
SSW Easement:
Easement Agreement dated September 30, 1991 between St. Louis Southwestern
Railway, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
Second Amendment to Easement Agreement dated November 16, 1994 between St. Louis
Page 61
<PAGE>
CONFIDENTIAL TREATMENT
Southwestern Railway, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
ATSF Easement
Master Rail Corridor Fiber Optic Agreement dated December 5, 1994 between The
Atchison, Topeka and Santa Fe Railway Company, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
CSX Easement:
Fiber Optic Placement Agreement dated as of March 1, 1995 between CSX
Transportation, Inc., as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Letter Agreement dated as of March 1, 1995 between CSX Transportation, Inc., as
Grantor, and Southern Pacific Telecommunications Company, as Grantee.
DART Easement:
Fiber Optics Agreement dated as of February 3, 1994 between Dallas Area Rapid
Transit, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
First Amendment to Fiber Optics Agreement dated as of November 13, 1995 between
Dallas Area Rapid Transit, as Grantor, and Southern Pacific Telecommunications
Company, as Grantee.
Fiber Optics Easement dated as of December 21, 1994 between Dallas Area Rapid
Transit, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
MTA Easement:
(SPTCo Easement Agreement dated September 30, 1991 was assigned as part of sale
of route.)
Amendment to Easement Agreement dated January 13, 1995 between the Los Angeles
County Metropolitan Transportation Authority, as Grantor, and Southern Pacific
Telecommunications Company, as Grantee.
First Severance Agreement and Amendment to Easement Agreement dated June 23,
1995 between Los Angeles County Metropolitan Transportation Authority and
Southern Pacific Telecommunications Company.
Public Easements:
License Agreement dated March 2, 1993 between the Utah Department of
Transportation and Southern Pacific Telecommunications Company.
Agreement dated March 17, 1992 between The Moffat Tunnel Improvement District
and Southern Pacific Telecommunications Company.
License Agreement dated September 11, 1995 between the City and County of
Denver, Board of Water Commissioners and SP Construction Services (covering the
Highline Canal Property).
License Agreement dated August 30, 1995 between the City and County of Denver,
Board of Water Commissioners and SP Construction Services (covering Conduit
Number 55).
License Agreement dated August 30, 1995 between the City and County of Denver,
Board of Water Commissioners and SP Construction Services (covering Conduit
Number 96).
License Agreement No. 95-01-25 dated July 24, 1995 between the City of Aurora,
Director of Utilities and Qwest Communications Corporation.
Page 62
<PAGE>
CONFIDENTIAL TREATMENT
License Agreement dated August 18, 1995 between the City of Aurora, Director of
Utilities and Qwest Communications Corporation.
Arapahoe County Street Cut and R.O.W. Use Permit Nos. SC5212, SC5213, SC5193,
SC5191, SC5190, SC5194, SC5195, and SC5192 issued to Southern Pacific
Telecommunications Company by Arapahoe County.
Utility Permit Nos. 596067, 595099, 95-145, 95-147, and 95-149 issued to
Southern Pacific Telecommunications Company by the Colorado Department of
Transportation.
Permit for Right-of-Way Use and/or Construction Permit No. 1095 1262 E issued by
SP Construction Services by Douglas County.
Utility Permit Nos. 7528, 7526, and 7525 issued to Qwest Communications
Corporation by the Colorado Department of Transportation.
Permit dated March 3, 1995 issued to SP Telecom Construction Services by the
Huerfano County Road and Bridge Department.
Permit for Construction and Installation of Communication Facilities in Public
Rights of Way (Permit No. TFI-95-002) dated February 21, 1995 issued to
Southern Pacific Telecommunications Company by Las Animas County.
Contractor License No. 70 dated May 9, 1995 issued to Southern Pacific
Telecommunications by the Town of Aguilar.
Permit dated April 28, 1995 issued to Southern Pacific Telecommunications
Company by the Town of Aguilar.
Right-of-Way 2983, Book 29, dated March 22, 1995 between the State of Colorado,
State Board of Land Commissioners, as Grantor, and Qwest Communications
Corporation, as Grantee.
Letter dated April 25, 1995 from the City of Trinidad, authorizing SP Telecom to
proceed with construction on the North Linden Avenue Communication Conduits.
Ordinance No. 950310 issued by the City of Kansas City, Missouri, granting
Southern Pacific Telecommunications Company and MCI Telecommunications
Corporation the right to install and maintain underground telecommunication
lines.
Missouri Highway and Transportation Commission Permit Nos. 6-95-00288, 6-95-
00286, 6-95-00287, 4-95-00682, 4-95-00681, 4-95-00683, and 4-95-00662 and
Excavation Permit(s) Receipts.
Private Easements:
Easement dated November 21, 1995 between American Federation of Human Rights, as
Grantor and Qwest Communications Corporation, as Grantee.
Easement dated September 26, 1995 between Ray W. Harness and Dorothy Elaine
Harness, as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated December 4, 1995 between James G. Armstrong and Bessie M.
Armstrong, as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Louis P. Vezzani and Evelyn M. Vezzani, as
Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Walsenburg Sand and Gravel Company, as
Grantor and Qwest Communications Corporation, as Grantee.
Easement dated March 29, 1995 between Joe Mario Amedei, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Lindo P. Vezzani and Sharron L. Vezzani,
Page 63
<PAGE>
CONFIDENTIAL TREATMENT
as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated May 19, 1995 between Ludvik Propane Gas, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Samuel J. Capps, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated April 17, 1995 between John James Fatur, as Grantor and Qwest
Communications Corporation, as Grantee.
Easement dated May 15, 1995 between Mark Bracco and Vicki Lynn Graham, as
Grantors and Qwest Communications Corporation, as Grantee.
Easement between Pamela L. Breitbarth (2/19/96), Virginia A. Buczek (4/17/95),
Ross A. Swanson (7/17/95), James R. Coressel (4/16/95) and Imogene Coressel
(4/16/95), as Grantors and Qwest Communications Corporation, as Grantee.
Easement dated March 30, 1995 between Bud Adams and Janna Adams, as Grantors,
and Qwest Communications Corporation, as Grantee.
Easement dated March 31, 1995 between Trinidad Properties, Inc. and MYBI
Partnership, as Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated June 6, 1995 between Rose Wirth, as Grantor, and Qwest
Communications Corporation, as Grantee.
Easement dated May 5, 1995 between Harold A. Winter and Viola A. Winter, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated May 18, 1995 between Ayuda Me Dios, as Grantor, and Qwest
Communications Corporation, as Grantee.
Easement dated April 19, 1995 between Gabriel Saliba and Mary J. Saliba, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated June 1, 1995 between Interstate Underground Warehouse and
Industrial Park, Inc., as Grantor, and Qwest Communications Corporation, as
Grantee.
Easement dated May 26, 1995 between Delbert Rustman and Juanita Rustman, as
Grantors, and Qwest Communications Corporation, as Grantee.
Easement dated August 28, 1996 between Red Creek Ranch, Inc., as Grantor and
Qwest Communications, as Grantee (Pueblo, CO).
Miscellaneous Easements
Grant of Right of Way and Easement dated December 20, 1961 between J. A.
Humphrey and A. Pollard Simons, as Grantors, and American Liberty Pipe Line
Company, as Grantee.
Amendment to Right-of-Way Agreement dated April 19, 1994 between Haynes/LICO
Properties II, as Grantor, and Southern Pacific Telecommunications Company, as
Grantee.
Amendment to Right of Way Grant dated January 31, 1996 between Prestonwood Golf
Club Corporation, as Grantor, and Qwest Communications Corporation, as Grantee.
Miscellaneous Documents:
SP Construction Services Safety Manual
Railroad Safety-Rules Governing Contractors Working on Railroads
Railroad Rules and Instructions for Maintenance of Way and Engineering and
Operating Manuals for Southern Pacific Lines
Page 64
<PAGE>
CONFIDENTIAL TREATMENT
The Atchison, Topeka and Santa Fe Railway Company Manual
Page 65
<PAGE>
CONFIDENTIAL TREATMENT EXHIBIT 10.4
FIRST AMENDMENT TO IRU AGREEMENT
This Amendment to IRU Agreement ("Amendment") is made and entered into as
of the 13th day of August, 1997, by and between Qwest Communications Corporation
("Qwest") and GTE Intelligent Network Services Incorporated ("GTE").
RECITALS
A. Qwest and GTE previously entered into an IRU Agreement dated as of
May 2, 1997 (the "Agreement").
B. Qwest and GTE wish to amend the Agreement to add additional Segments
and make certain modifications to the Agreement.
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Qwest and GTE agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings given to them in the Agreement.
2. (a) In accordance with Section 1.1(a) and subject to the provisions
of the Agreement, Qwest hereby grants GTE an IRU in twenty four (24) Dark Fibers
in the following additional Segments which shall be included in the description
of Segments on Exhibits A-1 and A-3 of the Agreement (the "Additional Segments")
and shall be added to and included within the System Route for purposes of the
Agreement:
<TABLE>
<CAPTION>
Estimated Estimated
Segment No. Segment System Route Miles Delivery Date
- ---------- ------- ------------------ --------------
<S> <C> <C> <C>
43 Atlanta-Tallahassee 325 12/15/98
44 Lake City-Tampa 268 12/15/98
45 Tampa-Miami 285 3/31/98
46 Miami-Jacksonville 345 8/31/98*
47A Jacksonville-Augusta 282 2/28/99
42B&C Tallahassee-Jacksonville 164 12/15/98
48 Augusta-Charlotte 198 3/31/99
Total Estimated Mileage 1867
</TABLE>
* This delivery date is contingent upon the acquisition of an SMF-28 fiber
route. In the event the SMF-28 fiber route is not used, the estimated delivery
date for this Segment is 3/31/99.
<PAGE>
CONFIDENTIAL TREATMENT
(b) With respect to Segment 48 from Augusta to Charlotte, Qwest and GTE
agree that in the event Qwest is unable to secure the necessary underlying right
of way required to convey Segment 48 in accordance with the requirements of the
Agreement and this Amendment, Qwest shall have the right to replace Segment 48
with a Segment from Augusta to Greenville as follows (the "Alternate Segment"):
Estimated Estimated
Segment No. Alternate Segment System Route Miles Delivery Date
- ---------- ----------------- ------------------ -------------
49 Augusta-Greenville 155 3/31/99
In the event a substitution is made under this provision, the parties agree that
the consideration for the Alternate Segment shall reflect the mileage of that
Segment and GTE shall be entitled to a credit for any overages paid for mileage
attributable to Segment 48.
3. Notwithstanding Section 3.1 of the Agreement, Qwest shall have the
right to utilize SMF-28 fiber on Segment 46 from Miami to Jacksonville, Florida;
provided, that in the event SMF-28 fiber is used on said Segment, Qwest will
make space available to GTE, at no cost to GTE, in two (2) regeneration
facilities along the route from Miami to Jacksonville in accordance with Section
7.2(a) of the Agreement. In addition, in the event SMF-28 fiber is used, the
purchase price for Segment 46 shall be adjusted to reflect a price of [*Material
Omitted and Separately Filed Under an Application for Confidential Treatment]
per route mile for that Segment only.
4. Subject to all the provisions of Section 7.2, Qwest will provide GTE
with additional regeneration and terminal facilities as mutually agreed to by
the parties and to be included on Exhibit F to the Agreement upon identification
by the parties. GTE agrees to pay Qwest the sum of [*Material Omitted and
Separately Filed Under an Application for Confidential Treatment] per site for
regeneration sites (estimated to be thirteen (13) regeneration sites) and
[*Material Omitted and Separately Filed Under an Application for Confidential
Treatment] per site for terminal sites (estimated to be twenty one (21) terminal
sites). Payment for facilities identified under this paragraph shall be due and
payable on a Segment by Segment basis upon completion of fiber splicing and
civil construction for the Segment associated with the facilities.
5. GTE hereby agrees to pay Qwest an amount equal to [*Material Omitted
and Separately Filed Under an Application for Confidential Treatment] per route
mile for the Additional Segments. The consideration for the Additional Segments
shall be payable according to the schedule set forth in paragraph 1 of Exhibit B
of the Agreement. The first payment shall be due and payable within [*Material
Omitted and Separately Filed Under an Application for Confidential Treatment]
after execution of this Amendment by both parties. The balance of the payments
shall be invoiced by Qwest as provided in Section 2.2 of the Agreement.
2
<PAGE>
CONFIDENTIAL TREATMENT
6. With respect to the Additional Segments only, Section 25.3(b) of the
Agreement is amended to provide that GTE shall not sell, assign, lease, grant an
IRU with respect to, exchange, encumber, or otherwise in any manner transfer or
make available in any manner to a Capacity Reseller any of GTE's rights in the
whole or discrete GTE Fibers at a capacity in excess of 24 DS-3s or 2 OC-12s or
any other designation for an equivalent band width, or engage in substantive
discussions or negotiations with respect thereto. GTE's obligations under
Section 25.3(a) remain in effect and are binding upon the Additional Segments.
7. Except as modified in this Amendment, all other provisions of the
Agreement shall be applicable to the Additional Segments and Qwest and GTE
hereby confirm and ratify in all respects the terms and conditions of the
Agreement, as amended by this Amendment.
Qwest and GTE have executed this Amendment effective as of the day first
written above.
QWEST COMMUNICATIONS GTE INTELLIGENT NETWORK SERVICES
CORPORATION INCORPORATED
By_____________________________ By_____________________________
Name: Name:
Title: Title:
Date: Date:
3
<PAGE>
CONFIDENTIAL TREATMENT EXHIBIT 10.5
SECOND AMENDMENT TO IRU AGREEMENT
This Amendment to IRU Agreement ("Amendment") is made and entered
into as of the _____ day of May, 1998, by and between Qwest
Communications Corporation ("Qwest") and GTE Intelligent Network Services
Incorporated ("GTE").
RECITALS
A. Qwest and GTE previously entered into an IRU Agreement dated as of
May 2, 1997 (the "Agreement").
B. Qwest and GTE wish to amend the Agreement to add additional Dark
Fibers and make certain modifications to the Agreement.
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Qwest and GTE agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings given to them in the Agreement.
2. In accordance with Section 1.1(a) and subject to the provisions of
the Agreement, Qwest hereby grants GTE an IRU in six (6) Dark Fibers between the
Qwest POP in Oakland, California located at 250 5th Street and the Qwest manhole
at the east end of the Bay Bridge, a distance of approximately 4.5 miles (the
"Additional Dark Fibers"). The Additional Dark Fibers shall be included within
the System Route for purposes of the Agreement.
3. GTE hereby agrees to pay Qwest an amount equal to [*Material Omitted
and Separately Filed Under an Application for Confidential Treatment] per route
mile for the Additional Dark Fibers, being a total of [*Material Omitted and
Separately Filed Under an Application for Confidential Treatment], payable
[*Material Omitted and Separately Filed Under an Application for Confidential
Treatment].
4. In addition to the Additional Dark Fibers, Qwest agrees to provide
GTE with six (6) Dark Fibers on a temporary lease basis between the manhole on
the San Francisco end of the Bay Bridge and the Qwest POP located at 60 Federal
Street (the "Lease Fibers"). The Lease Fibers will be provided to GTE [*Material
Omitted and Separately Filed Under an Application for Confidential Treatment]
for a term ending December 31, 1998.
5. Except as modified in this Agreement, all other provisions of the
Agreement shall be applicable to the Additional Dark Fibers.
<PAGE>
CONFIDENTIAL TREATMENT
Qwest and GTE have executed this Amendment effective as of the day first
written above.
QWEST COMMUNICATIONS GTE INTELLIGENT NETWORK SERVICES
CORPORATION INCORPORATED
By_____________________________ By_____________________________
Name: Name:
Title: Title:
Date: Date:
2
<PAGE>
CONFIDENTIAL TREATMENT EXHIBIT 10.6
THIRD AMENDMENT TO IRU AGREEMENT
This Amendment to IRU Agreement ("Amendment") is made and entered into as
of the 16th day of November, 1998, by and between Qwest Communications
Corporation ("QWEST") and GTE Intelligent Network Services Incorporated ("GTE").
RECITALS
A. QWEST and GTE previously entered into an IRU Agreement dated as of May
2, 1997, as amended by the First Amendment dated August 13, 1997 and the
Second Amendment dated May 29, 1998 (the "Agreement").
B. QWEST and GTE wish to amend the Agreement to add additional Dark
Fibers and make certain modifications to the Agreement
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
QWEST and GTE agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings given to them in the Agreement.
2. In accordance with the provisions of Section 1.1(b), the parties
agree to amend the route of Segment 44, from Lake City to Tampa in accordance
with the map attached hereto as Exhibit A, and to include the spur from
Bellview, Florida to Orlando, Florida as part of Segment 44. The Segment shall
be subdivided in Subsegments as follows: Segment 44A, Lake City to Bellview,
Segment 44B, Bellview to Tampa, and Segment 44C, Bellview to Orlando. The total
estimated route mileage for the new Segment 44, including the spur, remains at
268. Further, in accordance with Section 1.1(a) and subject to the provisions of
the Agreement, QWEST hereby grants GTE and IRU in twenty four (24) Dark Fibers
in the new Segment 52, Orlando to Titusville, containing an estimated 42 route
miles. Further, in accordance with Section 1.1(a) and subject to the provisions
of the Agreement, QWEST hereby grants GTE an IRU in twenty four (24) Corning
SMF-28 Dark Fibers in a diverse route from QWEST's POP facility at 115 North
Harrington Avenue, Raleigh, NC, to GTE's POP facility at 3632 North Roxboro
Road, Durham, NC containing an estimated 72.2 route miles (42.8 miles of OPGW
and 29.4 miles of terrestrial fiber), hereinafter referred to as the GTE Durham
Endlink.
3. GTE hereby agrees to pay QWEST as follows for the additional fibers:
for the twenty four (24) Dark Fibers in Segment 52, Orlando to Titusville, GTE
will pay QWEST the lump sum of [*Material Omitted and Separately Filed Under an
Application for Confidential Treatment]. For the twenty four (24) Dark Fibers in
the GTE Durham Endlink, GTE will pay QWEST the lump sum of [*Material Omitted
and Separately Filed Under an Application for Confidential Treatment].
<PAGE>
CONFIDENTIAL TREATMENT
4. The Estimated Delivery Date for Segment 52, Orlando to Titusville, is
December 31, 1998. The Estimated Delivery Date for the GTE Durham Endlink is
June 15, 1999.
5. The route miles of Segment 52 and the GTE Durham Endlink are exempted
from the provisions of Article 1.1(c) of the Agreement.
6. Except as modified in this Agreement, all other provisions of the
Agreement shall apply.
QWEST and GTE have executed this Amendment effective as of the day first
written above.
QWEST COMMUNICATIONS GTE INTELLIGENT NETWORK SERVICES
CORPORATION INCORPORATED
By_____________________________ By_____________________________
Name: Name:
Title: Title:
Date: Date:
2
<PAGE>
CONFIDENTIAL TREATMENT EXHIBIT 10.7
FOURTH AMENDMENT TO IRU AGREEMENT
This Amendment to IRU Agreement ("Amendment") is made and entered into as
of the 5th day of February, 1999, by and between Qwest Communications
Corporation ("Qwest") and GTE Intelligent Networks Services Incorporated
("GTE").
RECITALS
A. Qwest and GTE previously entered into an IRU Agreement dated as of
May 2, 1997, as amended by the First Amendment dated August 13, 1997, the
Second Amendment dated May 29, 1998 and the Third Amendment dated
November 16, 1998 (the "Agreement").
B. Qwest and GTE wish to amend the Agreement to add additional Dark
Fiber.
AGREEMENT
In consideration of the foregoing and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Qwest and GTE agree as follows:
1. Unless otherwise defined herein, all capitalized terms used herein
shall have the meanings given to them in the Agreement.
2. In accordance with Section 1.01(a) and subject to the provisions of
the Agreement, Qwest hereby grants GTE an IRU in twenty four (24) Dark Fibers in
a route in Dallas, Texas described as follow: Commencing at 4316 Bryan Street,
then proceeding south along N. Peak Street to Live Oak then, proceeding
southwest along Live Oak to N. Pearl, continuing northwest to San Jacinto,
continuing northeast to Leonard and then continuing southeast to 2323 Bryan;
then from 2323 Bryan Street along Bryan to 4316 Bryan Street (the "Dallas Ring
Fibers"), as shown on the map attached hereto.
3. GTE hereby agrees to pay Qwest an IRU Fee of [*Material Omitted and
Separately Filed Under an Application for Confidential Treatment] for the Dallas
Ring Fibers. [*Material Omitted and Separately Filed Under an Application for
Confidential Treatment].
4. Except as modified in this Amendment, all other provisions of the
Agreement shall be applicable to the Dallas Ring Fibers.
<PAGE>
CONFIDENTIAL TREATMENT
In Witness Whereof, Qwest and GTE have executed this Amendment effective
as of the day first written above.
QWEST COMMUNICATIONS GTE INTELLIGENT NETWORK SERVICES
CORPORATION INCORPORATED
By_____________________________ By_____________________________
Name: Name:
Title: Title:
Date: Date:
2
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 7, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,044
<SECURITIES> 0
<RECEIVABLES> 223,199
<ALLOWANCES> 5,550
<INVENTORY> 0
<CURRENT-ASSETS> 13,627
<PP&E> 1,817,002
<DEPRECIATION> 292,612
<TOTAL-ASSETS> 1,524,390
<CURRENT-LIABILITIES> 536,262
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 1,703,344
<TOTAL-LIABILITY-AND-EQUITY> 2,373,159
<SALES> 750,424
<TOTAL-REVENUES> 750,424
<CGS> 786,965
<TOTAL-COSTS> 1,375,161
<OTHER-EXPENSES> (32)
<LOSS-PROVISION> 0
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