-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N2LQO/nX070+scYcV6wKv5E736GYk0Tnmu9SDltt4R7F74MQV8zFeINWsHL+q5SC drLL5g154aDknqoNTV/mYg== 0000927356-97-001386.txt : 19971121 0000927356-97-001386.hdr.sgml : 19971121 ACCESSION NUMBER: 0000927356-97-001386 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: 4813 IRS NUMBER: 841339282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-22609 FILM NUMBER: 97719959 BUSINESS ADDRESS: STREET 1: 555 17TH ST STE 1000 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032911400 FORMER COMPANY: FORMER CONFORMED NAME: QUEST COMMUNICATIONS INTERNATIONAL INC DATE OF NAME CHANGE: 19970416 10-Q 1 FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-Q ------------------------ [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-22609 ------------------------ QWEST COMMUNICATIONS INTERNATIONAL INC. (EXACT NAME OF REGISTRANT SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 84-1339282 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 555 SEVENTEENTH STREET, SUITE 1000 DENVER, COLORDADO 80202 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (303) 291-1400 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock, $.01 par value, outstanding (the only class of common stock of the Company outstanding) was 103,320,766, as of November 12, 1997. ================================================================================ QWEST COMMUNICATIONS INTERNATIONAL INC. QUARTER ENDED SEPTEMBER 30, 1997 TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION PAGE ---- Item 1. Consolidated Balance Sheets of Qwest Communications International Inc. and Subsidiaries as of September 30, 1997 (Unaudited) and December 31, 1996................................ 3 Consolidated Statements of Operations of Qwest Communications International Inc. and Subsidiaries for the Periods Ended September 30, 1997 and 1996 (Unaudited).................... 5 Consolidated Statement of Stockholders' Equity of Qwest Communications International Inc. and Subsidiaries for the Nine Months Ended September 30, 1997 (Unaudited)........... 6 Consolidated Statements of Cash Flows of Qwest Communications International Inc. and Subsidiaries for the Nine Months Ended September 30, 1997 and 1996 (Unaudited)................ 7 Notes to Consolidated Financial Statements of Qwest Communications International Inc. and Subsidiaries (Information as of September 30, 1997 and 1996 and for the Three and Nine Months Ended September 30, 1997 and 1996 Is Unaudited).......................... 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Nine Months Ended September 30, 1997 and 1996............................. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risks........................................ 30 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds........................................................ 31 Item 5. Other Information................................................................................ 31 Item 6. Exhibits and Reports on Form 8-K SIGNATURE...................................................................................................... 32
Part I. Financial Information Item 1. Financial Statements QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION) - - -------------------------------------------------------------------------------
1997 1996 ---------- ----------- (unaudited) ASSETS - - ------ Current assets: Cash and cash equivalents $186,731 $6,905 Accounts receivable, net 64,719 29,248 Costs and estimated earnings in excess of billings 164,986 4,989 Deferred income tax asset -- 6,301 Notes and other receivables 14,936 14,934 Other current assets 7,063 328 ---------- ----------- Total current assets 438,435 62,705 ---------- ----------- Property and equipment, net 444,816 186,535 Deferred income tax asset 8,902 -- Notes and other receivables 115 11,052 Intangible and other long-term assets, net 16,210 3,967 ---------- ----------- Total assets $908,478 $264,259 ========== ===========
See accompanying notes to consolidated financial statements. 3 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS, CONTINUED SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION) - - --------------------------------------------------------------------------------
1997 1996 ---------- ----------- (unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY - - ------------------------------------ Current liabilities: Accounts payable and accrued expenses $178,676 $80,129 Deferred revenue 4,044 2,649 Billings in excess of costs and estimated earnings 12,440 5,034 Deferred income tax liability 6,432 -- Current portion of long-term debt 15,782 25,193 Advances from parent -- 19,138 ---------- ----------- Total current liabilities 217,374 132,143 Long-term debt 268,946 109,268 Deferred income tax liability -- 1,708 Other liabilities 53,307 11,698 ---------- ----------- Total liabilities 539,627 254,817 ---------- ----------- Stockholders' equity: Preferred Stock, $.01 par value. Authorized 25,000,000 shares. No shares issued and outstanding. -- -- Common Stock, $.01 par value. Authorized 400,000,000 shares. 103,320,766 shares and 86,500,000 shares issued and outstanding at September 30, 1997 and December 31, 1996, respectively. 1,033 865 Additional paid-in capital 412,005 55,027 Accumulated deficit (44,187) (46,450) ---------- ----------- Total stockholders' equity 368,851 9,442 ---------- ----------- Commitments and contingencies Total liabilities and stockholders' equity $908,478 $264,259 ========== ===========
See accompanying notes to consolidated financial statements. 4 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE PERIODS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION) (UNAUDITED)
- - --------------------------------------------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ------------- -------------- -------------- -------------- 1997 1996 1997 1996 ------------- -------------- -------------- -------------- Revenue: Carrier services $ 14,098 $ 9,247 $ 39,062 $ 45,106 Commercial services 18,361 9,163 38,033 25,475 ------------- -------------- -------------- -------------- 32,459 18,410 77,095 70,581 Network construction services 156,496 25,923 413,226 59,255 ------------- -------------- -------------- -------------- 188,955 44,333 490,321 129,836 ------------- -------------- -------------- -------------- Operating expenses: Telecommunications services 26,417 14,398 65,310 62,399 Network construction services 106,160 15,717 282,472 37,661 Selling, general and administrative 27,316 9,656 59,987 34,230 Growth share plan 4,131 -- 69,320 -- Depreciation and amortization 5,071 3,991 13,114 11,890 ------------- -------------- -------------- -------------- 169,095 43,762 490,203 146,180 ------------- -------------- -------------- -------------- Income (loss) from operations 19,860 571 118 (16,344) Other income (expense): Gain on sale of contract rights -- -- 9,296 -- Gain on sale of telecommunications service agreements -- 6,126 -- 6,126 Interest expense, net (4,159) (1,944) (8,886) (5,004) Interest income 3,926 728 5,912 1,898 Other income (expense), net 15 133 (1,986) 113 ------------- -------------- -------------- -------------- Income (loss) before income tax expense (benefit) 19,642 5,614 4,454 (13,211) Income tax expense (benefit) 6,991 2,160 2,191 (4,310) ------------- -------------- -------------- -------------- Net income (loss) $ 12,651 $ 3,454 $ 2,263 $(8,901) ============= ============== ============== ============== Net income (loss) per share $ 0.12 $ 0.04 $ 0.02 $ (0.10) ============= ============== ============== ==============
See accompanying notes to consolidated financial statements. 5 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
Common Stock --------------------- Additional Total Number of paid-in Accumulated stockholders' shares Amount capital deficit equity ---------- ------- ------------ ----------- ------------ Balances, December 31, 1996 86,500,000 $865 $55,027 $(46,450) $ 9,442 Issuance of common stock, net (unaudited) 15,525,000 155 319,381 - 319,536 Issuance of common stock warrants (unaudited) - - 2,300 - 2,300 Issuance of common stock for growth shares (unaudited) 1,295,766 13 35,297 - 35,310 Net income (unaudited) - - - 2,263 2,263 ---------- ------ --------- ----------- --------- Balances, September 30, 1997 (unaudited) 103,320,766 $1,033 $412,005 $(44,187) $368,851 =========== ====== ========= =========== =========
See accompanying notes to consolidated financial statements. 6 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (AMOUNTS IN THOUSANDS) (UNAUDITED) - - --------------------------------------------------------------------------------
1997 1996 -------- -------- Cash flows from operating activities: Net income (loss) $2,263 $(8,901) Adjustments to reconcile net income (loss) to net cash used in operating activities: Gain on sale of contract rights (9,296) -- Gain on sale of telecommunications service agreements -- (6,126) Depreciation and amortization 13,114 11,890 Deferred income tax expense 2,123 4,173 Changes in operating assets and liabilities: Receivables -accounts and notes, net (24,536) (23,200) Costs and estimated earnings in excess of billings (159,997) 14,706 Accounts payable and accrued expenses 59,848 (3,412) Payable to related parties, net -- (508) Billings in excess of costs and estimated earnings 7,406 3,158 Accrued growth share plan expense and deferred compensation 33,953 -- Other changes 15,050 (1,120) -------- ------- Net cash used in operating activities (60,072) (9,340) -------- ------- Cash flows from investing activities: Proceeds from sale of telecommunications service agreements -- 4,500 Proceeds from sale of contract rights 9,000 -- Expenditures for property and equipment (205,304) (48,853) -------- ------- Net cash used in investing activities (196,304) (44,353) -------- -------
7 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (AMOUNTS IN THOUSANDS) (UNAUDITED) - - --------------------------------------------------------------------------------
1997 1996 -------- -------- Cash flows from financing activities: Proceeds from issuance of common stock, net 319,536 -- Proceeds from issuance of common stock warrants 2,300 -- Borrowings of long-term debt 328,000 51,000 Repayments of long-term debt (185,858) (14,689) Debt issuance costs (8,638) (459) Net (payments to) advances from Parent (19,138) 20,486 --------- --------- Net cash provided by financing activities 436,202 56,338 --------- --------- Net increase in cash and cash equivalents 179,826 2,645 Cash and cash equivalents, beginning of period 6,905 1,484 --------- --------- Cash and cash equivalents, end of period $186,731 $ 4,129 ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest, net $ 4,473 $ 4,786 ========= ========= Cash paid for taxes, other than Parent $ 195 $ 132 ========= ========= Supplemental disclosure of significant non-cash investing and financing activities: Capital lease obligation $ -- $ 720 ========= ========= Accrued capital expenditures $ 57,903 $ -- ========= ========= Issuance of common stock in settlement of a portion of accrued Growth Share liability $ 35,310 $ -- ========= ========= Capital expenditures financed with equipment credit facility $ 8,125 $ -- ========= =========
See accompanying notes to consolidated financial statements. 8 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 1997 AND DECEMBER 31, 1996 (INFORMATION AS OF SEPTEMBER 30, 1997, AND FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 IS UNAUDITED) - - -------------------------------------------------------------------------------- (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) GENERAL AND BUSINESS Qwest Communications International Inc. (the Company) was wholly-owned by Anschutz Company (the Parent) until June 27, 1997, when the Company issued common stock in an initial public offering (as described in note (12) Securities Offering). Subsequent to the initial public offering and the issuance of additional common shares in settlement of certain Growth Shares (as described in note (11) Growth Share Plan), the Parent owns approximately 83.7% of the outstanding common stock of the Company. The Company is the ultimate holding company for the operations of Qwest Communications Corporation and subsidiaries (Qwest). The accompanying consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. (b) NET INCOME (LOSS) PER SHARE Net income (loss) per share for the three and nine months ended September 30, 1997 and 1996 was computed by dividing net income (loss) by the weighted average number of common shares outstanding during such periods. Common stock equivalent shares from options, warrants and common stock issuable for Growth Shares (as described in note (11) Growth Share Plan) are included in the computation when their effects are dilutive except that pursuant to Securities and Exchange Commission Staff Accounting Bulletin Number 83, Earnings Per Share Computations in an Initial Public Offering, 1,658,000 common shares issuable for Growth Shares granted during the 12-month period prior to the Company's initial public offering at prices below the anticipated public offering price were included in the calculation as if they were outstanding for all periods presented, up to the close of the initial public offering. The Financial Accounting Standards Board recently issued Statement of Financial Accounting Standards No. 128, Earnings Per Share (SFAS 128). SFAS 128 requires 9 the presentation of basic earnings per share (EPS) and, for companies with potentially dilutive securities, such as convertible debt, options and warrants, diluted EPS. SFAS 128 is effective for annual and interim periods ending after December 15, 1997. The Company does not believe that the adoption of SFAS 128 will significantly affect the calculation of the Company's net income (loss) per common share. (c) MANAGEMENT ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The accompanying unaudited, interim consolidated financial statements as of September 30, 1997, and for the three and nine months ended September 30, 1997 and 1996 are prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions of Form 10-Q, Article 10 of Regulation S-X. In the opinion of management, these statements reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of the results of such periods. The results of operations for any interim period are not necessarily indicative of results for the full year. Such financial statements should be read in conjunction with the audited consolidated balance sheets of the Company as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1996, included in the registration statement (no. 333-25391) on Form S-1 filed by the Company (as described in note (12) Securities Offering). The information contained in these unaudited interim consolidated financial statements as of December 31, 1996 has been derived from those statements. (d) INCOME TAXES The Company is included in the consolidated income tax return of the Parent, and a tax-sharing agreement provides for allocation of tax liabilities and benefits to the Company, in general, as though it filed a separate return. (2) GAIN ON SALE OF CONTRACT RIGHTS On March 10, 1997, the Company entered into an agreement with an unrelated third party to terminate certain equipment purchase and telecommunications capacity rights and options of the Company exercisable against the third party for $9.0 million. In 1997, the Company received the $9.0 million in cash. 10 (3) GAIN ON SALE OF TELECOMMUNICATIONS SERVICE AGREEMENTS On July 1, 1996, the Company sold its right, title and interest in certain telecommunications service agreements to an unrelated third party (the Buyer) for $5.5 million. During the transition of service agreements to the Buyer, the Company has incurred certain facilities costs on behalf of the Buyer, which are reimbursable to the Company. As of September 30, 1997 and December 31, 1996, net amounts of approximately $3.5 million and $2.0 million, respectively, were due to the Company for such costs. On March 31, 1997, the arrangement relating to transition services expired and has not yet been renegotiated. A dispute has arisen with respect to reimbursement of these costs and, as a result, the Company made a provision of $2.0 million in the three months ended March 31, 1997. Negotiations with the Buyer are continuing. The Company believes that the receivable balance as of September 30, 1997 is collectible. (4) NETWORK CONSTRUCTION SERVICES REVENUE AND EXPENSES Costs and billings on uncompleted contracts included in the accompanying consolidated financial statements are as follows (in thousands):
September 30, December 31, 1997 1996 ------------- ------------ (unaudited) Costs incurred on uncompleted contracts $359,338 $ 82,840 Estimated earnings 185,032 48,853 -------- -------- 544,370 131,693 Less: billings to date 391,824 131,738 -------- -------- $152,546 $ (45) ======== ======== Included in the accompanying balance sheet accounts under the following captions: Costs and estimated earnings in excess of billings $164,986 $4,989 Billings in excess of costs and estimated earnings (12,440) (5,034) -------- -------- $152,546 $ (45) ======== ======== Revenue the Company expects to realize for work to be performed on the above uncompleted contracts $577,886 $328,688 ======== ========
The Company has entered into agreements with unrelated third parties whereby the Company will provide indefeasible rights of use in multiple fibers along a coast-to-coast fiber optic telecommunications network (the Network) for a purchase price of approximately $1.1 billion. Earnings relating to these contracts are estimated using 11 allocations of the total cost of constructing the Network (as described in note (10) Commitments and Contingencies). (5) PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
September 30, December 31, 1997 1996 ------------------- ----------------- (unaudited) Land $ 558 $ 506 Facility and leasehold improvements 12,761 7,951 Communications and construction equipment 74,751 52,076 Fiber and conduit systems 92,924 42,446 Office equipment and furniture 8,324 6,360 Network construction and other assets held under capital leases 3,071 3,197 Work in progress 288,710 99,915 -------- -------- 481,099 212,451 Less accumulated depreciation and amortization (36,283) (25,916) -------- -------- Property and equipment, net $444,816 $186,535 ======== ========
(6) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following (in thousands):
September 30, December 31, 1997 1996 ------------------- ----------------- (unaudited) Accounts payable $ 40,163 $ 44,766 Construction accounting accrual 66,976 18,071 Capacity service obligation 8,971 3,658 Property, sales and other taxes 28,551 3,793 Accrued interest 14,594 707 Other 19,421 9,134 -------- -------- Accounts payable and accrued expenses $178,676 $ 80,129 ======== ========
12 (7) OTHER LIABILITIES Other liabilities consists of the following (in thousands):
September 30, December 31, 1997 1996 (unaudited) ------------------- ----------------- Right-of-way obligation $ 31,295 $ 1,297 Growth share accrual 13,996 9,291 Other 8,016 1,110 -------- -------- Other liabilities $ 53,307 $ 11,698 ======== ========
(8) LONG-TERM DEBT Long-term debt consists of the following (in thousands):
September 30, December 31, 1997 1996 ------------------- ----------------- (unaudited) Senior notes-Series B $250,000 $ -- Revolving credit facility 10,000 60,000 Customer contract credit facility 15,000 25,918 Equipment credit facility 8,125 -- Network credit facility -- 27,077 Equipment loans -- 9,820 Term notes -- 9,416 Capital lease obligations 1,423 2,010 Other 180 220 -------- -------- Total debt 284,728 134,461 Less current portion (15,782) (25,193) -------- -------- Long-term debt $268,946 $109,268 ======== ========
In August 1997, the Company completed an exchange of notes (the Exchange Notes), registered under the Securities Act of 1933 (the Act), for all of the originally issued 10 7/8% Senior Notes due 2007 (the Senior Notes). The Exchange Notes are identical in all material respects to the originally issued Senior Notes. The Company received no proceeds from and recognized no profit on the exchange transaction, and no change in the financial condition of the Company occurred as a result of the exchange transaction. The Senior Notes and the Exchange Notes are referred to, collectively, hereinafter as the "Series B Senior Notes." The Company had a $100.0 million three-year revolving credit facility. In October 1997, the Company paid the outstanding balance and terminated this credit facility. 13 In February 1997, the Company entered into a one year $50.0 million line of credit from a commercial bank. No amounts were ever drawn under this credit line, and the Company canceled the facility in July 1997. In October 1997, the Company issued $555,890,000 in principal amount at maturity of Senior Discount Notes, due 2007 (the Discount Notes), generating net proceeds of approximately $342.6 million, after deducting offering costs which are included in intangible and other long-term assets. Such net proceeds will be used to fund capital expenditures for continuing construction and activation of the Network and to fund further growth in the business. The Discount Notes will accrete at a rate of 9.47% per annum, compounded semi-annually, to an aggregate principal amount of $555,890,000 by October 15, 2002. The principal amount of the Discount Notes is due and payable in full on October 15, 2007. The Discount Notes are redeemable at the Company's option, in whole or in part, at any time on or after October 15, 2002, at specified redemption prices. In addition, prior to October 15, 2000, the Company may use the net cash proceeds from certain equity transactions to redeem up to 35% of the Discount Notes at specified redemption prices. Cash interest on the Discount Notes will not accrue until October 15, 2002, and thereafter will accrue at a rate of 9.47% per annum, and will be payable semi-annually in arrears commencing on April 15, 2003 and thereafter on April 15 and October 15 (each an interest payment date) of each year. The Company has the option of commencing the accrual of cash interest on an interest payment date on or after October 15, 2000, in which case the outstanding principal amount at maturity of the Discount Notes will, on such interest payment date, be reduced to the then accreted value, and cash interest will be payable on each interest payment date thereafter. In connection with the sale of the Discount Notes, the Company agreed to make an offer to exchange new notes, registered under the Act and with terms identical in all material respects to the Discount Notes, for the Discount Notes or, alternatively, to file a shelf registration statement under the Act with respect to the Discount Notes. If the registration statement for the exchange offer or the shelf registration statement, as applicable, are not filed or declared effective within specified time periods or, after being declared effective, cease to be effective or usable for resale of the Discount Notes during specified time periods (each a Registration Default), additional cash interest will accrue at a rate per annum equal to 0.50% of the principal amount at maturity of the Discount Notes during the 90-day period immediately following the occurrence of a Registration Default and increasing in increments of 0.25% per annum of the principal amount at maturity of the Discount Notes up to a maximum of 2.0% per annum, at the end of each subsequent 90-day period until the Registration Default is cured. The terms of certain loan agreements described above limit the Company's ability to pay dividends and restrict certain assets of the Company's subsidiaries. 14 (9) ADVANCES FROM PARENT Advances from Parent at December 31, 1996, which were non-interest bearing, included costs charged to the Company by the Parent and advances received from the Parent to fund operations, net of repayments. In May 1997, all outstanding advances from Parent, totaling approximately $28.0 million, were repaid. (10) COMMITMENTS AND CONTINGENCIES (a) NETWORK CONSTRUCTION PROJECT In 1996, the Company commenced construction of the Network, which is scheduled for completion in the second quarter of 1999. The Company projects its total remaining cost at September 30, 1997 for completing the construction of the Network will be approximately $1.2 billion. This amount includes the Company's remaining commitment through December 31, 1998 to purchase a minimum quantity of materials for approximately $200.5 million as of September 30, 1997, subject to quality and performance expectations. The Company has the option to extend the materials purchase agreement through December 31, 1999 and may assign some or all of its remaining purchase commitment to a third party or cancel the agreement by paying the seller an amount equal to 7% of any remaining commitment. The Company has contracted to provide a portion of the fibers in the Network to third parties (see note (4) Network Construction Services Revenue and Expenses). Although these agreements provide for certain penalties if the Company does not complete construction within the time frames specified within the agreements, management does not anticipate that the Company will incur any substantial penalties under these provisions. (b) EASEMENT AGREEMENTS In February 1997, the Company entered into a right-of-way agreement with an unrelated third party which provides for advance payment of $1.9 million for the initial five-year period of the agreement and $1.9 million in advance of each subsequent five-year period during the remainder of the 25-year term of the agreement. The present value of this obligation is included in other non-current liabilities as of September 30, 1997. In July 1997, the Company entered into a 25-year right-of-way agreement with an unrelated third party that allows the Company to construct and operate a fiber optic network for approximately 850 route miles along such right-of-way. The agreement provides for annual payments of approximately $2,500 per route mile. The present value of this obligation is included in other non-current liabilities as of September 30, 1997. 15 In October 1997, the Company entered into a perpetual right-of-way agreement with an unrelated third party that allows the Company to install conduit in up to approximately 300 route miles along such right-of-way. The agreement provides for a total payment in advance of approximately $4.9 million, which was paid by the Company in October 1997. In October 1997, the Company entered into a 25-year right-of-way agreement with an unrelated third party that allows the Company to construct and operate a fiber optic network over up to approximately 370 route miles along such right-of-way. The agreement provides for advance annual payments of approximately $4,500 per route mile. (11) GROWTH SHARE PLAN The Company has a Growth Share Plan for certain of its employees and directors. A "Growth Share" is a unit of value based on the increase in value of the Company over a specified measuring period. Upon completion of the common stock offering in June 1997 (as described in note (12) Securities Offering), certain Growth Shares vested in full. The Company has estimated an increase in value of the Growth Shares during 1997 and has recorded approximately $69.3 million of additional compensation expense in the nine months ended September 30, 1997. In July 1997, the Company issued 1,295,766 common shares, net of amounts relating to tax withholdings of approximately $21.9 million, in settlement of a portion of the accrued liability related to Growth Shares. Compensation relating to certain non-vested Growth Shares will be amortized as expense over the remaining approximately four-year vesting period. (12) SECURITIES OFFERING On May 23, 1997, the Board of Directors approved a change in the Company's capital stock to authorize 400 million shares of $.01 par value Common Stock (of which 10 million shares are reserved for issuance under the Equity Incentive Plan (as described in note (13) Equity Incentive Plan), 2 million shares are reserved for issuance under the Growth Share Plan, and 4.3 million shares are reserved for issuance upon exercise of warrants, as described below), and 25 million shares of $.01 par value Preferred Stock. On May 23, 1997, the Board of Directors declared a stock dividend to the existing stockholder of 86,490,000 shares of Common Stock, which was paid immediately prior to the effectiveness of the registration statement on June 23, 1997. This dividend is accounted for as a stock split. All shares and per share information included in the accompanying interim consolidated financial statements have been adjusted to give retroactive effect to the change in capitalization. The Company completed the initial public offering of 15,525,000 shares of Common Stock on June 27, 1997, raising net proceeds of approximately $319.5 million. Effective May 23, 1997, the Company sold to an affiliate of the Parent for $2.3 million in cash, a warrant to acquire 4.3 million shares of Common Stock at an exercise price of 16 $28.00 per share, exercisable on May 23, 2000. The warrant is not transferable. Stock issued upon exercise of the warrant will be subject to restrictions on sale or transfer for two years after exercise. (13) EQUITY INCENTIVE PLAN Effective June 23, 1997, the Company adopted the Qwest Communications International Inc. Equity Incentive Plan (the Equity Incentive Plan). This plan permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock units and other stock grants to key employees of the Company and affiliated companies and key consultants to the Company and affiliated companies who are responsible for the Company's growth and profitability. A maximum of 10 million shares of Common Stock may be subject to awards under the Equity Incentive Plan. The Company's Compensation Committee (the Committee) determines the exercise price for each option; however, stock options must have an exercise price that is at least equal to the fair market value of the Common Stock on the date the stock option is granted, subject to certain restrictions. All awards granted under the Equity Incentive Plan will immediately vest upon any change in control of the Company, as defined, unless provided otherwise by the Committee at the time of grant. All outstanding options will automatically terminate upon the occurrence of certain merger and reorganization transactions and appropriate notice by the Company to all option holders, as defined. For the nine months ended September 30, 1997, the Company has granted options to purchase a total of 5,800,500 shares of Common Stock of the Company. The options are exercisable over five years from the date of grant and have a weighted average exercise price of approximately $29.00 per share. As permitted by Statement of Financial Accounting Standards No. 123, Accounting for Stock Based Compensation, the Company accounts for the Equity Incentive Plan in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. No compensation expense has been recognized for grants under the Equity Incentive Plan. (14) MEXICO FIBER PURCHASE AGREEMENT In July 1997, the Company entered into an agreement with an unrelated third party whereby the Company will receive (i) four dark fibers along a 2,270 kilometer route to be constructed in Mexico (the Mexico Network) by the third party, and (ii) certain construction inventory and value-added tax refunds, totaling approximately $2.9 million. In exchange for these assets, the third party will receive the stock of the Company's subsidiary, SP Servicios de Mexico S. A. de C. V. (SPS), and approximately $6.7 million in cash. Upon completion of the Mexico Network and the extension of the Qwest Network 17 to the Mexican border, the Qwest Network will be linked to Mexico City, Mexico. Completion of the Mexican network is scheduled for late 1998. (15) SIGNIFICANT CUSTOMERS During the nine months ended September 30, 1997 and the year ended December 31, 1996, two or more customers, in aggregate, have accounted for 10% or more of the Company's total revenues in one or more periods, as follows:
Customer Customer Customer A B C ----------------------------------- 1996 27.8% 26.3% - 1997 6.3% 33.4% 36.9%
(16) ACQUISITION In October 1997, Qwest and an unrelated third party consummated an agreement whereby Qwest acquired from the third party all of the issued and outstanding shares of capital stock of the third party's then wholly owned internet service provider (the ISP), and the capital stock of the ISP issued at the closing of the acquisition, for $20.0 million in cash. The acquisition will be accounted for using the purchase method of accounting. The purchase price will be allocated to the assets and liabilities acquired based upon the estimated fair values of such assets and liabilities. 18 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 The following discussion and analysis should be read in conjunction with (i) the Company's accompanying unaudited interim financial statements and the notes thereto, and (ii) the financial statements, and related notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included in the registration statement (File No. 333-25391) on Form S-1 (Form S-1) filed by the Company. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of federal securities laws, including statements about the Company's plans to complete the Qwest Network (defined below), expectations as to funding its capital requirements, anticipated expansion of Carrier Services (defined below) and Commercial Services (defined below), regulatory and pricing trend projections, and other statements of expectations, beliefs, future plans and strategies, anticipated developments, and other matters that are not historical facts. Management cautions the reader that these forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by the statements. Important factors that could prevent the Company from achieving its stated goals include, but are not limited to failure by the Company (i) to manage effectively, cost efficiently and on a timely basis the construction of the route segments, (ii) to enter into additional customer contracts to sell dark fiber or provide high-volume capacity and otherwise expand its telecommunications customer base, (iii) to obtain and maintain all necessary rights-of-way. For additional information, see "Risk Factors" included in the Company's filings with the SEC. OVERVIEW The Company is a facilities-based provider of communications services to interexchange carriers and other communications entities (Carrier Services) and to businesses and consumers (Commercial Services), and it constructs and installs fiber optic communications systems for interexchange carriers and other communications entities, as well as for its own use (Network Construction Services). The Company is expanding its existing long distance network into an approximately 16,000 route-mile, coast-to-coast, technologically advanced fiber optic telecommunications network (the Qwest Network), which includes the recently announced 3,000 route-mile extensions in the Southeastern states, California and Texas. The Company will employ, throughout substantially all of the Qwest Network, a self-healing SONET four-fiber ring architecture equipped with the most advanced commercially available fiber and transmission electronics manufactured by Lucent Technologies and Northern Telecom Inc. (Nortel), respectively. The Qwest Network's advanced fiber and transmission electronics are expected to provide the Company with lower installation, operating and maintenance costs than older fiber systems generally in commercial use today. In addition, the Company has entered into construction contracts for the sale of dark fiber along the route of the Qwest Network, which will reduce the Company's net cost per fiber mile with respect to 19 the fiber it retains for its own use. As a result of these cost advantages, the Company believes it will be well positioned to capture market share and take advantage of the rapidly growing demand for data transmission, multimedia and long haul voice capacity. The Company derives its revenue from Carrier Services, Commercial Services and Network Construction Services. In October 1997, Qwest and NEWSUPERNET (NSN) consummated an agreement whereby Qwest acquired from NSN all of the issued and outstanding shares of capital stock of NSN's then wholly-owned internet service provider, SuperNet, Inc. (SNI), and the capital stock of SNI issued at the closing of the acquisition, for $20.0 million in cash. The acquisition will be accounted for using the purchase method of accounting. The purchase price will be allocated to the assets and liabilities acquired based upon the estimated fair values of such assets and liabilities. Carrier Services. Carrier Services provide high-volume and conventional dedicated line services over the Company's owned capacity and switched services over owned and leased capacity to interexchange carriers and other telecommunications providers. The Company is currently focusing on expanding Carrier Services to increase its revenue stream and reduce per unit costs, targeting short-term capacity sales on a segment-by-segment basis as the Qwest Network is deployed and activated, and is increasingly seeking longer-term, high-volume capacity agreements from major carriers. In addition to traditional telecommunications carriers, the Company is marketing to internet service providers and other data service companies. Revenue from Carrier Services has been derived from high-volume capacity services, dedicated line services and switched services. The Company provides high-volume transmission capacity services through service agreements for terms of one year or longer. Dedicated line services are generally offered under service agreements for an initial term of one year. High-volume capacity service agreements and dedicated line service agreements generally provide for "take or pay" monthly payments at fixed rates based on the capacity and length of circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis, and the service is billed on a minutes-of-use basis. Revenue from carrier customers that is billed on a minutes-of-use basis has the potential to fluctuate significantly based on changes in usage that are highly dependent on differences between the prices charged by the Company and its competitors. The Company, however, has not experienced significant fluctuations to date. For the three and nine months ended September 30, 1997, the Company's five largest carrier customers accounted for approximately 44.4% and 41.3% of Carrier Services revenue, respectively. Commercial Services. Commercial Services provide long distance voice, data and video services to businesses and consumers. The Company plans to build on its Carrier Services experience to expand its presence in the Commercial Services market by developing its distinctive "ride the light" brand identity and aggressively marketing its existing and planned voice, data and other transmission products and services. The Company plans to build direct end user relationships by developing strong distribution channels, providing competitive pricing and superior network quality and offering enhanced, market-driven services to businesses and consumers. Revenue from Commercial Services is recognized primarily on a minutes-of-use basis. Commercial Services has generated revenue using three primary sales channels: direct mail, agent and telemarketing. The Commercial Services market is highly competitive and generally subject to significant customer attrition. The Company's attrition rates vary by product line and sales channel, and the Company typically has experienced an average monthly attrition rate ranging from 4% to 9%. The average 20 attrition rates for the three and nine months ended September 30, 1997 have been consistent with historical rates. In September 1997, the Company entered into an arrangement with a third party under which they will jointly define and test new broadband business multimedia services. The Company has also entered into marketing agreements in September 1997 with two additional third parties. Under one of these agreements, the third party, a marketing company that wholesales and retails telecommunications products on a national basis, will be an authorized sales representative of Qwest, marketing the Company's long-distance products through affinity groups. Under the second of these agreements, the Company will offer its One Plus and Calling Card services (with competitive international pricing for both) to utilities across the nation along with other services provided by the third party under its Simple Choice/SM/ brand name. Network Construction Services. Network Construction Services consist of the construction and installation of fiber optic communication systems for interexchange carriers and other telecommunications providers, as well as for the Company's own use. Revenue from Network Construction Services generally is recognized under the percentage of completion method as performance milestones relating to the contracts are completed. Losses, if any, on uncompleted contracts are expensed in the period in which they are identified, and any revisions to estimated profits on a contract are recognized in the period in which they become known. In 1996, the Company entered into construction contracts for the sale of dark fiber to Frontier Communications International, Inc. (Frontier) and WorldCom, Inc. (WorldCom) whereby the Company has agreed to install and provide dark fiber to each along portions of the Qwest Network. The Company also entered into two construction contracts in 1997 with GTE Intelligent Network Services Incorporated (GTE) for the sale of dark fiber along segments of the route of the Qwest Network. After completion of the Qwest Network, the Company expects that revenues from Network Construction Services will be less significant to the Company's operations. As previously disclosed, the Company is expanding its network into Mexico. Upon completion of the Qwest Network to the Mexican border, the Qwest Network will be linked to Mexico City, Mexico. Completion of the Mexican network is scheduled for late 1998. Pricing. The Company believes that prices in the telecommunication services industry will continue to decline as a result of reforms prompted by the Telecommunications Act of 1996 and reform of the rules governing access charges and international settlement rates. The Company also believes that the effect of such decreases in prices on total revenue will be partially offset by increased demand for telecommunications services, and that the low cost per unit base of the Qwest Network will give it a competitive advantage relative to its competitors. Operating Expenses. The Company's principal operating expenses consist of expenses for network construction incurred by Network Construction Services, expenses for telecommunications services, selling, general and administrative expenses (SG&A), and depreciation and amortization. Expenses for Network Construction Services consist primarily of costs to construct the Qwest Network, including conduit, fiber cable, construction crews and rights-of-way. Costs attributable to the construction of the Qwest Network for the Company's own use are capitalized. Expenses for telecommunications services primarily consist of the cost of leased capacity, Local Exchange Carrier (LEC) access charges, engineering and other operating costs. Since the Company currently provides dedicated line services primarily over its owned network, the cost of 21 providing these services generally does not include the cost of leased capacity or LEC access charges. Expenses for switched services, however, include these costs. The Company leases capacity from other carriers to extend its switched services for originating and terminating traffic beyond its own network boundaries. LEC access charges, which are variable, represent a significant portion of the total cost for switched services. Due in part to these costs, revenue from switched services has lower gross margins than revenue from dedicated line services. When the Qwest Network is completed and activated, the Company will be able to serve more customer needs over its own capacity on the Qwest Network. Furthermore, with additional switched traffic on the Qwest Network, the Company believes it will realize economies of scale and thereby lower its telecommunications costs as a percentage of revenue. SG&A includes the cost of salaries, benefits, occupancy costs, commissions, sales and marketing expenses and administrative expenses. Commercial Services sales and marketing expenses are incurred primarily through the use of its agent, telemarketing and direct mail sales channels. The Company expects that increased SG&A will be necessary to realize the anticipated growth in revenue for Carrier Services and Commercial Services as the Company develops the Qwest Network. The Company is in the process of opening commercial sales offices in selected major geographic markets to implement the Company's strategy, as segments of the Qwest Network become operational. In addition, SG&A expenses will increase as the Company continues to recruit experienced telecommunications industry personnel to implement the Company's strategy. The Company has a Growth Share Plan for certain of its employees and directors. Growth Share Plan expense, included in operating expenses, reflects the Company's estimate of compensation expense with respect to the Growth Shares issued to participants. A "Growth Share" is a unit of value based on the increase in value of the Company over a specified measuring period. Growth Shares granted under the Plan generally vest at the rate of 20% for each full year of service completed after the grant date subject to risk of forfeiture. Participants receive their vested portion of the increase in value of the Growth Shares upon a triggering event, as defined, which includes the end of a growth share performance cycle. Upon completion of the common stock offering in June 1997, certain Growth Shares vested in full, which resulted in substantial compensation expense under the Growth Share Plan in the second quarter of 1997, and the issuance in July 1997 of 1,295,766 shares of Common Stock, which were net of amounts related to tax withholdings, in settlement of the accrued liability related to these Growth Shares. Effective with the initial public offering, all holders of Growth Shares not vested by virtue of the initial public offering have been granted nonqualified stock options under the Company's Equity Incentive Plan, and the value of these Growth Shares has been capped based upon the initial public offering price of $22.00 per share. Compensation expense relating to these non-vested Growth Shares will be recognized over the remaining approximately four-year vesting period and is estimated to be up to approximately $27.7 million in total. The Company does not anticipate any future grants under the Growth Share Plan. 22 RESULTS OF OPERATIONS The table set forth below summarizes the Company's revenue by source, operating expenses, other income (expense), and other financial and operating data (amounts in thousands, except per share information, minutes of use, route miles and switch information):
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ------------------------------------------------------------------------ 1997 1996 1997 1996 ----------------- ---------------- ----------------- ----------------- Revenue: Carrier services................... $ 14,098 $ 9,247 $ 39,062 $ 45,106 Commercial services................ 18,361 9,163 38,033 25,475 ------------- ------------- ------------- ------------ 32,459 18,410 77,095 70,581 Network construction services...... 156,496 25,923 413,226 59,255 ------------- ------------- ------------- ------------ Total revenue.................. 188,955 44,333 490,321 129,836 Operating Expenses: Telecommunications services........ 26,417 14,398 65,310 62,399 Network construction services...... 106,160 15,717 282,472 37,661 Selling, general and administrative................. 27,316 9,656 59,987 34,230 Growth share plan.................. 4,131 - 69,320 - Depreciation and amortization...... 5,071 3,991 13,114 11,890 ------------- ------------- ------------- ------------ Total operating expenses...... 169,095 43,762 490,203 146,180 Income (loss) from operations........... 19,860 571 118 (16,344) Other income (expense): Gain on sale of contract rights.... - - 9,296 - Gain on sale of telecommunications service agreements............. - 6,126 - 6,126 Interest and other (expense) income, net.................... (218) (1,083) (4,960) (2,993) ------------- ------------- ------------- ------------ Income (loss) before income tax expense (benefit).......... 19,642 5,614 4,454 (13,211) Income tax expense (benefit)....... 6,991 2,160 2,191 (4,310) ------------- ------------- ------------- ------------ Net income (loss).............. $ 12,651 $ 3,454 $ 2,263 $ (8,901) ============= ============= ============= ============ Net income (loss) per share.... $ 0.12 $ 0.04 $ 0.02 $ (0.10) ============= ============= ============= ============ Weighted average common shares outstanding........................ 105,812 88,158 93,945 88,158 ============= ============= ============= ============ OTHER FINANCIAL AND OPERATING DATA: EBITDA (1)......................... $ 24,946 $ 4,695 $ 11,246 $ (2,742) ============= ============= ============= ============ EBITDA, adjusted for growth share plan expense (1)...... $ 29,077 $ 4,695 $ 80,566 $ (2,742) ============= ============= ============= ============ Capital expenditures, including non-cash items.............. $ 271,332 $ 49,573 ============= ============ Minutes of use..................... 199,000,000 107,000,000 433,000,000 275,000,000 ============= ============= ============= ============ AS OF AS OF SEPTEMBER 30, DECEMBER 31, 1997 1996 ------------ ------------ Route miles of conduit installed........................................ 7,900 3,650 Route miles of dark fiber installed (excluding lit fiber)............... 2,800 1,800 Route miles of lit fiber installed...................................... 2,800 900 Switches................................................................ 5 5
23 (1) EBITDA represents net income (loss) before interest, income tax expense (benefit), depreciation and amortization, a non-recurring expense of $1.6 million in the nine months ended September 30, 1996 to restructure its operations (including the direct sales group), the gain on sale of telecommunications agreements of $6.1 million (which is non-recurring) in the nine months ended September 30, 1997, and the gain on sale of contract rights of approximately $9.3 million (which is non-recurring) in the nine months ended September 30, 1997, respectively. EBITDA includes earnings from the construction contracts for the sale of dark fiber that the Company will use to provide cash for construction costs of the Qwest Network. EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net earnings (loss) as an indicator of the Company's operating performance or as an alternative to cash flows as a source of liquidity and may not be comparable with EBITDA as defined by other companies. The Company believes that EBITDA is commonly used by financial analysts and others in the telecommunications industry. EBITDA adjusted for Growth Share Plan expense represents EBITDA (as defined above), excluding the effect of Growth Share Plan expense. - - -------------------------------------------------------------------------------- THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1996 The Company reported net income of $12.7 million and $2.3 million in the three and nine months ended September 30, 1997, respectively, compared to net income of $3.5 million and a net loss of $8.9 million in the same periods of the prior year. Excluding the effect of the compensation expense relating to the Growth Share Plan, net of income tax, the Company's reported net income would have been approximately $15.3 million and $46.6 million for the three and nine months ended September 30, 1997, respectively. Revenue. Total revenue increased $144.6 million, or 326%, and $360.5 million, or 278%, during the three and nine months ended September 30, 1997, respectively, as compared to the corresponding periods in 1996. Revenue from Network Construction Services increased $130.6 million, or 504%, and $354.0 million, or 597%, during the three and nine months ended September 30, 1997, respectively, as compared to the corresponding periods in 1996. The increases were due primarily to network construction revenue from dark fiber sales to WorldCom, GTE and Frontier. Carrier Services revenue increased $4.9 million, or 52%, and decreased $6.0 million, or 13%, for the three and nine months ended September 30, 1997, respectively, compared with the corresponding periods in 1996. The increase in the three months ended September 30, 1997, as compared to the corresponding period in the prior year resulted from the growth in on-net dedicated line services on lit portions of the Network. The decrease in revenue in the nine months ended September 30, 1997, as compared to the corresponding period in the prior year, was primarily due to the Company's sale of its resale dedicated line services on leased capacity on July 1, 1996. The sold business generated revenue of $18.8 million for the nine months ended September 30, 1996. Exclusive of this revenue, Carrier Services revenue increased $12.8 million, or 48%, during the nine months ended September 30, 1997, as compared to the corresponding period of 1996. This increase in Carrier Services revenue was due primarily to increases in revenue from carrier switched services and carrier dedicated line services provided on the Qwest Network. Commercial Services revenue increased $9.2 million, or 100%, and $12.6 million, or 49%, for the three and nine months ended September 30, 1997, respectively, as compared to the corresponding periods in 1996. The increase was due primarily to growth in switched services provided to small- and medium-sized businesses and to consumers as a result of continued expansion of the Company's direct mail, agent and telemarketing sales channels. Operating Expenses. Total operating expenses increased $125.3 million, or 286%, and $344.0 million, or 235%, during the three and nine months ended September 30, 1997, respectively, over the same periods in 1996, due primarily to increases in telecommunications services, network construction services, SG&A, Growth Share Plan and depreciation and amortization expense. 24 Expenses for telecommunications services increased $12.0 million, or 83%, and $2.9 million, or 5%, for the three and nine months ended September 30, 1997, respectively, compared to the corresponding periods in the prior year. The growth in telecommunications services expenses was primarily attributable to the continued growth in switched services and network engineering and operations, partially offset by the reduction in expenses resulting from the sale on July 1, 1996 of the Company's resale dedicated line services on leased capacity. Expenses for Network Construction Services increased $90.4 million, or 575%, and $244.8 million, or 650%, in the three and nine months ended September 30, 1997, respectively, compared to the corresponding periods in 1996, due to costs of construction contracts relating to increased dark fiber sales revenue. SG&A increased $17.7 million, or 183%, and $25.8 million, or 75%, in the three and nine months ended September 30, 1997, respectively, compared to the corresponding periods of 1996. The increase was due primarily to increases in expenses related to the following: the Company's direct mail sales program, the development of the Company's new brand identity, administrative and information services support of the Company's growth, and recruiting and hiring additional personnel. The Company anticipates that as it deploys the Qwest Network, expands its Carrier Services and Commercial Services, and initiates its direct sales operations, SG&A will continue to increase. The Company has estimated an increase in the value of Growth Shares, primarily triggered by the June 1997 initial public offering, and has recorded approximately $4.1 million and $69.3 million of additional compensation expense in the three and nine months ended September 30, 1997, respectively. No expense was recognized in the three and nine months ended September 30, 1996, as there were no compensatory elements in those periods. The Company anticipates total additional expense of up to approximately $27.7 million through the year 2002 in connection with this plan. The Company's depreciation and amortization expense increased $1.1 million, or 27%, and $1.2 million, or 10%, during the three and nine months ended September 30, 1997, respectively, from the corresponding periods in 1996. This increase resulted primarily from activating the Denver to Sacramento segment of the Qwest Network in late July 1997, purchases of additional equipment used in constructing the Qwest Network and purchases of other fixed assets to accommodate the Company's growth. The Company expects that depreciation and amortization expense will continue to increase in subsequent periods as the Company continues to activate additional segments of the Qwest Network and amortizes the goodwill acquired with the SNI purchase (discussed above). Interest and Other Income (Expense). Pursuant to a capacity sale in 1993, the Company obtained certain rights of first refusal to re-acquire network communications equipment and terminal locations including leasehold improvements should the purchaser, under that agreement, sell the network. In the first quarter of 1997, the Company sold certain of these rights to the purchaser in return for $9.0 million in cash and the right to re-acquire certain terminal facilities. As previously discussed, the Company sold a portion of its dedicated line services on leased capacity in July 1996. During the transition of the service agreements to the buyer, the Company incurred certain facilities costs on behalf of the buyer, which were to be reimbursed to the Company. A dispute arose with respect to the reimbursement of such costs and, as a result, the Company made a provision of approximately $2.0 million in the first quarter of 1997. 25 During the three and nine months ended September 30, 1997 the Company's net interest and other expenses decreased $.9 million and increased $2.0 million, respectively, as compared to the corresponding periods of 1996. Interest expense, net, increased $2.2 million, or 114%, and $3.9 million, or 78%, during the three and nine months ended September 30, 1997, respectively, as compared to the corresponding periods of 1996. These increases were due primarily to interest expense related to the issuance of $250.0 million in principal amount of 10 7/8% Senior Notes, due 2007 (the Senior Notes) on March 31, 1997, partially offset by additional capitalized interest resulting from construction of the Qwest Network. Interest income increased by $3.2 million, or 439%, and $4.0 million, or 211%, during the three and nine months ended September 30, 1997, respectively, attributable to the increase in cash equivalent balances, which resulted from the issuance of the Senior Notes and the initial public offering. During the nine months ended September 30, 1997, the Company's other expense, net, increased $2.1 million, as compared to the corresponding period of 1996 due primarily to the provision for transition service costs described in the previous paragraph. The Company expects interest expense to grow in future periods due to the issuance in October 1997 of its 9.47% Senior Discount Notes (discussed below). Income Taxes. The Company is included in the consolidated federal income tax return of Anschutz Company (the Parent), and a tax sharing agreement provides for allocation of tax liabilities and benefits to the Company, in general, as though it filed a separate tax return. The Company's effective tax rate nine months ended September 30, 1997 was higher than the statutory federal rate as a result of permanent differences between book and tax expense relating to the Growth Share Plan. The Company's effective tax rate in the three months ended September 30, 1997 and in the three and nine months ended September 30, 1996 approximated the statutory federal rate. Net Income (Loss). The Company realized net income of $12.7 million and $2.3 million in the three and nine months ended September 30, 1997, respectively, compared to net income of $3.5 million and a net loss of $8.9 million in the corresponding periods of 1996 as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES During the nine months ended September 30, 1997, the Company has funded capital expenditures and long-term debt repayments primarily through the net proceeds from the debt and equity offerings. The Company intends to finance its operations in the future through internally generated and external funds without relying on cash advances, contributions or guarantees from the Parent. The Company's operations generated insufficient cash flows during the nine months ended September 30, 1997 to enable it to meet its capital expenditures, debt service and other cash needs. Total cash expended during this period to fund capital expenditures, repayments of long-term debt to third parties and net repayments of advances from the Parent was approximately $205.3 million, $185.9 million and $19.1 million, respectively. Total cash used in operations was approximately $60.1 million during the same period. During the first nine months of 1997, total cash provided by loans secured by collateral owned by its parent or an affiliate was approximately $78.0 million. As of September 30, 1997, the Company had positive working capital of approximately $221.1 million. As of December 31, 1996, the Company had a working capital deficit of approximately $69.4 million. 26 In March 1997, the Company issued $250.0 million in principal amount of its 10 7/8% Senior Notes due 2007 (the Senior Notes), the net proceeds (approximately $242.0 million) of which were used to repay certain long-term debt and to fund a portion of capital expenditures required to construct segments of the Qwest Network. Issuance costs totaling approximately $8.0 million are being amortized to interest expense over the term of the Senior Notes. Interest on the Senior Notes is payable semi-annually on April 1 and October 1 of each year, commencing on October 1, 1997, and the principal amount of the Senior Notes is due and payable in full on April 1, 2007. The Indenture for the Senior Notes (the Indenture) contains certain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries (the Restricted Subsidiaries) to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of the Company or its Restricted Subsidiaries, issue or sell capital stock of the Company's Restricted Subsidiaries or enter into certain mergers and consolidations. In addition, under certain limited circumstances, the Company will be required to offer to purchase the Senior Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase with the excess proceeds of certain asset sales. In the event of a Change of Control (as defined in the Indenture), holders of the Senior Notes will have the right to require the Company to purchase all of their Senior Notes at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest. In May 1997, the Company and an unrelated third party supplier (the Supplier) entered into a $90.0 million credit agreement (the Equipment Credit Facility) to finance the transmission electronics equipment to be purchased from the Supplier under a procurement agreement. Under the Equipment Credit Facility, the Company may borrow funds as it purchases the equipment to fund up to 75% of the purchase price of such equipment and related engineering and installation services provided by the Supplier, with the purchased equipment and related items serving as collateral for the loans. Principal amounts outstanding under the Equipment Credit Facility will be payable in quarterly installments commencing on June 30, 2000, with repayment in full due and payable on March 31, 2004. Borrowings will bear interest at the Company's option at either: (i) a floating base rate announced by a designated reference bank plus an applicable margin; or (ii) LIBOR plus an applicable margin. As of September 30, 1997, approximately $8.1 million was outstanding under the Equipment Credit Facility. In June 1997, the Company received approximately $319.5 million in net proceeds from the sale of 15,525,000 shares of Common Stock in its Initial Public Offering. In August 1997, the Company completed a registered exchange of new Senior Notes (with terms identical in all material respects to the originally issued Senior Notes) for all of the originally issued Senior Notes. The Company received no proceeds from and recognized no profit on the exchange transaction, and no change in the financial condition of the Company occurred as a result of the exchange transaction. In October 1997, the Company issued $555,890,000 in principal amount at maturity of Senior Discount Notes, due 2007 (the Discount Notes), generating net proceeds of approximately $342.6 million, after deducting offering costs which are included in intangible and other long-term assets, such net proceeds will be used to fund capital expenditures for continuing construction and activation of the Network and to fund further growth in the business. The Discount Notes will accrete at a rate of 9.47% per annum, compounded semi-annually, to an aggregate principal amount of $555,890,000 27 by October 15, 2002. The principal amount of the Discount Notes is due and payable in full on October 15, 2007. The Discount Notes are redeemable at the Company's option, in whole or in part, at any time on or after October 15, 2002, at specified redemption prices. In addition, prior to October 15, 2000, the Company may use the net cash proceeds from certain specified equity transactions to redeem up to 35% of the Discount Notes at specified redemption prices. Cash interest on the Discount Notes will not accrue until October 15, 2002, and thereafter will accrue at a rate of 9.47% per annum, and will be payable semi- annually in arrears commencing on April 15, 2003 and thereafter on April 15 and October 15 (each an interest payment date) of each year. The Company has the option of commencing the accrual of cash interest on an interest payment date on or after October 15, 2000, in which case the outstanding principal amount at maturity of the Discount Notes will, on such interest payment date, be reduced to the then accreted value, and cash interest will be payable on each interest payment date thereafter. The indenture for the Discount Notes contains certain covenants that are substantially identical to the Senior Notes described below. In connection with the sale of the Discount Notes, the Company agreed to make an offer to exchange new notes, registered under the Securities Act of 1933 (the Act) and with terms identical in all material respects to the Discount Notes (the New Notes), for the Discount Notes or, alternatively, to file a shelf registration statement under the Act with respect to the Discount Notes. If the registration statement for the exchange offer or the shelf registration statement, as applicable, are not filed or declared effective within specified time periods or, after being declared effective, cease to be effective or usable for resale of the Discount Notes during specified time periods (each a Registration Default), additional cash interest will accrue at a rate per annum equal to 0.50% of the principal amount at maturity of the Discount Notes during the 90-day period immediately following the occurrence of a Registration Default and increasing in increments of 0.25% per annum of the principal amount at maturity of the Discount Notes up to a maximum of 2.0% per annum, at the end of each subsequent 90-day period until the Registration Default is cured. In February 1997, the Company entered into a one-year $50.0 million line of credit from a commercial bank. No amounts were ever drawn under this credit line, and the facility was canceled by the Company in July 1997. The Company had a $100.0 million three-year revolving credit facility that converts to a two-year term loan maturing on April 2, 2001. In October 1997, the Company repaid the outstanding balance and terminated this credit facility. The Company is considering obtaining a new bank credit facility of equal or lesser amount. In May 1997, the Company's board of directors approved a change in the Company's capital stock to authorize 400 million shares of $.01 par value Common Stock (of which 10 million shares were reserved for issuance under the equity incentive plan, 2 million shares were reserved for issuance under the Growth Share Plan, and 4.3 million shares were reserved for issuance upon exercise of warrants), and 25 million shares of $.01 par value Preferred Stock. In May 1997, the Company declared a stock dividend to the existing stockholder of 86,490,000 shares of Common Stock, which was paid immediately prior to the effectiveness of the registration statement on June 23, 1997. In June 1997, the Company completed an initial public offering of 15,525,000 shares of its Common Stock. Effective May 23, 1997, the Company sold to an affiliate of the Parent for $2.3 million in cash, a warrant to acquire 4.3 million shares of Common Stock at an exercise price of $28.00 per 28 share, exercisable on May 23, 2000. The warrant is not transferable. Stock issued upon exercise of the warrant will be subject to restrictions on sale or transfer for two years after exercise. The Company estimates the total cost to construct and activate the Qwest Network and complete construction relating to the dark fiber sold to Frontier, WorldCom and GTE will be approximately $1.9 billion. Total anticipated costs include approximately $640.0 million already expended by the Company as of September 30, 1997. The Company anticipates remaining total cash outlays for these purposes of approximately $170.0 million in 1997, $850.0 million in 1998 and $240.0 million in 1999. Estimated total expenditures in 1997 and 1998 include the Company's commitment to purchase a minimum quantity of fiber for approximately $399.0 million (subject to quality and performance specifications), of which approximately $198.5 million had been expended as of September 30, 1997. Estimated total expenditures for 1997, 1998 and 1999 together also include approximately $139.0 million for the purchase of electronic equipment. In addition, the Company anticipates approximately $97.0 million of aggregate capital expenditures in 1997 and 1998 to support growth in Carrier Services and Commercial Services. As of September 30, 1997, the Company has obtained the following sources of funds: (i) approximately $1.1 billion under the Frontier, WorldCom and GTE contracts and additional smaller construction contracts for sales of dark fiber, of which approximately $351.0 million had already been paid and $770.0 million remained to be paid at September 30, 1997; (ii) $90.0 million of vendor financing; (iii) approximately $117.8 million of net proceeds from the sale of the Senior Notes remaining after repayment of certain existing debt; and (iv) approximately $319.5 million of net proceeds from the initial public offering, of which approximately $164.3 million has been used as of September 30, 1997 for construction of the Network. The Company believes that its available cash and cash equivalent balances at September 30, 1997, the net proceeds from issuance of the Discount Notes in October and cash flow from operations will satisfy its currently anticipated cash requirements at least through the second quarter of 1998. With the completion of the 16,000 route-mile network, the Company will provide telecommunications services nationally to its customers primarily over its own facilities, using leased facilities in those portions of the country not covered by the Qwest Network. Qwest is evaluating the economics of extending its core network versus continuing to lease network capacity. In this regard, the Company is considering extensions in the Pacific Northwest, and the Company is in negotiations to connect the route between Boston and New York City. Also, the Company continues to evaluate opportunities to acquire or invest in complementary, attractively valued businesses, facilities, contract positions and hardware to improve its ability to offer new products and services to customers, to compete more effectively and to facilitate further growth of its business. 29 Item 3. Quantitative and Qualitative Disclosures About Market Risks Not applicable. 30 PART II. OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds (c) Recent Sales of Unregistered Securities No equity securities of the registrant were sold by the registrant during the period covered by this report that were not registered under the Securities Act of 1933. As described in Part I of this report, in July 1997, the Company issued 1,295,766 shares of its Common Stock (par value $.01 per share) in settlement of accrued liability related to "Growth Shares" outstanding under its Growth Share Plan (a noncontributory, nondiscretionary employee benefit plan); such issuances of Common Stock did not require registration under policies and analyses contained in applicable SEC releases relating to employee benefit plans. (d) Use of Proceeds The registrant completed its initial public offering of 15,525,000 shares of its Common Stock (par value $.01 per share) on June 27, 1997 pursuant to a registration statement (File No. 333-25391) declared effective on June 23, 1997. The underwriters for the offering were Salomon Brothers Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and Merrill Lynch & Co. The initial public offering price was $22.00 per share, with an aggregate offering price of $341,550,000 (including overallotment option shares) and net proceeds to the Company of approximately $319.5 million, after deducting underwriting discount of approximately $20.5 million and $1.5 million for expenses in connection with the issuance and distribution of the Common Stock. Through September 30, 1997, the Company has used approximately $164.3 million of such net proceeds from its initial public offering for construction of its fiber optic telecommunications network with the remaining net proceeds temporarily invested in certain short-term investment grade securities, such as money market funds, government securities and commercial paper. Item 5. Other Information Annual Meeting Information In order to be considered for inclusion in the Company's proxy statement and form of proxy relating to the Company's annual meeting of shareholders following the end of the Company's 1997 fiscal year, proposals by individual shareholders must be received by the Company no later than December 31, 1997. The Company expects to hold its first annual meeting of shareholders in early May 1998, and the Company will notify the shareholders appropriately of the details related to the meeting. 31 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Qwest Communications International Inc., a Delaware corporation November 14, 1997 By: /s/ ROBERT S. WOODRUFF -------------------------- Robert S. Woodruff Executive Vice President - Finance and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer) 32 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 3. Bylaws (as amended) 11. Statements re computation of per share income (loss) 27. Financial data schedule (b) Reports on Form 8-K None EX-3 2 BYLAWS AS AMENDED EXHIBIT 3 BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC. As Amended as of September 11, 1997 INDEX TO BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC.
Page ARTICLE I Offices 1 Section 1.01 Business Offices 1 ---------------- Section 1.02 Registered Office 1 ----------------- ARTICLE II Stockholders 1 Section 2.01 Annual Meeting 1 -------------- Section 2.02 Special Meetings 1 ---------------- Section 2.03 Place of Meeting 1 ---------------- Section 2.04 Notice of Meetings 2 ------------------ Section 2.05 Fixing Date for Determination of Stockholders of Record 2 -------------------------------------------------------- Section 2.06 Voting List 2 ----------- Section 2.07 Proxies 3 ------- Section 2.08 Quorum and Manner of Acting 3 --------------------------- Section 2.09 Voting of Shares 3 ---------------- Section 2.10 Voting of Shares by Certain Holders 3 ----------------------------------- Section 2.11 Action Without a Meeting 4 ------------------------ Section 2.12 Conduct of Meetings 5 ------------------- Section 2.13 Nomination of Directors 6 ----------------------- ARTICLE III Board of Directors 7 Section 3.01 General Powers 7 -------------- Section 3.02 Number, Tenure and Qualifications 7 --------------------------------- Section 3.03 Resignation 7 ----------- Section 3.04 Removal 7 ------- Section 3.05 Vacancies 7 --------- Section 3.06 Regular Meetings 8 ---------------- Section 3.07 Special Meetings 8 ---------------- Section 3.08 Meetings by Telephone 8 --------------------- Section 3.09 Notice of Meetings 8 --------------------- Section 3.10 Quorum and Manner of Acting 8 --------------------------- Section 3.11 Interested Directors 9 -------------------- Section 3.12 Action Without a Meeting 9 ------------------------ Section 3.13 Executive and Other Committees 9 ------------------------------ Section 3.14 Compensation 10 ------------ Section 3.15 Chairman of the Board 10 --------------------- ARTICLE IV Officers 10 Section 4.01 Number and Qualifications 10 ------------------------- Section 4.02 Election and Term of Office 10 ---------------------------
Section 4.03 Compensation 11 ------------ Section 4.04 Resignation 11 ----------- Section 4.05 Removal 11 ------- Section 4.06 Vacancies 11 --------- Section 4.07 Authority and Duties 11 -------------------- Section 4.08 Surety Bonds 13 ------------ ARTICLE V Stock 13 Section 5.01 Issuance of Shares 13 ------------------ Section 5.02 Stock Certificates; Uncertificated Shares 13 ----------------------------------------- Section 5.03 Payment for Shares 13 ------------------ Section 5.04 Lost Certificates 14 ----------------- Section 5.05 Transfer of Shares 14 ------------------ Section 5.06 Registered Holders 14 ------------------ Section 5.07 Transfer Agents, Registrars and Paying Agents 15 --------------------------------------------- ARTICLE VI Indemnification 15 Section 6.01 Definitions 15 ----------- Section 6.02 Right to Indemnification 15 ------------------------ Section 6.03 Successful on the Merits 16 ------------------------ Section 6.04 Advancement of Expenses 16 ----------------------- Section 6.05 Proceedings by a Party 16 ---------------------- Section 6.06 Subrogation 17 ----------- Section 6.07 Other Payments 17 -------------- Section 6.08 Insurance 17 --------- Section 6.09 Other Rights and Remedies 17 ------------------------- Section 6.10 Applicability; Effect 17 --------------------- Section 6.11 Severability 17 ------------ ARTICLE VII Miscellaneous 18 Section 7.01 Waivers of Notice 18 ----------------- Section 7.02 Presumption of Assent 18 --------------------- Section 7.03 Voting of Securities by the Corporation 18 --------------------------------------- Section 7.04 Loans to Employees and Officers; Guaranty of -------------------------------------------- Obligations of Employees and Officers 18 ------------------------------------- Section 7.05 Seal 19 ---- Section 7.06 Fiscal Year 19 ----------- Section 7.07 Amendments 19 ----------
BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC. ARTICLE I Offices Section 1.01 Business Offices. The corporation may have such offices, ---------------- either within or outside Delaware, as the board of directors may from time to time determine or as the business of the corporation may require. Section 1.02 Registered Office. The registered office of the ----------------- corporation required by the Delaware General Corporation Law to be maintained in Delaware shall be as set forth in the certificate of incorporation, unless changed as provided by law. ARTICLE II Stockholders Section 2.01 Annual Meeting. An annual meeting of the stockholders -------------- shall be held on such date and at such time as the board of directors shall fix in the notice of meeting, beginning with the year 1998, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for any annual meeting of the stockholders, or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the stockholders as soon thereafter as conveniently may be. Failure to hold an annual meeting as required by these bylaws shall not invalidate any action taken by the board of directors or officers of the corporation. Section 2.02 Special Meetings. Special meetings of the stockholders, ---------------- for any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman of the Board or by the board of directors pursuant to a resolution approved by the affirmative vote of a majority of directors then in office, and shall be called by the Chairman of the Board at the written request of the holders of not less than 25 percent of the votes of the outstanding shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. Such written request shall state the purpose or purposes of the proposed meeting. Section 2.03 Place of Meeting. Each meeting of the stockholders shall ---------------- be held at such place, either within or outside Delaware, as may be designated in the notice of meeting, or, if no place is designated in the notice, at the principal office of the corporation. -1- Section 2.04 Notice of Meetings. Except as otherwise required by law, ------------------ written notice of each meeting of the stockholders stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given, either personally (including delivery by private courier) or by first class, certified or registered mail, to each stockholder of record entitled to notice of such meeting, not less than ten nor more than 60 days before the date of the meeting. Such notice shall be deemed to be given, if personally delivered, when delivered to the stockholder, and, if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation, but if notice of two consecutive annual meetings and all notices of meetings of or the taking of action by written consent without a meeting to any stockholder during the period between such two consecutive annual meetings, or all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a 12-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required until another address for such person is delivered to the corporation. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with the foregoing provisions of this Section 2.04. Section 2.05 Fixing Date for Determination of Stockholders of Record. -------------------------------------------------------- For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for any other lawful action, the board of directors may fix a date as the record date for any such determination of stockholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall be not more than 60 nor less than ten days before the date of such meeting. If no record date is fixed for determining stockholders entitled to notice of or to vote at a meeting of stockholders, then the record date shall be the close of business on the day next preceding the day on which notice is given, or, if notice is waived, the close of business on the day next preceding the day on which the meeting is held, or, for determining stockholders for any other purpose, the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Notwithstanding the foregoing provisions of this Section 2.05, the record date for determining stockholders entitled to take, or receive notice of, corporate action in writing without a meeting as provided in Section 2.11 shall be determined as provided in such Section. Section 2.06 Voting List. The officer who has charge of the stock books ----------- of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a -2- complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.07 Proxies. Each stockholder entitled to vote at a meeting of ------- stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 2.08 Quorum and Manner of Acting. At all meetings of --------------------------- stockholders, a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of a majority of the shares represented at a meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater proportion or number or voting by classes is otherwise required by law, the certificate of incorporation or these bylaws. In the absence of a quorum, a majority of the shares so represented may adjourn the meeting from time to time in accordance with Section 2.04, until a quorum shall be present or represented. Section 2.09 Voting of Shares. Unless otherwise provided in the ---------------- certificate of incorporation and subject to the provisions of Section 2.05, each stockholder entitled to vote shall have one vote for each outstanding share of capital stock held of record by such stockholder on each matter submitted to a vote of the stockholders either at a meeting thereof or pursuant to Section 2.11. In the election of directors each record holder of stock entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has the right to vote. Cumulative voting shall not be allowed. If a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 2.10 Voting of Shares by Certain Holders. ----------------------------------- (a) Fiduciaries; Pledgors. Persons holding stock in a fiduciary --------------------- capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such shares and vote thereon. (b) Joint Owners. If shares stand of record in the names of two or ------------ more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants -3- by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effects: (i) if only one votes, his act binds all; (ii) if more than one votes, the act of the majority so voting binds all; and (iii) if more than one votes, but the vote is evenly split on any particular matter, each faction may vote the shares in question proportionally, or any person voting the shares, or a beneficiary, if any, may apply to any court having jurisdiction to appoint an additional person to act with the persons so voting the shares, in which case the shares shall then be voted as determined by a majority of such persons. If the secretary of the corporation is given notice and is furnished a copy of the instrument or order creating a tenancy held in unequal interests, a majority or even split for the purpose of subparagraph (iii) shall be a majority or even split in interest. Section 2.11 Action Without a Meeting. ------------------------ (a) Written Consent. Unless otherwise provided in the certificate --------------- of incorporation, any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted (which consent may be signed in counterparts). Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered to the corporation in the manner required by the Delaware General Corporation Law, written consents signed by a sufficient number of stockholders to take the action are delivered to the corporation in the manner required by the Delaware General Corporation Law. (b) Determination of Stockholders Entitled to Act By Consent. For -------------------------------------------------------- purposes of determining stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a date as the record date for any such determination of stockholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation in the manner required by the Delaware General Corporation Law. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the day on which the board of directors adopts the resolution taking such prior action. -4- (c) Notice to Non-Consenting Stockholders. Prompt notice of the ------------------------------------- taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation in the manner required by the Delaware General Corporation Law. Such notice shall be given in accordance with the applicable provisions of Section 2.04. Section 2.12 Conduct of Meetings. The chairman of the annual or any ------------------- special meeting of the stockholders shall be the chairman of the board, if there is one, or, if there is not one or in his absence, the chief executive officer or president of the corporation (or in his absence, any person designated by the board of directors), unless and until a different person is elected by a majority of the shares entitled to vote at such meeting. The chairman of the meeting shall appoint one or more persons to act as inspectors of election at the meeting and to make a written report thereof. Meetings of stockholders shall be conducted in accordance with the following rules: (a) The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. (b) If disorder should arise that prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting to another time and place and upon his so doing the meeting is immediately adjourned. (c) The chairman may ask or require that anyone who is not a bona fide stockholder or proxy leave the meeting. (d) A resolution or motion shall be considered for vote only if proposed in accordance with the provisions of Section 2.12(e) and only if proposed by a stockholder or a duly authorized proxy and seconded by an individual who is a stockholder or a duly authorized proxy, other than the individual who proposed the resolution or motion. (e) At any annual or special meeting of stockholders only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the meeting. For any new business proposed by management to be properly brought before the annual meeting, such new business shall be approved by the board of directors, either directly or through its approval by proxy solicitation materials related thereto, and shall be stated in writing and filed with the secretary of the corporation at least five days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting. Any stockholder may make any other proposal at a meeting and the same may be discussed and considered, but unless properly brought before the meeting such proposal shall not -5- be acted upon at the meeting. No business may be properly brought before a special meeting unless identified in the notice thereof given in accordance with applicable law and Section 2.04 of these bylaws. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 120 days prior to the date of the corporation's proxy statement released to stockholders in connection with the previous year or if the date of the annual meeting has been changed by more than 30 days from the date contemplated at the previous year's annual meeting, then 150 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days notice is given or made to the stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any financial interest of the stockholder in such proposal, and (v) any additional information as the Board or the president of the corporation shall deem necessary or desirable. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at an annual or special meeting except in accordance with the procedures set forth in this Section 2.12(e). The chairman of an annual or special meeting shall, if the facts warrant, determine and declare to the meeting that new business of any stockholder was not properly brought before the meeting in accordance with the provisions of this Section 2.12(e), and if the chairman should so determine, the chairman shall so declare to the meeting and any such business or proposal not properly brought before the meeting shall not be acted upon at the meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. Section 2.13 Nomination of Directors. Nomination of persons to stand for ----------------------- election at any annual or special stockholders meeting may be made at any time prior to the vote thereon by the board of directors or a committee of the board of directors. Other than as provided in the immediately preceding sentence, no such nominations shall be entertained unless written notice of such proposed nominations are received by the secretary of the corporation, (i) if for an annual meeting, not less than 90 days in advance of the date that corresponds to the date that the corporation's proxy statement was first mailed or released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date for the annual meeting has been changed by more than 30 calendar days -6- from the date of the previous year's annual meeting, such written notice shall suffice if received not less than 30 days prior to such meeting, and (ii) if for any other stockholders meeting, not less than seven days after notice of such meeting is first given. Such written notice shall provide the name and age of each nominee and complete account of the business experience of each nominee during the past five years, including the present occupation and business activities of the nominee regardless of whether compensation in any form whatever was received for such activities or experience. ARTICLE III Board of Directors Section 3.01 General Powers. The business and affairs of the -------------- corporation shall be managed by or under the direction of its board of directors, except as otherwise provided in the Delaware General Corporation Law or the certificate of incorporation. Section 3.02 Number, Tenure and Qualifications. The board of directors --------------------------------- of the corporation shall consist of one or more members. The number of directors of the corporation shall be as fixed from time to time by resolution of the board of directors. Except as otherwise provided in Sections 2.01 and 3.05, directors shall be elected at each annual meeting of stockholders, by a plurality of the votes present in person or represented by proxy at the meeting and entitled to vote at the election of directors. Each director shall hold office until his successor shall have been elected and qualified or until his earlier death, resignation or removal. Directors need not be residents of Delaware or stockholders of the corporation. Any reduction in the authorized number of directors shall not have the effect of shortening the term of any incumbent director unless such director is also removed from office in accordance with Section 3.04. Section 3.03 Resignation. Any director may resign at any time by giving ----------- written notice to the corporation. A director's resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.04 Removal. Any director or the entire board of directors may ------- be removed, with or without cause, by the affirmative vote of holders of at least a majority of the votes of the outstanding shares of stock generally entitled to vote in the election of directors, voting together as a single class, at a meeting for which notice of the proposed removal has been given in accordance with Section 2.04. Section 3.05 Vacancies. Unless otherwise provided in the certificate of --------- incorporation, any vacancy or any newly created directorship resulting from any increase in the authorized number of directors may be filled by a majority of directors then in office, although less than a quorum, or by a sole remaining director, or by the stockholders if there are no directors remaining, and a director so chosen shall hold office until the next annual meeting of stockholders and until his successor is duly elected and qualified. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the -7- vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this Section for the filling of other vacancies. Section 3.06 Regular Meetings. A regular meeting of the board of ---------------- directors shall be held immediately after and at the same place as the annual meeting of stockholders, or as soon thereafter as conveniently may be, at the time and place, either within or without Delaware, determined by the board, for the purpose of electing officers and for the transaction of such other business as may come before the meeting. Failure to hold such a meeting, however, shall not invalidate any action taken by any officer then or thereafter in office. The board of directors may provide by resolution the time and place, either within or outside Delaware, for the holding of additional regular meetings without other notice than such resolution. Section 3.07 Special Meetings. Special meetings of the board of ---------------- directors may be called by or at the request of the chairman of the board or any director. The person authorized to call special meetings of the board of directors may fix any convenient place, either within or outside Delaware, as the place for holding any special meeting of the board of directors called by him. Section 3.08 Meetings by Telephone. Unless otherwise restricted by the --------------------- certificate of incorporation, members of the board of directors or any committee thereof may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting in such manner shall constitute presence in person at the meeting. Section 3.09 Notice of Meetings. Notice of each meeting of the board of ------------------ directors (except those regular meetings for which notice is not required) stating the place, day and hour of the meeting shall be given to each director at least five days prior thereto by the mailing of written notice by first class mail or at least three days prior thereto by personal delivery (including delivery by courier) of written notice or by telephone, telegram, facsimile or other similar form of communication, except that in the case of a meeting to be held pursuant to Section 3.08 notice may be given by personal delivery or by facsimile, telegram or telephone 24 hours prior thereto. The method of notice need not be the same to each director. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage thereon prepaid, addressed to the director at his business or residence address. If sent by telegram, facsimile or similar form of communication, such notice shall be deemed to be given when sent by such method to the director during normal business hours at the location of the recipient at the last address or facsimile number of the director furnished by him to the corporation for such purpose. If communicated by telephone, such notice shall be deemed to be given when communicated directly to the director or to the person designated by the director as a person authorized to receive such notice. Neither the business to be transacted at nor the purpose of any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 3.10 Quorum and Manner of Acting. Except as otherwise may be --------------------------- required by law, the certificate of incorporation or these bylaws, a majority of the number of directors fixed -8- in accordance with these bylaws, present in person, shall constitute a quorum for the transaction of business at any meeting of the board of directors, and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. If less than a quorum is present at a meeting, the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. No director may vote or act by proxy or power of attorney at any meeting of the board of directors. Section 3.11 Interested Directors. No contract or transaction between -------------------- the corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or the contract or transactions is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee that authorizes the contract or transaction. Section 3.12 Action Without a Meeting. Unless otherwise restricted by ------------------------ the certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting, without prior notice and without a vote, if all members of the board or committee consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the board or committee. Section 3.13 Executive and Other Committees. The board of directors may ------------------------------ designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware General Corporation Law to be submitted to stockholders for approval; or (b) adopting, -9- amending or repealing any bylaw of the corporation. The delegation of authority to any committee shall not operate to relieve the board of directors or any member of the board form any responsibility imposed by law. Subject to the foregoing, the board of directors may provide such powers, limitations and procedures for such committees as the board deems advisable. To the extent the board of directors does not establish other procedures, each committee shall be governed by the procedures set forth in Sections 3.06 (except as they relate to an annual meeting), 3.07 through 3.11 and 7.01 and 7.02 as if the committee were the board of directors. Each committee shall keep regular minutes of its meetings, which shall be reported to the board of directors when required and submitted to the secretary of the corporation for inclusion in the corporate records. Section 3.14 Compensation. Unless otherwise restricted by the certificate ------------ of incorporation, the board of directors, or any committee thereof as may be authorized by the board, shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and each meeting of any committee of the board of which he is a member and may be paid a fixed sum for attendance at each such meeting or a stated salary or both a fixed sum and a stated salary. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 3.15 Chairman of the Board. The Chairman of the Board, who --------------------- shall be elected from among the directors, shall preside at all meetings of the stockholders and directors of the corporation, or the Chairman's designee shall so preside, and shall have and may exercise all such powers and perform such other duties as may be assigned to him from time to time by the Board of Directors. [Added by amendment as of September 11, 1997] ARTICLE IV Officers Section 4.01 Number and Qualifications. The officers of the corporation ------------------------- shall consist of a chairman of the board, a chief executive officer, a president, a secretary, a treasurer and such other officers, including one or more vice-presidents and a controller, as may from time to time be elected or appointed by the board. In addition, the board of directors or the president may elect or appoint such assistant and other subordinate officers including assistant vice-presidents, assistant secretaries and assistant treasurers, as it or he shall deem necessary or appropriate. Any number of offices may be held by the same person, except that no person may simultaneously hold the offices of president and secretary. Section 4.02 Election and Term of Office. Except as provided in Sections --------------------------- 4.01 and 4.06, the officers of the corporation shall be elected by the board of directors annually at the first meeting of the board held after each annual meeting of the stockholders as provided in Section 3.06. If the election of officers shall not be held as provided herein, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until the expiration of his term in office if -10- elected or appointed for a specified period of time or until his earlier death, resignation or removal. Section 4.03 Compensation. Officers shall receive such compensation for ------------ their services as may be authorized or ratified by the board of directors, or any committee of the board as may be authorized, and no officer shall be prevented from receiving compensation by reason of the fact that he is also a director of the corporation. Election or appointment as an officer shall not of itself create a contract or other right to compensation for services performed by such officer. Section 4.04 Resignation. Any officer may resign at any time, subject ----------- to any rights or obligations under any existing contracts between the officer and the corporation, by giving written notice to the corporation. An officer's resignation shall take effect at the time stated therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.05 Removal. Any officer may be removed at any time by the ------- board of directors, or, in the case of assistant and other subordinate officers, by the president (whether or not such officer was appointed by the president), whenever in its or his judgment, as the case may be, the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer shall not in itself create contract rights. Section 4.06 Vacancies. A vacancy occurring in any office by death, --------- resignation, removal or otherwise may be filled by the board of directors, or, if such office may be filled by the president as provided in Section 4.01, by the president, for the unexpired portion of the term. Section 4.07 Authority and Duties. The officers of the corporation -------------------- shall have the authority and shall exercise the powers and perform the duties specified below, and as may be additionally specified by the chief executive officer, the board of directors or these bylaws (and in all cases where the duties of any officer are not prescribed by the bylaws or the board of directors, such officer shall follow the orders and instructions of the president), except that in any event each officer shall exercise such powers and perform such duties as may be required by law: (a) Chief Executive Officer. The chief executive officer ----------------------- shall, subject to the direction and supervision of the board of directors, (i) have general and active control of its affairs and business and general supervision of its officers, agents and employees; (ii) in the absence of the chairman of the board, preside at all meetings of the stockholders and the board of directors; (iii) see that all orders and resolutions of the board of directors are carried into effect; and (iv) perform all other duties incident to the office of Chief Executive Officer and as from time to time may be assigned to him by the board of directors. (b) President. The president shall, subject to the --------- direction and supervision of the board of directors, (i) if there is no chief executive officer, be the chief operating officer of the corporation and have general and active control of its affairs and business and general supervision of its officers, agents and employees; (ii) unless there is a chairman of the board or chief executive officer, preside at all meetings of the stockholders and the board of -11- directors; (iii) see that all orders and resolutions of the board of directors are carried into effect; and (iv) perform all other duties incident to the office of president and as from time to time may be assigned to him by the board of directors. (c) Chief Financial Officer; Treasurer. The chief financial officer ---------------------------------- or, in the absence of a chief financial officer, the treasurer shall: (i) be the principal financial officer of the corporation and have the care and custody of all its funds, securities, evidences of indebtedness and other personal property and deposit the same in accordance with the instructions of the board of directors; (ii) receive and give receipts and acquittances for moneys paid in on account of the corporation, and pay out of the funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity; (iii) unless there is a controller, be the principal accounting officer of the corporation and as such prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations; (iv) upon request of the board, make such reports to it as may be required at any time; and (v) perform all other duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the board of directors or the president. Assistant treasurers, if any, shall have the same powers and duties, subject to the supervision by the treasurer. (d) Vice-Presidents. The vice-president, if any (or, if there is more --------------- than one, then each vice-president), shall assist the president and shall perform such duties as may be assigned to him by the president or by the board of directors. The vice-president, if there is one (or, if there is more than one, then the vice-president designated by the board of directors, or, if there be no such designation, then the vice-presidents in order of their election), shall, at the request of the president or, in his absence or inability or refusal to act, perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions upon the president. Assistant vice-presidents, if any, shall have such powers and perform such duties as may be assigned to them by the president or by the board of directors. (e) Secretary. The secretary shall: (i) prepare and maintain the --------- minutes of the proceedings of the stockholders, the board of directors and any committees of the board; (ii) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (iii) be custodian of the corporate records and of the seal of the corporation; (iv) keep at the corporation's registered office or principal place of business within or outside Colorado a record containing the names and addresses of all stockholders and the number and class of shares held by each, unless such a record shall be kept at the office of the corporation's transfer agent or registrar; (v) have general charge of the stock books of the corporation, unless the corporation has a transfer agent; (vi) authenticate records of the corporation; and (vii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. -12- [Section 4.07 amended as of September 11, 1997 to renumber paragraphs and delete old paragraph (a)] Section 4.08 Surety Bonds. The board of directors may require any ------------ officer or agent of the corporation to execute to the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE V Stock Section 5.01 Issuance of Shares. The issuance or sale by the corporation ------------------ of any shares of its authorized capital stock of any class, including treasury shares, shall be made only upon authorization by the board of directors, except as otherwise may be provided by law. Every issuance of shares shall be recorded on the books of the corporation maintained for such purpose by or on behalf of the corporation. Section 5.02 Stock Certificates; Uncertificated Shares. The shares of ----------------------------------------- stock of the corporation shall be represented by certificates, except that the board of directors may, in accordance with applicable provisions of law, authorize the issuance of some or all of any or all classes or series of stock of the corporation without certificates. If shares are represented by certificates (or if a holder of uncertificated shares requests his shares to be represented by a certificate), each certificate shall be signed by or in the name of the corporation by the chairman or a vice-chairman of the board of directors, or the president or a vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, representing the number of shares owned by him in the corporation. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Certificates of stock shall be in such form consistent with law as shall be prescribed by the board of directors. Section 5.03 Payment for Shares. Shares shall be issued for such ------------------ consideration (but not less than the par value thereof) as shall be determined from time to time by the board of directors. Treasury shares shall be disposed of for such consideration as may be determined from time to time by the board. Such consideration shall be paid in such form and in such manner as the directors shall determine. In the absence of actual fraud in the transaction, the judgment of the directors as to the value of such consideration shall be conclusive. The capital stock issued by the corporation shall be deemed to be fully paid and non-assessable stock if: (a) the entire amount of the consideration has been received by the corporation in the form of cash, services rendered, personal property, real property, leases of real property or a combination thereof; or (b) not less than the amount of the consideration determined to be capital pursuant to statute has -13- been received by the corporation in such form and the corporation has received a binding obligation of the subscriber or purchaser to pay the balance of the subscription or purchase price; provided, however, nothing contained herein shall prevent the board of directors from issuing partly paid shares pursuant to statute. The directors may, from time to time, demand payment in respect of each share of stock not fully paid in the manner prescribed by statute. In addition, when the whole of the consideration payable for shares of a corporation has not been paid in, and the assets shall be insufficient to satisfy the claims of its creditors, each holder of or subscriber for such shares shall be bound to pay on each share held or subscribed for by him the sum necessary to complete the amount of the unpaid balance of the consideration for which such shares were issued or are to be issued by the corporation. No person becoming an assignee or transferee of shares or of a subscription for shares in good faith and without knowledge or notice that the full consideration therefor has not been paid shall be personally liable for any unpaid portion of such consideration, but the transferor shall remain liable therefor, and no person holding shares in any corporation as collateral security shall be personally liable as a stockholder but the person pledging such shares shall be considered the holder thereof and shall be so liable. No executor, administrator, guardian, trustee or other fiduciary shall be personally liable as a stockholder, but the estate or funds held by such executor, administrator, guardian, trustee or other fiduciary in such fiduciary capacity shall be liable. Section 5.04 Lost Certificates. In case of the alleged loss, theft or ----------------- destruction of a certificate of stock the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as it may prescribe. The board of directors may in its discretion require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.05 Transfer of Shares. Upon presentation and surrender to the ------------------ corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, payment of all transfer taxes, if any, and the satisfaction of any other requirements of law, including inquiry into and discharge of any adverse claims of which the corporation has notice, the corporation or the transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on the books maintained for such purpose by or on behalf of the corporation. No transfer of shares shall be effective until it has been entered on such books. The corporation or a transfer agent of the corporation may require a signature guaranty or other reasonable evidence that any signature is genuine and effective before making any transfer. Transfers of uncertificated shares shall be made in accordance with applicable provisions of law. Section 5.06 Registered Holders. The corporation shall be entitled to ------------------ recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. -14- Section 5.07 Transfer Agents, Registrars and Paying Agents. The board --------------------------------------------- of directors may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Delaware. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. ARTICLE VI Indemnification Section 6.01 Definitions. For purposes of this Article, the following ----------- terms shall have the meanings set forth below: (a) The Corporation. The term "the corporation" means the --------------- corporation and shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (b) Other Enterprises. The term "other enterprises" shall include ----------------- employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and the beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. Section 6.02 Right to Indemnification. The corporation shall indemnify, ------------------------ to the fullest extent permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to -15- believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. Any indemnification under this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in this section. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. Section 6.03 Successful on the Merits. To the extent that a director, ------------------------ officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in section 6.02, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6.04 Advancement of Expenses. Expenses (including attorneys' ----------------------- fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 6.05 Proceedings by a Party. The corporation shall indemnify or ---------------------- advance expenses to a party in connection with any proceeding (or part thereof) initiated by the party only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. -16- Section 6.06 Subrogation. In the event of any payment under this ----------- Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified party, who shall execute all papers and do everything that may be necessary to assure such rights of subrogation to the corporation. Section 6.07 Other Payments. The corporation shall not be liable under -------------- this Article to make any payment in connection with any proceeding against or involving a party to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of the amounts otherwise indemnifiable hereunder. A party shall repay to the corporation the amount of any payment the corporation makes to the party under this Article in connection with any proceeding against or involving the party, to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of such amount. Section 6.08 Insurance. The corporation shall have power to purchase --------- and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this Article. Section 6.09 Other Rights and Remedies. The indemnification and ------------------------- advancement of expenses provided by, or granted pursuant to this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 6.10 Applicability; Effect. The indemnification and advancement --------------------- of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.11 Severability. If any provision of this Article shall be ------------ held to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Article (including without limitation, all portions of any Sections of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the provisions of this Article (including, without limitation, all portions of any Section of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent of this Article that each party covered hereby is entitled to the fullest protection permitted by law. -17- ARTICLE VII Miscellaneous Section 7.01 Waivers of Notice. Whenever notice is required to be given ----------------- by law, by the certificate of incorporation or by these bylaws, a written waiver thereof, signed by the person entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting or (in the case of a stockholder) by proxy shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting need be specified in any written waiver of notice unless required by these bylaws to be included in the notice of such meeting. Section 7.02 Presumption of Assent. A director or stockholder of the --------------------- corporation who is present at a meeting of the board of directors or stockholders at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director or stockholder who voted in favor of such action. Section 7.03 Voting of Securities by the Corporation. Unless otherwise --------------------------------------- provided by resolution of the board of directors, on behalf of the corporation the president or any vice-president shall attend in person or by substitute appointed by him, or shall execute written instruments appointing a proxy or proxies to represent the corporation at, all meetings of the stockholders of any other corporation, association or other entity in which the corporation holds any stock or other securities, and may execute written waivers of notice with respect to any such meetings. At all such meetings and otherwise, the president or any vice-president, in person or by substitute or proxy as aforesaid, may vote the stock or other securities so held by the corporation and may execute written consents and any other instruments with respect to such stock or securities and may exercise any and all rights and powers incident to the ownership of said stock or securities, subject, however, to the instructions, if any, of the board of directors. Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of ----------------------------------------------------------- Employees and Officers. The corporation may lend money to, or guarantee any - - ---------------------- obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of any corporation at common law or under any statute. -18- Section 7.05 Seal. The corporate seal of the corporation shall be in ---- such form as adopted by the board of directors, and any officer of the corporation may, when and as required, affix or impress the seal, or a facsimile thereof, to or on any instrument or document of the corporation. Section 7.06 Fiscal Year. The fiscal year of the corporation shall be as ----------- established by the board of directors. Section 7.07 Amendments. These bylaws may be amended or repealed and new ---------- bylaws adopted by the board of directors or by the stockholders entitled to vote. (END) -19- EX-11 3 INCOME PER SHARE COMPUTATION EXHIBIT 11 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE INCOME (LOSS) (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) ================================================================================
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 1997 1996 1997 1996 --------- -------- -------- --------- Net income (loss) to common stockholders $ 12,651 $ 3,454 $ 2,263 $ (8,901) Total weighted average number of shares of common stock outstanding: Weighted average number of shares of common stock outstanding 105,812 86,500 93,945 86,500 Common stock issuable under Growth Share Plan - 1,658 - 1,658 --------- -------- -------- --------- Total weighted average number of shares of common stock outstanding 105,812 88,158 93,945 88,158 Net income (loss) per share $ 0.12 $ 0.04 $ 0.02 $ (0.10)
EX-27 4 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from the consolidated balance sheet as of September 30, 1997 and consolidated statement of operations for the nine months ended September 30, 1997 included in the Company's Form 10-Q, and is qualified in its entirety by reference to such financial statements. 1,000 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 186,731 0 69,138 4,419 0 438,435 481,099 36,283 908,478 217,374 250,000 0 0 1,033 412,005 908,478 490,321 490,321 0 490,203 (13,222) 0 8,886 4,454 2,191 2,263 0 0 0 2,263 0.02 0.02
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