-----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, DxH1Jn6CplX7G6RlZ6uhwq2jE5OU6HZP33Yrfo/ONB7dDB/hklF5A3CeIlyen7S+ CzJDviY55bpxfV0OeIffew== 0000927356-99-001285.txt : 19990812 0000927356-99-001285.hdr.sgml : 19990812 ACCESSION NUMBER: 0000927356-99-001285 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [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: 99683773 BUSINESS ADDRESS: STREET 1: 700 QWEST TOWER STREET 2: 555 SEVENTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032911400 MAIL ADDRESS: STREET 1: 700 QWEST TOWER STREET 2: 555 SEVENTEENTH STREET CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: QUEST COMMUNICATIONS INTERNATIONAL INC DATE OF NAME CHANGE: 19970416 10-Q 1 QWEST COMMUNICATIONS QUARTERLY REPORT =============================================================================== 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 June 30, 1999 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 Identification incorporation or organization) Number) 700 QWEST TOWER 555 SEVENTEENTH STREET DENVER, COLORADO 80202 ---------------------- (Address of principal executive offices) (303) 992-1400 -------------- (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 approximately 745.7 million, as of August 9, 1999. =============================================================================== QWEST COMMUNICATIONS INTERNATIONAL INC. QUARTER ENDED JUNE 30, 1999 TABLE OF CONTENTS
Page ---- PART I. Financial Information Item 1. Financial Statements (Unaudited): Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 1999 and 1998 3 Condensed Consolidated Balance Sheets as of June 30, 1999 and December 31, 1998 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 1999 and 1998 5 Notes to Condensed Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations for the Three and Six Months Ended June 30, 1999 and 1998 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. Other Information Item 1. Legal Proceedings 23 Item 2. Changes in Securities and Use of Proceeds 24 Item 4. Submission of Matters to a Vote of Security Holders 24 Item 6. Exhibits and Reports on Form 8-K 24 Signature Page 29
2 Part I. Financial Information Item 1. Condensed Financial Statements QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (In Millions, Except Per Share Information) (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, ----------------------------- ------------------------------ 1999 1998 1999 1998 -------------- ------------ ------------- -------------- Revenue: Communications services $ 790.4 $ 239.8 $ 1,527.6 $ 282.4 Construction services 83.3 153.9 224.5 288.4 -------------- ------------ ------------- -------------- Total revenue 873.7 393.7 1,752.1 570.8 -------------- ------------ ------------- -------------- Operating expenses: Access and network operations 444.6 153.6 877.6 184.5 Construction services 19.6 108.1 96.3 205.6 Selling, general and administrative 222.6 107.9 436.0 152.1 Depreciation and amortization 92.9 32.0 188.8 40.1 Merger costs - 62.5 - 62.5 Provision for in-process research and development - 750.0 - 750.0 -------------- ------------ ------------- -------------- Total operating expenses 779.7 1,214.1 1,598.7 1,394.8 Operating income (loss) 94.0 (820.4) 153.4 (824.0) Other (income) expense: Interest expense, net 39.2 18.9 71.2 33.2 Other expense (income), net 6.9 (6.4) 9.8 (14.4) -------------- ------------ ------------- -------------- Earnings (loss) before income taxes 47.9 (832.9) 72.4 (842.8) Income tax expense (benefit) 29.4 (24.0) 49.2 (27.1) -------------- ------------ ------------- -------------- Net earnings (loss) $ 18.5 $ (808.9) $ 23.2 $ (815.7) ============== ============ ============= ============== Net earnings (loss) per share - basic $ 0.03 $ (1.67) $ 0.03 $ (1.82) ============== ============ ============= ============== Net earnings (loss) per share - diluted $ 0.02 $ (1.67) $ 0.03 $ (1.82) ============== ============ ============= ==============
See accompanying notes to condensed consolidated financial statements. 3 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Millions, Except Share Information) (Unaudited)
June 30, December 31, 1999 1998 --------------- --------------- ASSETS Current assets: Cash $ 1,437.4 $ 462.8 Trade accounts and notes receivable, net 663.6 628.1 Prepaid expenses and other 240.1 348.2 --------------- --------------- Total current assets 2,341.1 1,439.1 Property and equipment, net 3,159.7 2,655.4 Excess of cost over net assets acquired, net 3,308.7 3,402.0 Other, net 1,190.2 571.1 --------------- --------------- TOTAL ASSETS $ 9,999.7 $ 8,067.6 =============== =============== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 246.1 $ 205.1 Accrued facility costs 185.9 300.2 Accrued construction costs 141.6 145.9 Accrued expenses and other 369.8 586.3 --------------- --------------- Total current liabilities 943.4 1,237.5 Debt and capital lease obligations, net of current portion 2,336.2 2,307.1 Other long-term liabilities 197.4 284.8 Minority interest 58.5 - Commitments and contingencies Stockholders' equity: Preferred stock - $.01 par value; authorized 25.0 million shares; no shares issued and outstanding - - Common stock - $.01 par value; authorized 2.0 billion shares; 745.1 million shares and 694.0 million shares issued and outstanding at June 30, 1999 and December 31, 1998, respectively. 7.5 6.9 Paid-in capital 7,187.0 5,105.0 Accumulated other comprehensive income 122.3 2.2 Accumulated deficit (852.6) (875.9) --------------- --------------- Total stockholders' equity 6,464.2 4,238.2 --------------- --------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,999.7 $ 8,067.6 =============== ===============
See accompanying notes to condensed consolidated financial statements. 4 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Millions) (Unaudited)
Six Months Ended June 30, ----------------------------- 1999 1998 ------------- ------------- Net cash (used in) provided by operating activities $ (109.3) $ 100.8 ------------- ------------- Cash flows from investing activities: Acquisitions and investments, net of cash acquired (149.1) (22.4) Expenditures for property and equipment (764.3) (413.4) ------------- ------------- Net cash used in investing activities (913.4) (435.8) ------------- ------------- Cash flows from financing activities: Proceeds from long-term debt - 328.7 Repayments of long-term debt (2.6) (22.0) Financing costs (5.3) (1.2) Proceeds from issuance of common stock, net 1,923.1 - Proceeds from employee stock transactions 82.1 17.5 Other - (1.8) ------------- ------------- Net cash provided by financing activities 1,997.3 321.2 ------------- ------------- Net increase (decrease) in cash and cash equivalents 974.6 (13.8) Cash and cash equivalents, beginning of period 462.8 379.8 ------------- ------------- Cash and cash equivalents, end of period $ 1,437.4 $ 366.0 ============= ============= Supplemental disclosure of cash flow information: Cash paid for interest, net $ 59.5 $ 16.0 ============= ============= Supplemental disclosure of significant non-cash investing and financing activities: Net assets, net of cash, contributed to KPNQwest $ 212.1 $ - ============= ============= Income tax benefit attributable to exercise of employee stock options $ 60.2 $ 7.1 ============= =============
See accompanying notes to condensed consolidated financial statements. 5 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 (1) Business and Background Qwest Communications International Inc. and subsidiaries ("Qwest" or the "Company") is a leading Internet communications company engaged in two core business segments: Communications Services and Construction Services. Communications Services provides a full range of voice, data, video and related services to business customers, governmental agencies and consumers. In addition, it provides high-volume voice and conventional private line services to other communications providers, Internet service providers ("ISPs") and other data service companies. Construction Services constructs and installs fiber optic systems for other communications providers, as well as for the Company's own use. (2) Basis of Presentation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the condensed consolidated financial statements include all adjustments, consisting of normal recurring items, necessary to fairly present the results of operations, financial position and cash flows for the periods presented. The results of operations for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the audited financial statements included in the Company's Annual Report on Form 10-K (as incorporated by reference from its annual report to shareholders) for the year ended December 31, 1998. Certain prior year balances have been reclassified to conform to the 1999 presentation. (3) Comprehensive Income The following table represents the calculation of comprehensive income (loss) for the three and six months ended June 30, 1999 and 1998 (in millions):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------- ----------- ------------ Net income (loss) $ 18.5 $ (808.9) $ 23.2 $ (815.7) ------------ ------------- ----------- ------------ Other comprehensive income: Net unrealized holding gains on securities 64.4 - 121.5 - Foreign currency translation adjustments - - (1.4) - ------------ ------------- ----------- ------------ Total other comprehensive income 64.4 - 120.1 - ------------ ------------- ----------- ------------ Comprehensive income $ 82.9 $ (808.9) $ 143.3 $ (815.7) ------------ ------------- ----------- ------------
(4) Capital Stock In May 1999, Qwest's stockholders approved an increase in the number of authorized common shares from 600 million to 2 billion. In April 1999, Qwest's board of directors approved a two-for-one stock split in the form of a stock dividend for stockholders of record as of the close of business on May 3, 1999. The new shares were distributed on May 24, 1999. All share and per share information included in the condensed consolidated financial statements and the notes hereto have been adjusted to give retroactive effect to the change in capitalization. 6 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 In May 1999, Qwest issued approximately 40.7 million shares to BellSouth Corporation (together with its subsidiaries, "BellSouth") in exchange for approximately $1.9 billion in cash. Qwest's principal stockholder, Anschutz Company, sold approximately 33.3 million existing shares to BellSouth for approximately $1.6 billion. The investment by BellSouth represents an approximate 10% equity stake in Qwest. (5) Investments In June 1999, Qwest and KPMG LLP, a leading professional services firm, formed a joint venture called Qwest Cyber.Solutions LLC, to provide Internet- based end-to-end application service provider, application hosting, and application management services. Qwest contributed approximately $60.0 million consisting of cash and other assets, and owns a 51% stake in the venture. The financial position and results of operation of the venture have been consolidated in the accompanying financial statements from the date of formation and the minority interest represents KPMG's stake in the venture. In June 1999, Qwest signed a definitive agreement to invest $90.0 million for an approximate 19% stake in Advanced Radio Telecom Corp. ("ART"), a facilities-based, broadband ISP that provides a direct connection from customer location to the Internet, to help support the construction of ART's fixed, high- speed wireless networks. In connection with this transaction, a group of investors also signed a definitive agreement to invest $161.0 million. The companies expect to close the transaction in the third quarter of 1999, subject to ART shareholder approval, regulatory approval, and other customary conditions. In April 1999, the Company and KPN Telecom B.V. ("KPN"), the Dutch telecommunications company, formed a joint venture to create a pan-European IP- based fiber optic network, linked to the Company's network in North America, for data, video and voice services. Qwest and KPN each own 50 percent of the venture which is governed by a six-person supervisory board, to which Qwest and KPN have each named three members. KPN contributed two partially completed bi-directional, self-healing fiber optic rings (EuroRingsTM 1 and 2) and certain communications services contracts to the joint venture. Qwest contributed Xlink Internet Service Gmbh ("Xlink"), the operating subsidiaries of EUnet International Limited ("EUnet") and cash. Also, Qwest and KPN have contributed transatlantic capacity that connect EuroRingsTM with Qwest's network in North America, as well as certain other assets. The net book value of total assets contributed by Qwest totaled approximately $300.0 million. Qwest deconsolidated EUnet and Xlink in April 1999. Qwest's investment in the joint venture is being accounted for under the equity method. (6) Construction Services Costs and billings on uncompleted contracts included in the accompanying condensed consolidated balance sheets were as follows (in millions):
June 30, December 31, 1999 1998 ------------ ------------ Costs incurred on uncompleted contracts $ 994.6 $ 898.8 Estimated earnings 619.6 499.4 ------------ ------------ 1,614.2 1,398.2 Less: billings to date (1,490.8) (1,176.1) ------------ ------------ Costs and estimated earnings in excess of billings, net $ 123.4 $ 222.1 ============ ============
The Company has entered into various agreements to provide indefeasible rights of use of multiple fibers along the network. Such agreements include contracts with three major customers for an aggregate purchase price of approximately $1.1 billion. Construction Services revenue relating to the contracts with these major customers was approximately $21.3 million and $105.2 million for the three months ended June 30, 1999 and 1998, respectively, and 7 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 approximately $64.3 million and $211.7 million for the six months ended June 30, 1999 and 1998, respectively. Progress billings are made upon customers' acceptance of performance milestones. Although these construction agreements provide for certain penalties if the Company does not complete construction within the time frames specified within the agreements, management does not anticipate that the Company will incur any substantial penalties under these provisions. (7) Debt and Capital Lease Obligations Debt and capital lease obligations consisted of the following (in millions): June 30, December 31, 1999 1998 ---------- ------------ Fixed rate debt at interest rates ranging from 7.25% to 10 7/8% $ 2,310.6 $ 2,279.5 Capital lease and other obligations 27.1 30.4 ---------- ------------ Total debt and capital lease obligations 2,337.7 2,309.9 Less current portion (1.5) (2.8) ---------- ------------ Debt and capital lease obligations $ 2,336.2 $ 2,307.1 ========== ============ The current portion of debt and capital lease obligations is included in accrued expenses and other in the accompanying condensed consolidated balance sheets. In March 1999, the Company entered into a $1.0 billion credit agreement with a syndicate of banks. This credit agreement provides for two five-year revolving credit facilities for a total of $500.0 million and one 364-day revolving credit facility in the amount of $500.0 million. The credit facilities bear interest at either the bank base rate of interest or LIBOR, plus an applicable margin. (8) Income Taxes Total income tax expense (benefit) differed from the amounts computed by applying the federal statutory income tax rate (35%) to earnings (loss) before income tax expense (benefit) as a result of the following items:
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1999 1998 1999 1998 ------------ ------------ ----------- ------------ Statotory income tax expense (benefit) 35.0% (35.0%) 35.0% (35.0%) State taxes, net of federal effect 7.7% - 5.1% - R&D - 31.5% - 31.1% Goodwill amortization 16.1% 0.3% 20.4% 0.4% Foreign losses 3.3% - 6.4% - Other, net (0.7%) 0.3% 1.1% 0.3% ------------ ------------ ----------- ------------ Total income tax expense (benefit) 61.4% (2.9%) 68.0% (3.2%) ============ ============ =========== ============
8 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 (9) Commitments and Contingencies (a) DSL Services Commitments In January 1999, Qwest made a $15.0 million equity investment in high- speed, digital subscriber line ("DSL") local networks through an agreement with Covad Communications Group, Inc. ("Covad"), a packet-based Competitive Local Exchange Carrier ("CLEC"). The Company has committed to purchase DSL services for approximately $20.0 million over a five-year term commencing on the date that Covad's DSL services are commercially available in the 22 metropolitan areas that Covad will serve, which is expected to occur by the end of 1999. In April 1999, Qwest made an additional equity investment, totaling $15.0 million in cash, in DSL local networks through an agreement with Rhythms NetConnections Inc. ("Rhythms"), a packet-based CLEC that provides high-speed networking solutions for remote access to private networks and the Internet. The Company has committed to place a minimum number of orders for DSL service over a seven-year term commencing on the date that Rhythms is operational in 29 metropolitan areas, which is expected to be in the first quarter of 2000. In the event that the Company fails to meet the order target, the Company is committed to pay Rhythms for the difference between the order target and the number of actual orders placed. (b) Network and Communications Capacity Exchanges From time to time, the Company enters into agreements to acquire long- term telecommunications capacity rights from unrelated third parties in exchange for long-term telecommunications capacity rights along segments of the network under construction. The exchange agreements provide for liquidated damages to be levied against the Company in the event the Company fails to deliver the telecommunications capacity, in accordance with the agreed-upon timetables. (c) Vendor Agreements The Company has agreements with certain telecommunications inter- exchange carriers and third party vendors that require the Company to maintain minimum monthly and/or annual usage. The Company has historically met all minimum usage requirements and believes the minimum usage commitments will continue to be met. (d) Japan-U.S. Cable Consortium Commitment The Company is participating in a consortium of communications companies that is building a submarine cable system connecting the United States to Japan. In connection with this transaction, the Company is committed to purchase approximately $56.0 million of fiber optic cable and other network assets of the 13,125-route-mile, four-fiber pair cable system to the Pacific Rim. The Company has purchased $9.7 million of assets as of June 30, 1999. (e) Legal Matters The Company has been named as a defendant in various litigation matters. Management intends to vigorously defend these outstanding claims. The Company believes it has adequate accrued loss contingencies and that, although the ultimate outcome of these claims cannot be ascertained at this time, current pending or threatened litigation matters are not expected to have a material adverse impact on the Company's results of operations or financial position. (10) Weighted Average Shares Outstanding For the three months ended June 30, 1999, the weighted average number of shares used for computing basic earnings per share was 718.5 million, and the weighted average number of shares used for computing diluted earnings per share was 757.5 million (including 39.0 million incremental common shares attributable to dilutive securities 9 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 related to warrants, options and growth shares). For the six months ended June 30, 1999, the weighted average number of shares used for computing basic earnings per share was 708.4 million, and the weighted average number of shares used for computing diluted earnings per share was 747.3 million (including 38.9 million incremental common shares attributable to dilutive securities related to warrants, options and growth shares). The weighted average number of shares used for computing basic and diluted loss per share for the three and six months ended June 30, 1998 was 484.8 million and 449.1 million, respectively. Because the Company had a net loss in 1998, the effect on loss per share of all options and warrants was anti-dilutive. (11) Business Segment Information The Company's two business segments are Communications Services and Construction Services, each having a separate management team and infrastructure, offering different products and services, and utilizing different marketing strategies to target different types of customers. Communications Services provides multimedia communications services to retail and wholesale customers. Construction Services constructs and installs fiber optic systems for other communications entities, as well as for the Company's own use. The Company evaluates the performance of its business segments based on their respective earnings (loss) from operations, before interest and other (income) expense and income taxes. The following table presents summarized financial information related to the business segments for the three and six months ended June 30, 1999 and 1998 (in millions):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------------ 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Revenue: Communications services $ 790.4 $ 239.8 $ 1,527.6 $ 282.4 Construction services 83.3 153.9 224.5 288.4 ---------- ---------- ---------- ---------- Total revenue $ 873.7 $ 393.7 $ 1,752.1 $ 570.8 ========== ========== ========== ========== Earnings (loss) from operations: Communications services $ 70.1 $ (35.0) $ 104.4 $ (65.5) Construction services 45.3 33.1 92.4 61.6 Merger costs - (812.5) - (812.5) Depreciation and amortization - corporate (21.4) (6.0) (43.4) (7.6) ---------- ---------- ---------- ---------- Earnings (loss) from operations $ 94.0 $ (820.4) $ 153.4 $ (824.0) ========== ========== ========== ========== Unallocated other (income) expense: Interest expense, net $ 39.2 $ 18.9 $ 71.2 $ 33.2 Other (income) expense, net 6.9 (6.4) 9.8 (14.4) ---------- ---------- ---------- ---------- Earnings (loss) before income taxes $ 47.9 $ (832.9) $ 72.4 $ (842.8) ========== ========== ========== ==========
During the three and six months ended June 30, 1999, no single customer accounted for 10% or more of the Company's total revenue. During the three months ended June 30, 1998, Frontier and GTE accounted for 10.9% and 12.7%, respectively, of the Company's total revenue and are included in the Construction Services segment. During the six months ended June 30, 1998, Frontier and GTE accounted for 15.8% and 17.3%, respectively, of the Company's total revenue and are included in the Construction Services segment. 10 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Three and Six Months Ended June 30, 1999 and 1998 (12) Subsequent Event In July 1999, Qwest entered into a definitive merger agreement with U S WEST, Inc. Under terms of the merger agreement, Qwest will issue shares of its common stock having a value of $69.00 for each share of U S WEST common stock, subject to a "collar" on Qwest's average stock price between $28.26 and $39.90 per share. The number of Qwest shares to be issued for each U S WEST share will be determined by dividing $69.00 by the average of the daily volume weighted average prices of Qwest common stock for 15 randomly selected trading days over a 30-day measurement period ending three days before the closing of the transaction, provided that Qwest will not issue more than 2.44161 shares for each U S WEST share nor less than 1.72932 shares for each U S WEST share. The transaction will be accounted for as a purchase and is structured to be tax-free to U S WEST shareowners to the extent of the Qwest stock delivered in the transaction. The obligation, if necessary, under the "collar" may be satisfied in whole or in part with cash if Qwest's average stock price is below $38.70 per share. In determining the cash amount for the collar, Qwest and U S WEST will consider Qwest's desire to reduce dilution to its stockholders, U S WEST's potential desire to provide a cash element to its stockholders and both companies' desire to maintain the company's strong financial condition. If the companies decide to provide cash as part of the collar consideration, the minimum exchange ratio would be 1.783. U S WEST may terminate the merger agreement if the closing price of Qwest's shares is below $22.00 for 20 consecutive trading days before the closing, or if the average Qwest share price during the measurement period is less than $22.00. The Boards of Directors of both Qwest and U S WEST have unanimously approved the proposed merger. The merger is subject to approval by the stockholders of both companies, federal and state regulatory approvals and other customary closing conditions. Anschutz Company, the beneficial owner of approximately 39 percent of the outstanding shares of Qwest, has agreed to vote its shares in favor of the merger. Closing of the merger is expected by mid- 2000. In connection with the termination of the U S WEST and Global Crossing merger agreement, U S WEST paid Global Crossing a break-up fee of $140.0 million in cash and agreed to return $140.0 million in Global Crossing shares, valued at $62.75 per share, purchased by U S WEST in connection with its agreement with Global Crossing. Qwest advanced to U S WEST the $140.0 million cash payment and agreed to purchase $140.0 million in services from Global Crossing over four years at the best commercially available prices. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Information Regarding Forward-Looking Statements This report contains or incorporates by reference "forward-looking statements" as that term is used in federal securities laws about Qwest's financial condition, results of operations and business. These statements include, among others: . statements concerning the benefits that Qwest expects will result from its business activities and certain transactions Qwest has completed, such as increased revenues, decreased expenses and avoided expenses and expenditures, . Qwest's plans to complete its communications network, and . other statements of Qwest's expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this document, or may be incorporated by reference to other documents Qwest has filed with the Securities and Exchange Commission ("SEC"). You can find many of these statements by looking for words such as "believes", "expects", "anticipates", "estimates", or similar expressions used in this report or incorporated by reference in this report. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Qwest's actual results to be materially different from any future results expressed or implied by Qwest in those statements. The risks and uncertainties include those risks, uncertainties and risk factors identified, among other places, under "Risk Factors" in Qwest's registration statement on Form S-4, SEC file number 333-81149. The most important factors that could prevent Qwest from achieving its stated goals include, but are not limited to, the following: . Qwest's failure to construct its communications network on schedule and on budget; . operating and financial risks related to managing rapid growth, integrating acquired businesses and sustaining operating cash flow to meet Qwest's debt service requirements, make capital expenditures and fund operations; . potential fluctuation in quarterly results; . volatility of stock price; . intense competition in the communications services market; . dependence on new product development; . Qwest's ability to achieve year 2000 compliance; . rapid and significant changes in technology and markets; . adverse changes in the regulatory or legislative environment affecting Qwest's business; . failure to maintain necessary rights of way; and . failure to complete the merger with U S WEST timely or at all, and difficulties in combining operations of Qwest and U S WEST and in realizing synergies expected from the merger. Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward- looking statements. Qwest cautions you not to place undue reliance on the statements, which speak only as of the date of this report or, in the case of documents incorporated by reference, the date of the document. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward- looking statements that Qwest or persons acting on its behalf may issue. Qwest undertakes no obligation to review or confirm analysts' expectations or estimates or to release publicly any revisions to 12 any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Overview Qwest Communications International Inc. ("Qwest" or the "Company") is a leading Internet communications company engaged in two core businesses: Communications Services and Construction Services. Communications Services includes Internet and Multimedia Services, Business Services, Consumer Services and Wholesale Services. Internet and Multimedia Services provides Internet Protocol ("IP") - enabled services such as Internet access, web hosting, co-location and remote access. Internet and Multimedia Services are being developed according to market demand in partnership with leading information technology companies, including the following: . Microsoft Corporation for business applications and service; . KPMG LLP (through the Qwest Cyber.Solutions joint venture) for application service provider, application hosting and application management services; . SAP America, Inc. and Hewlett Packard Company for hosting and systems management services; . Covad Communications Group, Inc. ("Covad") and Rhythms NetConnections Inc. ("Rhythms") for digital subscriber line ("DSL") technology for high- speed local network connectivity; . Oracle Corporation and Siebel Systems, Inc. for application hosting services; and . Siebel Systems, Inc. for comprehensive application hosting services for Siebel Systems' applications. Business Services and Consumer Services provide a full range of voice, data, video and related services to business customers, governmental agencies and consumers. Wholesale Services provides high-volume voice and conventional private line services to other communications providers, as well as to Internet service providers ("ISPs"), and other data service companies. Construction Services constructs and installs fiber optic systems for other communications providers, as well as for the Company's own use. The Company began operations in 1988 constructing fiber optic conduit systems primarily for major long distance carriers in exchange for cash and capacity rights. The Company entered into major construction contracts for the sale of dark fiber to Frontier, MCI WorldCom and GTE whereby the Company has agreed to install and provide dark fiber to each along portions of the Company's network. In addition to these contracts, the Company has signed agreements with other communications providers and government agencies for the sale of dark fiber along the Company's network. Revenue from Construction Services generally is recognized under the percentage of completion method as performance milestones relating to the contract are satisfactorily completed. Central to Qwest's strategy is the Qwest Macro Capacity(SM) Fiber Network, a high-capacity IP-based fiber optic network designed to allow customers to seamlessly exchange multimedia content -- images, data and voice. The technologically advanced network spans approximately 18,500 route-miles with an additional 300 route-mile segment scheduled for completion by the end of 1999. The network employs a self-healing SONET ring architecture. It is equipped with advanced fiber and state-of-the-art transmission electronics. Qwest's network architecture supports IP, Asynchronous Transfer Mode ("ATM") and frame relay services, as well as circuit switched services. In 1998, Qwest became the first network service provider to complete a transcontinental IP-based fiber optic network when it activated its network from Los Angeles to San Francisco to New York. The Company also activated the nation's first OC-48 native IP network along certain routes of the Company's network. Along this OC-48 network, the Company offers high-speed dedicated Internet access, web hosting, IP-based virtual private network services and expanded availability of voice over IP long distance services. Additionally, the Company's European joint venture, KPNQwest, provides a pan-European IP-based fiber optic network. The services offered allow customers in Europe to broadcast video, data and voice globally. (See further discussion of the KPNQwest joint venture below.) 13 Qwest is also expanding its network to carry international data and voice traffic to Mexico and the Far East. The 1,400 route-mile Mexico network is complete. The Company is also participating in a consortium of communications companies that is building a submarine cable system connecting the United States to Japan. Scheduled for completion by the second quarter of 2000, the 13,125- mile four-fiber pair cable will ultimately be capable of transmitting information at the rate of 640 gigabits per second. U S WEST Merger Agreement In July 1999, Qwest entered into a definitive merger agreement with U S WEST, Inc. Under terms of the merger agreement, Qwest will issue shares of its common stock having a value of $69.00 for each share of U S WEST common stock, subject to a "collar" on Qwest's average stock price between $28.26 and $39.90 per share. The number of Qwest shares to be issued for each U S WEST share will be determined by dividing $69.00 by the average of the daily volume weighted average prices of Qwest common stock for 15 randomly selected trading days over a 30-day measurement period ending three days before the closing of the transaction, provided that Qwest will not issue more than 2.44161 shares for each U S WEST share or less than 1.72932 shares for each U S WEST share. The transaction will be accounted for as a purchase and is structured to be tax-free to U S WEST shareowners to the extent of the Qwest stock delivered in the transaction. The obligation, if necessary, under the "collar" may be satisfied in whole or in part with cash if Qwest's average stock price is below $38.70 per share. In determining the cash amount for the collar, Qwest and U S WEST will consider Qwest's desire to reduce dilution to its stockholders, U S WEST's potential desire to provide a cash element to its stockholders and both companies' desire to maintain the company's strong financial condition. If the companies decide to provide cash as part of the collar consideration, the minimum exchange ratio would be 1.783. U S WEST may terminate the merger agreement if the closing price of Qwest's shares is below $22.00 for 20 consecutive trading days before the closing, or if the average Qwest share price during the measurement period is less than $22.00. The Boards of Directors of both Qwest and U S WEST have unanimously approved the proposed merger. The merger is subject to approval by the stockholders of both companies, federal and state regulatory approvals and other customary closing conditions. Anschtuz Company, the beneficial owner of approximately 39 percent of the outstanding shares of Qwest, has agreed to vote its shares in favor of the merger. Closing of the merger is expected by mid- 2000. In connection with the termination of the U S WEST and Global Crossing merger agreement, U S WEST paid Global Crossing a break-up fee of $140.0 million in cash and agreed to return $140.0 million in Global Crossing shares, valued at $62.75 per share, purchased by U S WEST in connection with its agreement with Global Crossing. Qwest advanced to U S WEST the $140.0 million cash payment and agreed to purchase $140.0 million in services from Global Crossing over four years at the best commercially available prices. Strategic Investments and Other Alliances Investment in Qwest Cyber.Solutions LLC. In June 1999, Qwest and KPMG LLP, a leading professional services firm, formed a joint venture called Qwest Cyber.Solutions LLC, to provide Internet-based end-to-end application service provider, application hosting, and application management services. The venture will offer customers a broad set of vendor products available for Enterprise Resource Planning ("ERP"), Customer Relationship Management ("CRM") and Back Office solutions, a state-of-the-art Internet Protocol ("IP") broadband network, technologically advanced Cybercenters and a starting skill base of more than 450 certified application specialists. Qwest contributed approximately $60.0 million consisting of cash and other assets, and owns a 51% stake in the venture. The financial position and results of operation of the venture have been consolidated in the accompanying financial statements from the date of formation and the minority interest represents KPMG's stake in the venture. 14 Investment in Advanced Radio Telecom Corp. In June 1999, Qwest signed a definitive agreement to invest $90.0 million for an approximate 19% stake in Advanced Radio Telecom Corp. ("ART"), a facilities-based, broadband ISP that provides a direct connection from customer location to the Internet, to help support the construction of ART's fixed, high-speed wireless networks. In connection with this transaction, a group of high-tech investment funds also signed a definitive agreement to invest $161.0 million. The companies expect to close the transaction in the third quarter of 1999, subject to ART shareholder approval, regulatory approval, consents to certain material amendments and other customary conditions. Relationship With BellSouth. In April 1999, BellSouth Corporation (together with its subsidiaries, "BellSouth") and Qwest announced a strategic relationship whereby BellSouth invested approximately $3.5 billion for an approximate 10% equity stake in Qwest. Qwest issued approximately 40.7 million shares to BellSouth in exchange for approximately $1.9 billion in cash. Qwest's principal stockholder, Anschutz Company, sold approximately 33.3 million existing shares to BellSouth for approximately $1.6 billion. At the same time, a BellSouth affiliate and Qwest entered into a commercial arrangement for provisioning of a full range of integrated digital data, image and voice communications services for customers. These services will include Qwest's portfolio of data networking, Internet and voice services and BellSouth's local networking services. Once BellSouth is allowed to enter the long distance market, the companies will jointly develop and deliver a comprehensive set of end-to-end, high-speed data, image and voice communications services to business customers, with an emphasis on broadband and Internet-based data services. KPNQwest Joint Venture. In April 1999, Qwest and KPN Telecom B.V. ("KPN") formed a joint venture to create a pan-European IP-based fiber optic network, linked to the Company's network in North America, for data, video and voice services. The venture initially will offer managed broadband services, IP transit, Internet connectivity and value-added IP services, including consulting, hosting, and the broadcasting of live events over the Internet. The venture also plans to selectively sell dark fiber along its network. Customers of the venture will include Internet service and content providers, multinational firms in Europe and North America, as well as telecommunications carriers, operators and others who want to purchase wholesale or retail network capacity, fiber or services. Qwest and KPN each own 50 percent of the venture. The venture is governed by a six-person supervisory board, to which Qwest and KPN have each named three members. KPN contributed two partially completed bi-directional, self-healing fiber optic rings (EuroRingsTM 1 and 2) and certain communications services contracts to the joint venture. Qwest contributed Xlink Internet Service Gmbh ("Xlink"), the operating subsidiaries of EUnet International Limited ("EUnet") and cash. Also, Qwest and KPN have contributed transatlantic capacity that connects EuroRingsTM with Qwest's network in North America, as well as certain other assets. The net book value of total assets contributed by Qwest totaled approximately $300.0 million. Qwest deconsolidated EUnet and Xlink in April 1999. Qwest's investment in the joint venture is being accounted for under the equity method. Investment in Rhythms. In April 1999, Qwest made an equity investment, totaling $15.0 million in cash, in DSL local networks through an agreement with Rhythms NetConnections Inc. ("Rhythms"), a packet-based Competitive Local Exchange Carrier ("CLEC") that provides high-speed networking solutions for remote access to private networks and the Internet. Under this agreement, the Company expects to have access to 29 metropolitan areas (10 of which are in addition to the areas covered by an agreement that Qwest has with Covad Communications Group Inc.) by the first quarter of 2000, while further enhancing its ability to provide its customers with high-speed DSL connectivity to its network. The Company has committed to place a minimum number of orders for DSL service over a seven-year term commencing on the date that Rhythms is operational in 29 metropolitan areas. In the event that the Company fails to meet the order target, the Company is committed to pay Rhythms for the difference between the order target and the number of actual orders placed. Investment in Covad. In January 1999, Qwest made its first equity investment, totaling $15.0 million in cash, in high-speed, DSL local networks through an agreement with Covad Communications Group, Inc. ("Covad"), a packet- based CLEC. Under this agreement, the Company expects to have access to 22 metropolitan areas by the end of 1999, while enhancing its ability to provide its customers with high-speed DSL connectivity to its network. The Company has 15 committed to purchase DSL services for approximately $20.0 million over a five- year term commencing on the date that Covad's DSL services are commercially available in all 22 metropolitan areas. Results of Operations Three and Six Months Ended June 30, 1999 Compared to Three and Six Months Ended June 30, 1998 The Company reported net earnings of $18.5 million in the second quarter of 1999, compared to a net loss of $(808.9) million in the same quarter of the prior year. During the first six months of 1999, the Company reported net earnings of $23.2 million, compared to a net loss of $(815.7) million in the same period of the prior year. The Company's results of operations include the acquisitions of the following companies: Phoenix Network, Inc. from March 1998; LCI International, Inc. from June 1998; and Icon CMT Corp. from December 1998. After giving pro forma effect to these as if such acquisitions had occurred on January 1, 1998, and excluding the effects of merger related costs and non- recurring charges, the Company's reported net loss in the second quarter and first six months of 1998 would have been $(27.0) million and $(41.1) million, respectively. The results of operations for the second quarter of 1999 exclude the operating results of EUnet International Limited ("EUnet") which was contributed to the KPNQwest Joint venture on April 1, 1999. Revenue. Components of revenue for the second quarter and first six months of 1999 and 1998 were as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ------- ------- ---------- --------- ------- ---------- Communications services $ 790.4 $ 239.8 $ 550.6 $ 1,527.6 $ 282.4 $ 1,245.2 Construction services 83.3 153.9 (70.6) 224.5 288.4 (63.9) ------- ------- -------- --------- ------- ---------- Total revenue $ 873.7 $ 393.7 $ 480.0 $ 1,752.1 $ 570.8 $ 1,181.3 ======= ======= ======== ========= ======= ==========
During the second quarter and first six months of 1999, as compared to the same periods of the prior year, Communications Services revenue increased due to the addition of revenue from the acquisitions discussed above, and due to growth in all aspects of Communications Services. Construction Services revenue decreased during the second quarter and first six months of 1999, as compared to the same periods of the prior year, primarily as a result of the completion of the Company's network during the first six months of 1999. The Company expects that revenue from Construction Services will be less than $20 million for the remainder of 1999. Operating Expenses. Components of operating expenses for the second quarter and first six months of 1999 and 1998 were as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ----------------- -------------------- Increase Increase 1999 1998 (Decrease) 1999 1998 (Decrease) ------- -------- ---------- --------- -------- ---------- Access and network operations $ 444.6 $ 153.6 $ 291.0 $ 877.6 $ 184.5 $ 693.1 Construction services 19.6 108.1 (88.5) 96.3 205.6 (109.3) Selling, general and administrative 222.6 107.9 114.7 436.0 152.1 283.9 Depreciation and amortization 92.9 32.0 60.9 188.8 40.1 148.7 Merger related costs - 812.5 (812.5) - 812.5 (812.5) ------- -------- -------- --------- -------- ---------- Total operating expenses $ 779.7 $1,214.1 $ (434.4) $1,598.7 $1,394.8 $ 203.9 ======= ======== ======== ========= ======== ==========
16 Expenses for access and network operations primarily consist of the cost of operating the Company's network, Local Exchange Carrier ("LEC") access charges and the cost of leased capacity. The increase in access and network operations for the second quarter and first six months of 1999 over the same period of the prior year was primarily attributable to growth in Communications Services revenue. Expressed as a percentage of Communications Services revenue, access and network operations expenses decreased from 64.1% in the second quarter of 1998 to 56.3% in the second quarter of 1999, and from 65.3% in the first six months of 1998 to 57.4% in the same period of the current year. As the network is completed and activated, the Company expects it will be able to serve more customer needs over its own network, thereby continuing to reduce such costs as a percentage of revenue. Expenses for Construction Services consist primarily of costs of sale on network construction contracts, including conduit, fiber, cable, construction crews and rights of way. Costs attributable to the construction of the network for the Company's own use are capitalized. Expenses for Construction Services expressed as a percentage of construction revenue decreased from 70.2% in the second quarter of 1998 to 23.5% in the second quarter of 1999, and from 71.3% in the first six months of 1998 to 42.9% in the first six months of 1999. Selling, general and administrative ("SG&A") expense includes the cost of salaries, benefits, occupancy costs, commissions, sales and marketing expenses and administrative expenses. The increase in SG&A in the second quarter and first six months of 1999 as compared to the same periods of the prior year, was due primarily to the following: additional expenses related to acquired entities; increased sales and marketing efforts; additional bad debt expense related to the increase in Communications Services revenues; increased payroll- related costs from the recruiting and hiring of additional sales and administrative personnel; increased commissions expense related to the growth in Communications Services revenue; and additional building rent expense related to increased space obtained in response to the Company's infrastructure growth. Expressed as a percentage of total revenue, SG&A decreased from 27.4% in the second quarter of 1998 to 25.5% in the second quarter of 1999, and from 26.6% in the first six months of 1998 to 24.9% in the first six months of 1999. SG&A is expected to increase as the Company continues to intensify brand advertising, as services are expanded and as segments of the Company's network become operational. In addition, the Company expects that SG&A as a percentage of total revenue will increase as construction revenue decreases and as the Company continues its investment in data product and service offerings. The Company's depreciation and amortization expense increased due primarily to activating segments of the Company's network, purchases of assets to accommodate the Company's growth and depreciation and amortization of assets and goodwill related to the Company's acquisitions. The Company expects that depreciation expense will continue to increase in subsequent periods as the Company continues to activate additional segments of its network. The Company assessed and allocated values to in-process R&D projects related to the acquisition of LCI in June 1998. The values assigned to these assets were determined by identifying significant research projects for which technological feasibility had not been established. These assets consisted of a significant number of R&D projects grouped into three categories: (1) network systems automation tools; (2) advanced data services, including frame relay and Internet Protocol technologies; and (3) new operational systems and tools. Taken together, these projects, if successful, will enable the Company to provide advanced voice and data services as well as sophisticated network management and administration functions. The Company believes development efforts through June 30, 1999 have proceeded according to expectations. Remaining R&D efforts for these projects include various phases of technology design, development and testing. Anticipated completion dates for the remaining projects in progress will occur in phases through 1999, at which point the Company expects to begin generating the economic benefits from the technologies. Costs incurred in connection with these R&D efforts are expensed as incurred. The Company expects to continue its support of these efforts and the Company believes it has a reasonable chance of successfully completing the R&D programs. However, risk is associated with the completion of the projects, and the Company cannot assure that the projects will meet with either technological or commercial success. 17 If none of these projects is successfully developed, the sales and profitability of the Company may be adversely affected in future periods. The failure of any particular individual in-process project would not materially impact the Company's financial condition or results of operations. Operating results are subject to uncertain market events and risks, which are beyond the Company's control, such as trends in technology, government regulations, market size and growth, and product introduction or other actions by competitors. Other Expense (Income). Components of other expense (income) for the second quarter and first six months of 1999 and 1998, were as follows (in millions):
Three Months Ended Six Months Ended June 30, June 30, ------------------ ------------------ 1999 1998 Increase 1999 1998 Increase ------- --------- -------- ------- ------- -------- Interest expense, net $ 39.2 $ 18.9 $ 20.3 $ 71.2 $ 33.2 $ 38.0 Other expense (income), net 6.9 (6.4) 13.3 9.8 (14.4) 24.2 ------- --------- -------- ------- ------- -------- Total other expense (income) $ 46.1 $ 12.5 $ 33.6 $ 81.0 $ 18.8 $ 62.2 ======= ========= ======== ======= ======= ========
The increase in interest expense, net during the second quarter and first six months of 1999, as compared to the same periods of the prior year, resulted from an increase in long-term indebtedness, (see "Liquidity and Capital Resources" below), partially offset by an increase in capitalized interest resulting from construction of the Company's network. As the network is completed, interest expense, net will increase as the amount of capitalized interest decreases. Other expense (income), net, increased due primarily to losses on equity investments (including Qwest's proportionate share of KPNQwest losses). Income Taxes. The Company's effective tax rate for the second quarter and first six months of 1999 differed from the statutory income tax rate primarily as a result of the non-deductibility of acquisition-related goodwill, state income taxes and foreign losses. The effective tax rate for the second quarter and first six months of 1998 differed from the statutory rate primarily as a result of the non-deductibility of acquisition-related in-process research and development. Liquidity and Capital Resources During the first six months of 1999, cash used in operations was $109.3 million; cash used in investing activities was $913.4 million, including $764.3 million of capital expenditures; and cash provided by financing activities was $1,997.3 million. Cash provided by financing activities includes an approximate $1.9 billion equity investment by BellSouth and employee stock transactions of $82.1 million. The Company estimates the total cost to construct and activate its network and complete construction of dark fiber sold to third parties will be approximately $2.3 billion, of which the Company had already expended approximately $2.2 billion as of June 30, 1999. The Company is participating in a consortium of communications companies that is building a submarine cable system connecting the United States to Japan. In connection with this transaction, the Company is committed to purchase approximately $56.0 million of fiber optic cable and other network assets of the 13,125-route-mile, four-fiber pair cable system to the Pacific Rim. The Company has purchased $9.7 million of assets as of June 30, 1999. The Company believes that its available cash and cash equivalent balances at June 30, 1999, cash flow from operations and its available credit agreement (described below) will satisfy its currently anticipated cash requirements for at least the next 12 months. The Company anticipates capital expenditures during the remainder of 1999 to support its growth in Communications Services, including continued expansion of data products and services, and to complete 18 construction and activate additional capacity along the Company's network to be approximately $800 million to $900 million. In March 1999, the Company entered into a $1.0 billion credit agreement with a syndicate of banks. This credit agreement provides for two five-year revolving credit facilities for a total of $500.0 million and one 364-day revolving credit facility in the amount of $500.0 million. The credit facilities bear interest at either the bank base rate of interest or LIBOR plus an applicable margin. As of June 30, 1999, there were no borrowings outstanding under the credit agreement. Year 2000 Many existing computer systems, including hardware and software, use only the last two digits to identify a year. Consequently, as the year 2000 approaches, such systems will not recognize the difference in a year that begins with "20" rather than "19". As a result of the date change in the year 2000, if any of the Company's computer systems use only two digits to define the year, these defective systems may cause disruptions in its network operations through which the Company provides communications services to its customers and in its internal operations. Additionally, the Company is dependent upon outside sources to provide communications services to its customers and to bill its customers for such services. The greatest risk to the Company's ability to provide communications services is the failure of third-party service providers to be year 2000 compliant, especially those third-party service providers that provide local access and certain of the billing systems upon which the provision of long distance telecommunications service relies. The Company has established a year 2000 compliance group. The objective of the year 2000 compliance group is to minimize disruptions as a result of the date change in the year 2000. The compliance group has developed a five-step plan to identify and repair year 2000 affected systems: (i) identify potentially date-sensitive systems, including third-party products; (ii) assess such systems for year 2000 compliance; (iii) modify, upgrade or replace non-compliant systems; (iv) test the corrected systems; and (v) deploy the corrected systems. The year 2000 compliance group has focused mainly on the Company's domestic operations and, to a lesser extent, on its international operations. In addition to reviewing its own systems, the year 2000 compliance group is submitting requests to third-party service providers to obtain information as to their compliance efforts. The five step process has been virtually completed for Qwest's mission critical, internally developed software applications, mission critical data center hardware and software and mission critical voice and data network elements. Remediation and deployment of desktop computers will continue during the third quarter of 1999. Additional testing is expected to occur throughout 1999. To the extent issues are discovered as a result of such additional testing, remediation and re-deployment of corrected systems will be scheduled as necessary. The Company's overall efforts to integrate the operations of recently acquired businesses and various other factors, including the compliance efforts of third-parties, over which the Company has no control, may affect these target dates. The Company will develop contingency plans as needed. The high level contingency plans are virtually complete; while implementation and testing is expected to be completed by September 30, 1999. During the first six months of 1999, the Company incurred approximately $6.5 million for year 2000 compliance costs, included in SG&A expense. The Company expects to incur approximately $3.0 million to $5.0 million in additional SG&A expense during the remainder of 1999 to implement its year 2000 plan. The Company currently estimates capital expenditures for new systems to replace non-year 2000 compliant systems will total approximately $10.0 million (having incurred approximately $6.5 million through June 30, 1999). 19 Regulatory Matters--Recent Developments Access Charge Reform and Universal Service. Qwest's costs of providing long distance services could be affected by changes in the "access charges" imposed by local exchange carriers on interexchange carriers ("IXCs") to originate and terminate calls over local networks and by changes in its contributions to the universal service fund. In accordance with the schedule established in the Federal Communications Commission's ("FCC's") access charge reform order, an increase in the primary interexchange carrier charge ("PICC") became effective July 1, 1999. The PICC is a flat-rate charge imposed on an IXC by the local exchange carrier for each line that is presubscribed to an IXC. Corresponding reductions were made in the per-minute access charges assessed on IXCs. On May 27, 1999, the FCC increased the funding for the second year of the federal universal service support mechanism for schools, libraries, and rural health care providers. Supreme Court Decision on FCC Rules Implementing the Telecommunications Act of 1996. On January 25, 1999, the U.S. Supreme Court issued a decision that upheld many of the rules the FCC had created to implement the portions of the Telecommunications Act of 1996 ("1996 Act") that are designed to bring competition to local exchange markets. In the decision, the Supreme Court upheld the FCC's authority to implement the 1996 Act through rules that are binding on the states. The Supreme Court also upheld the FCC's regulations regarding state review of interconnection agreements, the granting of certain exemptions to rural incumbent local exchange carriers, and dialing parity. "Dialing parity" means that consumers can use non-incumbent carriers by dialing as they normally do, rather than having to dial special "access codes" to reach their preferred carrier. The Supreme Court also upheld the FCC's decisions: . that competitors need not own facilities in order to purchase network elements from incumbent local exchange carriers; . that incumbent local exchange carriers may not separate combinations of network elements before providing them to nondominant carriers unless requested to do so by a nondominant carrier; 20 . that network elements include the features, functions, and capabilities provided by means of network equipment; and . that non-incumbent carriers may adopt particular provisions of another carrier's interconnection agreement without adopting the entire agreement. The Supreme Court remanded to the FCC, however, the issue of what network elements incumbent local exchange carriers must make available to non- incumbent carriers. In April 1999, the FCC released proposed rules on this subject. Qwest participated in this proceeding by filing comments and reply comments on those proposed rules. The FCC is expected to complete this proceeding later in 1999. In addition, a federal court will now need to decide whether the method adopted by the FCC in 1996 for establishing prices for network elements purchased from the incumbent local exchange carriers and for interconnection with the incumbent local exchange carriers' networks is permissible. Qwest is unable to predict what actions the FCC or a federal court will take on these and other issues related to the Supreme Court's decision. The Supreme Court's decision is likely to have an impact on other matters as well, including interconnection agreements between non-incumbent carriers and incumbent local exchange carriers, the rules the states have adopted concerning local exchange competition, and the original local exchange carriers' applications for long distance authority. Qwest is unable to predict, however, how the decision will impact those matters or how the decision will affect competition. Truth-in-billing. In April 1999, the FCC adopted guidelines governing the format and content of telephone bills. These guidelines, which are scheduled to become effective in the late summer or early fall of 1999, will require carriers to (1) clearly identify the service provider responsible for each charge on the bill; (2) clarify when customers may withhold payment to dispute a charge without risking the loss of their basic local service; (3) identify on the bill the carrier to whom a customer should direct his or her complaint about a particular charge; and (4) adopt uniform descriptions for line item charges related to federal regulatory action. The adoption of these new rules will impact the way Qwest presents its bills to customers. The FCC also sought public comment on the text it should adopt for industry standardized descriptions for line item charges related to regulatory action. Qwest participated in this proceeding by filing reply comments. 1+ Dialing Parity. In many states, consumers wishing to use carriers other than the incumbent local exchange carrier for long distance services within the incumbent local exchange carrier's area have had to dial special access codes to do so. The need to dial extra digits in these states has put Qwest and other carriers at a competitive disadvantage compared with incumbent local exchange carriers whose customers can make these calls simply by dialing "1" plus the desired number. If a non-incumbent carrier's customer attempts to make one of these calls by simply dialing "1" plus the desired number, the call will automatically be routed to the incumbent local exchange carrier in those states that have not required 1+ dialing parity. The Supreme Court's January 25, 1999 decision, which is discussed above, upholds the FCC's rule requiring that incumbent local exchange carriers make it possible for consumers to make these long distance calls on a 1+ basis, using Qwest or any other carrier the consumer desires. Regulatory commissions in most states also have issued decisions imposing similar requirements. Dialing parity is scheduled to be implemented in all states by the late summer of 1999. Qwest expects to benefit from the implementation of this 1+ calling capability. 21 Item 3. Quantitative and Qualitative Disclosures About Market Risk The Company has $162.5 million of 10 7/8% Senior Notes, due 2007, $555.9 million of 9.47% Senior Discount Notes, due 2007, $450.5 million of 8.29% Senior Discount Notes, due 2008, $750.0 million of 7.50% Senior Notes, due 2008, $350.0 million of 7.25% Notes due 2007 and $300.0 million of 7.25% Senior Notes, due 2008. The Company's long-term debt obligations are principally fixed interest rate and non-trading in nature, and as a result, the Company is less sensitive to market rate fluctuations. The Company currently does not use derivative financial instruments to manage its interest rate risk and has no cash flow exposure due to general interest rate changes for its fixed interest rate long- term debt. The following table provides information about the Company's market risk exposure associated with changing interest rates on its fixed rate debt and capital lease and other obligations (dollars in millions):
Expected Maturity --------------------------------------------------------------------------- Year Ended December 31, -------------------------------------------------- Unamortized 1999 2000 2001 2002 2003 Thereafter Discounted Total ----- ----- ----- ----- ----- ---------- ----------- --------- Long-term fixed rate debt $ - $ - $ - $ - $ - $ 2,568.9 $ (258.2) $ 2,310.7 Capital lease and other obligations $ 1.5 $ 1.7 $ 2.1 $ 2.6 $ 3.0 $ 16.2 $ - $ 27.1 Average interest rate 8.1% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%
Collectively, the fixed rate debt, capital lease and other obligations, with a carrying value of $2,337.8 million, had an estimated fair value of $2,269.9 million at June 30, 1999, based on current interest rates offered for debt of similar terms and maturity. The Company's European-country operations were not material to the Company's consolidated financial position as of June 30, 1999, and results of operations or cash flows for the first six months of 1999. In addition, foreign currency transaction gains and losses were not material to the Company's results of operations for the six months ended June 30, 1999, and the Company does not expect to be subject to material foreign currency exchange rate risk from the effects of exchange rate movements of foreign currencies on the costs or cash flows the Company would receive from its share of the KPNQwest Joint Venture. To date, the Company has not entered into any significant foreign currency forward exchange contracts or other derivative financial instruments to hedge the effects of adverse fluctuations in foreign currency exchange rates. 22 Part II Item 1. Legal Proceedings On April 3, 1998, in an action captioned Lionel Phillips v. LCI International Inc. and H. Brian Thompson, the plaintiffs filed a putative class action complaint in the United States District Court for the Eastern District of Virginia against LCI and H. Brian Thompson, the Chairman and Chief Executive Officer of LCI. The plaintiffs brought the action as a class action purportedly on behalf of stockholders of LCI who sold LCI Common Stock between February 17, 1998 and March 9, 1998. The plaintiffs alleged, among other things, that the defendants violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder by making materially false and misleading statements on February 17, 1997 that LCI was not for sale at a time when negotiations between Qwest and LCI regarding a potential merger were allegedly ongoing. On June 25, 1998, defendants moved to dismiss the complaint on the grounds that it failed to state a claim against defendants. By Order dated July 20, 1998, the Court granted defendants' motion to dismiss the complaint but granted the plaintiffs leave to amend the complaint within fifteen days. On August 4, 1998, the plaintiffs filed an amended complaint and Qwest again moved to dismiss the lawsuit. On September 30, 1998, the Court granted the defendants' motion to dismiss the complaint. On October 20, 1998, the plaintiffs appealed the Court's decision. On June 7, 1999, the appeal was argued before a panel of the United States Court of Appeals for the Fourth Circuit. Qwest continues to await a disposition of the appeal and intends to vigorously defend this action. On September 15, 1998, in an action captioned Aaron Parnes v. Scott A. Baxter, Wayne B. Weisman, Richard M. Brown, Scott Harmolin, Samuel A. Plum, Icon CMT Corp. and Qwest Communications International Inc., the plaintiff filed a putative class action complaint in the Court of Chancery of the State of Delaware in and for New Castle County (the "Court") against Icon, its directors and Qwest. In the suit, the plaintiff alleged that consummation of the Icon merger will subject the Icon stockholders to the control of Mr. Anschutz, who will continue to be the principal stockholder of Qwest after the consummation of the merger. The plaintiff further alleged that the Icon merger constitutes a change in control of Icon and imposes heightened fiduciary duties on the members of the Icon board of directors to maximize stockholder value. The plaintiff also alleged that the members of the Icon board of directors violated their fiduciary duties by failing to auction Icon or to undertake an active "market check" for other potential bidders. The plaintiff seeks, among other things, to have the Court declare the suit a proper class action, enjoin the Icon merger and require the members of the Icon board of directors to auction Icon and/or conduct a "market check," and to award monetary damages, together with costs and disbursements. The defendants consider the action to be without merit and intend to vigorously defend the action. The defendants have filed answers denying the allegations of the complaint. Qwest has been named as a defendant in Drawhorn v. Qwest Communications International Inc. et al., Hudson v. Qwest Communications International, Inc., and Hord v. Qwest Communications International Inc. et al. The cases are purported class actions, filed in Indiana, Tennessee and Texas, respectively, which involve the Company's right to install its fiber optic cable network in easements and right-of-ways crossing the plaintiff's land. In general, the Company obtained the rights to construct its network from railroads, utilities, and others, and installed its network along the rights of way so granted. Plaintiffs in the purported class actions assert that they are the owners of lands over which Qwest's fiber optic cable network passes, and that the railroads, utilities, and others who granted the Qwest the right to construct and maintain its network did not have the legal ability to do so. The Indiana and Texas actions purport to be on behalf of a national class of owners of land over which Qwest's network passes; the Tennessee action purports to be 23 on behalf of a class of such owners in the State of Tennessee. The complaints seek damages on theories of trespass and unjust enrichment, and punitive damages as well. Qwest has received, and may in the future receive, claims and demands related to rights of way issues similar to the issues in the Drawhorn, Hudson and Hord litigations that may be based on similar or different legal theories. Management believes that the Company has substantial defenses to the claims asserted in these actions, and intends to defend them vigorously. Qwest also has been named as a defendant in various other litigation matters. Management intends to vigorously defend these outstanding claims. Qwest believes it has adequate accrued loss contingencies and that, although the ultimate outcome of these claims cannot be ascertained at this time, current pending or threatened litigation matters are not expected to have a material adverse impact on Qwest's results of operations or financial position. Item 2. Changes in Securities and Use of Proceeds (c) Sale of unregistered securities: In May 1999, Qwest issued 40.7 million shares to BellSouth Corporation in exchange for approximately $1.9 billion in cash. These shares have not been registered with the Securities and Exchange Commission in reliance on the exemption provided in Section 4(2) of the Securities Act of 1933, as amended. Item 4. Submission of Matters to a Vote of Security Holders On May 5, 1999, the Company held its Annual Meeting of Stockholders. There were 703,318,096 shares of Common Stock of the Company that could be voted at the meeting, and 87%, or 612,645,838 shares, of Common Stock were represented at the meeting, in person or by proxy, which constituted a quorum. The results were as follows: 1. Election of 12 directors to serve for one-year terms until the 2000 Annual Meeting of Stockholders. All of management's nominees were elected as directors of the Company to serve until the next annual meeting of the stockholders and until their successors are elected and qualified. 2. Approval of the Qwest Communications International Inc. Employee Stock Purchase Plan:
For Against Abstain --- ------- ------- 610,600,708 1,600,754 444,376
3. Approval of amendment to Qwest's Amended and Restated Certificate of Incorporation to increase the authorized number of shares of the Company's Common Stock:
For Against Abstain --- ------- ------- 573,172,632 38,989,424 483,782
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits
Exhibit Number Description - -------------- ----------- 2.1 Agreement and Plan of Merger dated as of July 18, 1999 between U S WEST, Inc. and Qwest (incorporated herein by reference to Qwest's Current Report on Form 8-K dated July 20, 1999). 3.1** Amended and Restated Certificate of Incorporation of Qwest. 3.2***** Certificate of Amendment of Amended and Restated Certificate of Incorporation of Qwest. 3.3 Certificate of Amendment to the Amended and Restated Certificate of Incorporation, as amended (incorporated herein by reference to Qwest's quarterly report on Form 10-Q for the period end March 31, 1999).
24 3.4 Amended and Restated Bylaws (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998). 4.1(a)*** Indenture dated as of October 15, 1997 with Bankers Trust Company (including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47% Series B Senior Discount Notes due 2007 as an exhibit thereto). 4.1(b)**** Indenture dated as of August 28, 1997 with Bankers Trust Company (including form of Qwest's 10 7/8% Series B Senior Notes due 2007 as an exhibit thereto). 4.1 (c)**** Indenture dated as of January 29, 1998 with Bankers Trust Company (including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29% Series B Senior Discount Notes due 2008 as an exhibit thereto). 4.1(d) Indenture dated as of November 4, 1998 with Bankers Trust Company (including form of Qwest's 7.50% Senior Discount Notes due 2008 and 7.50% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4 (File No. 333-71603) filed February 2, 1999). 4.1(e) Indenture dated as of November 27, 1998 with Bankers Trust Company (including form of Qwest's 7.25% Senior Discount Notes due 2008 and 7.25% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4 (File No. 333-71603) filed February 2, 1999). 4.2(b) Registration Agreement dated November 27, 1998 with Salomon Brothers Inc relating to Qwest's 7.25% Senior Discount Notes due 2008 (incorporated by reference to Qwest's Registration Statement on Form S-4 (File No. 333-71603) filed February 2, 1999). 4.3 Indenture dated as of June 23, 1997 between LCI International, Inc., and First Trust National Association, as trustee, Providing for the Issuance of Senior Debt Securities, including Resolutions of the Pricing Committee of the Board of Directors establishing the terms of the 7.25% Senior Notes due June 15, 2007 (incorporated by reference to exhibit 4(c) in LCI's Current Report on Form 8-K dated June 23, 1997). 4.4 Credit Agreement, dated as of March 31, 1999, among Qwest Communications International Inc., as Borrower, NationsBank, N.A., as Administrative Agent, and the Lenders party thereto. 10.1** Growth Share Plan, as amended, effective October 1, 1996.* 10.2 Equity Incentive Plan, as amended. (incorporated herein by reference to Qwest's quarterly report on Form 10-Q for the period end March 31, 1999).* 10.3 Qwest Communications International Inc. Employee Stock Purchase Plan (incorporated by reference to Qwest's Preliminary Proxy Statement for the Annual Meeting of Stockholders, filed February 26, 1999).* 10.4 Qwest Communications International Inc. Deferred Compensation Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* 10.5**** Equity Compensation Plan for Non-Employee Directors.* 10.6 Qwest Communications International Inc. 401-K Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* 10.7** Employment Agreement dated December 21, 1996 with Joseph P. Nacchio.* 10.8**** Growth Share Plan Agreement with Joseph P. Nacchio, effective January 1, 1997, and Amendment thereto.* 10.9**** Non-Qualified Stock Option Agreement with Joseph P. Nacchio, effective June 23, 1997.* 10.11** Promissory Note dated November 20, 1996 and Severance Agreement dated December 1, 1996 with Robert S. Woodruff.*
25 10.12**** Employment Agreement dated March 7, 1997 with Stephen M. Jacobsen.* 10.13**** Employment Agreement dated September 19, 1997 with Larry Seese.* 10.15**** Employment Agreement dated October 8, 1997 with Lewis O. Wilks.* 10.16**+ IRU Agreement dated as of October 18, 1996 with Frontier Communications International Inc. 10.17**+ IRU Agreement dated as of February 26, 1996 with WorldCom Network Services, Inc. 10.18**+ IRU Agreement dated as of May 2, 1997 with GTE. 10.19 LCI International, Inc. 1992 Stock Option Plan (incorporated by reference to LCI's Registration Statement No. 33-60558).* 10.20 LiTel Communications, Inc. 1993 Stock Option Plan (incorporated by reference to LCI's Registration Statement No. 33-60558).* 10.21 LCI International, Inc. 1994/1995 Stock Option Plan (incorporated by reference to LCI's Annual Report on Form 10-K for the year ended December 31, 1993).* 10.22 LCI International, Inc. 1995/1996 Stock Option (incorporated by reference to LCI's Proxy Statement for the 1995 Annual Meeting of Shareowners).* 10.23 LCI International Management Services, Inc. Supplemental Executive Retirement Plan (incorporated by reference to LCI's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995).* 10.24 1997/1998 LCI International, Inc. Stock Option Plan (incorporated by reference to LCI's Annual Report on Form 10-K for the year ended December 31, 1996).* 10.25(a) 1995 Stock Option Plan of Icon CMT Corp. (incorporated by reference to Icon CMT Corp.'s Registration Statement on Form S- 1/A, No. 333-38339).* 10.25(b) Amendment to Amended and Restated 1995 Stock Option Plan of Icon CMT Corp. (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* 10.26 U.S. Long Distance Corp. 1990 Employee Stock Option Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* 10.27+ Contractor Agreement dated January 18, 1993 by and between LCI International Telecom Corp. and American Communications Network, Inc. (incorporated by reference to LCI's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995). 10.28 Participation Agreement dated as of November 1996 among LCI International, Inc., as the Construction Agent and as the Lessee, First Security Bank, National Association, as the Owner Trustee under the Stuart Park Trust the various banks and lending institutions which are parties thereto from time to time as the Holders, the various banks and lending institutions which are parties thereto from time to time as the Lenders and NationsBank of Texas, N.A., as the Agent for the Lenders (incorporated by reference to LCI's Annual Report on Form 10-K for the year ended December 31, 1996). 10.29 Agency Agreement between LCI International, Inc., as the Construction Agent and First Security Bank, National Association, as the Owner Trustee under the Stuart Park Trust as the Lessor dated as of November 15, 1996 (incorporated by reference to LCI's Annual Report on Form 10-K for the year ended December 31, 1996). 10.30 Deed of Lease Agreement dated as of November 15, 1996 between First Security Bank, National Association as the Owner Trustee under the Stuart Park Trust, as Lessor and LCI International, Inc. as Lessee (incorporated by reference to LCI's Annual Report on Form 10-K for the year ended
26 December 31, 1996). 10.31 Common Stock Purchase Agreement dated as of December 14, 1998 with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K filed December 16, 1998). 10.32 Registration Rights Agreement dated December 14, 1998 with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K filed December 16, 1998). 10.33 Registration Rights Agreement dated as of April 18, 1999 with Anschutz Company and Anschutz Family Investment Company LLC (incorporated by reference to Qwest's Current Report on Form 8-K/A filed April 28, 1999). 10.34 Common Stock Purchase Agreement dated as of April 19, 1999 with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A filed April 28, 1999). 10.35 Registration Rights Agreement dated as of April 19, 1999 with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A filed April 28, 1999). 10.36 Voting Agreement dated as of July 18, 1999 among each of the shareholders listed on the signature page thereto and U S WEST, Inc. (incorporated herein by reference to Qwest's Current Report on Form 8-K dated July 20, 1999). 10.37 Agreement entered into as of July 18, 1999 between Qwest and Global Crossing Ltd. (incorporated herein by reference to Qwest's Current Report on Form 8-K dated July 20, 1999). 10.38 Agreement dated as of July 18, 1999 between Qwest and Global Crossing Holdings Ltd. 21.1 Subsidiaries of the Registrant (incorporated herein by reference to Qwest's quarterly report on Form 10-Q for the period end March 31, 1999). 27 Financial Data Schedule
* Indicates executive compensation plans and arrangements. ** Incorporated by reference in Form S-1 as declared effective on June 23, 1997 (File No. 333-25391). *** Incorporated by reference to exhibit 4.1 in Form S-4 as declared effective on January 5, 1998 (File No. 333-42847). **** Incorporated by reference in Qwest's Form 10-K for the year ended December 31, 1997. ***** Incorporated by reference to the exhibit of the same number to Qwest's Registration Statement on Form S-3 (File No. 333- 58617) filed July 7, 1998. + Portions have been omitted pursuant to a request for confidential treatment. (b) Reports on Form 8-K: During the quarter ended June 30, 1999, Qwest filed the following Current Reports on Form 8-K: 1. On April 27, 1999, Qwest filed a Current Report on Form 8-K announcing its strategic relationship with BellSouth Corporation (together with its subsidiaries, "BellSouth"), the investment by BellSouth in 40.7 million shares of Qwest Common Stock at $47.25 per share, and the sale by Qwest's principal shareholder of 33.3 million shares of Qwest Common Stock to BellSouth at $47.25 per share. As a result of these two purchases, BellSouth owns approximately 10% of the Company's issued and outstanding shares for a total investment of approximately $3.5 billion. 2. On April 28, 1999, Qwest filed a Current Report on Form 8-K/A, restating the Current Report on Form 8-K filed April 27, 1999 regarding the relationship with BellSouth. 3. On June 14, 1999, Qwest filed a Current Report on Form 8-K announcing is offer to acquire U S WEST, Inc., a Delaware corporation, and Frontier Corporation, a New York corporation, in separate transactions. 4. On June 18, 1999, Qwest filed a Current Report on Form 8-K announcing a change in auditors from KPMG LLP to Arthur Andersen LLP. This change in auditors resulted from Qwest entering into a business venture with KPMG LLP that effectively impaired KPMG's independence. 27 5. On June 21, 1999, Qwest filed a Current Report on Form 8-K announcing a press release in connection with separate letters it delivered to Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S WEST, Inc., a Delaware corporation, and Mr. Joseph P. Clayton, Chief Executive Officer of Frontier Corporation, a New York corporation, discussing Qwest's offer to acquire the companies. 6. On June 22, 1999, Qwest filed a Current Report on Form 8-K announcing a press release in connection with a letter it delivered to Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S WEST, Inc., a Delaware corporation, urging the U S West Board to enter into discussions with Qwest regarding a business combination. 7. On June 23, 1999, Qwest filed a Current Report on Form 8-K announcing a press release in connection with separate letters it delivered to Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S WEST, Inc., a Delaware corporation, and Mr. Joseph P. Clayton, Chief Executive Officer of Frontier Corporation, a New York corporation. The letters contained revisions to Qwest's previous offer to acquire the companies. 8. On June 29, 1999, Qwest filed a Current Report on Form 8-K announcing a press release in connection with a letter it delivered to Mr. Solomon D. Trujillo, Chairman, President and Chief Executive Officer of U S WEST, Inc., a Delaware corporation, stating that Qwest does not expect to encounter any difficulty in obtaining the necessary FCC regulatory approvals to complete its proposed mergers with U S West, Inc. and Frontier Corporation. 28 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 By: /s/ Robert S. Woodruff ----------------------- ROBERT S. WOODRUFF Executive Vice President - Finance And Chief Financial Officer (Principal Financial and Accounting Officer) August 11, 1999 -- 29 EX-10.2 2 EQUITY INCENTIVE PLAN ================================================================================ QWEST COMMUNICATIONS INTERNATIONAL INC. EQUITY INCENTIVE PLAN (effective June 23, 1997) (amended and restated, effective June 1, 1998) ================================================================================ TABLE OF CONTENTS ----------------- Page ---- ARTICLE I - INTRODUCTION................................................... 1 1.1 Establishment.................................................. 1 1.2 Purposes....................................................... 1 ARTICLE II - DEFINITIONS.................................................... 1 2.1 Definitions.................................................... 1 2.2 Gender and Number.............................................. 4 ARTICLE III - PLAN ADMINISTRATION............................................ 4 3.1 General........................................................ 4 3.2 Delegation by Committee........................................ 4 ARTICLE IV - STOCK SUBJECT TO THE PLAN...................................... 5 4.1 Number of Shares............................................... 5 4.2 Other Shares of Stock.......................................... 5 4.3 Adjustments for Stock Split, Stock Dividend, Etc............... 5 4.4 Other Distributions and Changes in the Stock................... 6 4.5 General Adjustment Rules....................................... 6 4.6 Determination by the Committee, Etc............................ 6 ARTICLE V - CORPORATE REORGANIZATION; CHANGE IN CONTROL.................... 7 5.1 Reorganization of Qwest........................................ 7 5.2 Required Notice................................................ 7 5.3 Acceleration of Exercisability................................. 7 5.4 Change in Control of Qwest..................................... 8 5.5 Reorganization of Affiliated Corporations...................... 8 ARTICLE VI - PARTICIPATION.................................................. 9 ARTICLE VII - OPTIONS........................................................ 9 7.1 Grant of Options............................................... 9 7.2 Stock Option Certificates...................................... 9 7.3 Restrictions on Incentive Options..............................13 7.4 Shareholder Privileges.........................................13 ARTICLE VIII - RESTRICTED STOCK AWARDS........................................13 8.1 Grant of Restricted Stock Awards...............................13 8.2 Restrictions...................................................13 8.3 Privileges of a Stockholder, Transferability...................14 8.4 Enforcement of Restrictions....................................14 ARTICLE IX - STOCK UNITS......................................................14 ARTICLE X - STOCK APPRECIATION RIGHTS.........................................15 10.1 Persons Eligible..................................................15 10.2 Terms of Grant....................................................15 10.3 Exercise..........................................................15 10.4 Number of Shares or Amount of Cash................................15 10.5 Effect of Exercise................................................15 10.6 Termination of Services...........................................15 ARTICLE XI - STOCK BONUSES....................................................16 ARTICLE XII - OTHER COMMON STOCK GRANTS.......................................16 ARTICLE XIII - RIGHTS OF PARTICIPANTS.........................................16 13.1 Service...........................................................16 13.2 Nontransferability................................................16 13.3 No Plan Funding...................................................17 ARTICLE XIV - GENERAL RESTRICTIONS............................................17 14.1 Investment Representations........................................17 14.2 Compliance with Securities Laws...................................17 14.3 Changes in Accounting Rules.......................................17 ARTICLE XV - OTHER EMPLOYEE BENEFITS..........................................18 ARTICLE XVI - PLAN AMENDMENT, MODIFICATION AND TERMINATION....................18 ARTICLE XVII - WITHHOLDING....................................................18 17.1 Withholding Requirement...........................................18 17.2 Withholding With Stock............................................19 ARTICLE XVIII - REQUIREMENTS OF LAW...........................................19 18.1 Requirements of Law...............................................19 18.2 Federal Securities Law Requirements...............................19 18.3 Governing Law.....................................................19 ARTICLE XIX - DURATION OF THE PLAN............................................20 QWEST COMMUNICATIONS INTERNATIONAL INC. EQUITY INCENTIVE PLAN ARTICLE I INTRODUCTION 1.1 Establishment. Qwest Communications International Inc., a Delaware corporation, effective June 23, 1997, established the Qwest Communications International Inc. Equity Incentive Plan (the "Plan") for certain employees of the Company (as defined in subsection 2.1(f)) and certain consultants to the Company. The Plan permits the grant of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, non- qualified stock options, restricted stock awards, stock appreciation rights, stock bonuses, stock units and other stock grants to certain key employees of the Company and to certain consultants to the Company. 1.2 Purposes. The purposes of the Plan are to provide those who are selected for participation in the Plan with added incentives to continue in the long-term service of the Company and to create in such persons a more direct interest in the future success of the operations of the Company by relating incentive compensation to increases in shareholder value, so that the income of those participating in the Plan is more closely aligned with the income of the Company's shareholders. The Plan is also designed to provide a financial incentive that will help the Company attract, retain and motivate the most qualified employees and consultants. 1.3 Effective Date; Amendment. The initial effective date of the Plan was June 23, 1997. The Plan is amended and restated, as of June 1, 1998. The provisions of the Plan, as so amended and restated, shall apply to any Award (as defined in subsection 2.1(b)) granted on or after June 1, 1998, and, to the extent that the provisions of this amended and restated Plan do not adversely affect the Award, shall also apply to Awards granted prior to June 1, 1998. ARTICLE II DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: (a) "Affiliated Corporation" means any corporation or other entity that is affiliated with Qwest through stock ownership or otherwise and is designated as an "Affiliated Corporation" by the Board, provided, however, that for purposes of Incentive Options granted pursuant to the Plan, an "Affiliated Corporation" means any parent or subsidiary of the Company as defined in Section 424 of the Code. 1 (b) "Award" means an Option, a Restricted Stock Award, a Stock Appreciation Right, a Stock Unit, grants of Stock pursuant to Article XI or other issuances of Stock hereunder. (c) "Board" means the Board of Directors of Qwest. (d) "Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (e) "Committee" means a committee consisting of members of the Board who are empowered hereunder to take actions in the administration of the Plan. The Committee shall be so constituted at all times as to permit the Plan to comply with Rule 16b-3 or any successor rule promulgated under the Securities Exchange Act of 1934 (the "1934 Act"). Except as provided in Section 3.2, the Committee shall select Participants from Eligible Employees and Eligible Consultants of the Company and shall determine the awards to be made pursuant to the Plan and the terms and conditions thereof. (f) "Company" means Qwest and the Affiliated Corporations. (g) "Disabled" or "Disability" shall have the meaning given to such terms in Section 22(e)(3) of the Code. (h) "Effective Date" means the original effective date of the Plan, June 23, 1997. (i) "Eligible Employees" means those employees (including, without limitation, officers and directors who are also employees) of the Company or any subsidiary or division thereof, upon whose judgment, initiative and efforts the Company is, or will become, largely dependent for the successful conduct of its business. For purposes of the Plan, an employee is any individual who provides services to the Company or any subsidiary or division thereof as a common law employee and whose remuneration is subject to the withholding of federal income tax pursuant to section 3401 of the Code. Employee shall not include any individual (A) who provides services to the Company or any subsidiary or division thereof under an agreement, contract, or any other arrangement pursuant to which the individual is initially classified as an independent contractor or (B) whose remuneration for services has not been treated initially as subject to the withholding of federal income tax pursuant to section 3401 of the Code even if the individual is subsequently reclassified as a common law employee as a result of a final decree of a court of competent jurisdiction or the settlement of an administrative or judicial proceeding. Leased employees within the meaning of section 414(n) of the Code shall not be treated as employees under this Plan. (j) "Eligible Consultants" means those consultants to the Company who are determined, by the Committee, to be individuals whose services are important to the Company and who are eligible to receive Awards, other than Incentive Options, under the Plan. (k) "Fair Market Value" means the average of the mean between the bid and the asked prices of the Stock or the closing price, as applicable, on the Nasdaq National Market, the principal stock exchange or other market on which the Stock is traded, over the five consecutive 2 trading days ending on a particular date or by such other method as the Committee, or the individual or individuals to whom the Committee has delegated authority to grant Awards, may specify at the time an Award is granted. If the price of the Stock is not reported on any securities exchange or national market system, the Fair Market Value of the Stock on a particular date shall be as determined by the Committee. If, upon exercise of an Option, the exercise price is paid by a broker's transaction as provided in subsection 7.2(g)(ii)(D), Fair Market Value, for purposes of the exercise, shall be the price at which the Stock is sold by the broker. (l) "Incentive Option" means an Option designated as such and granted in accordance with Section 422 of the Code. (m) "Non-Qualified Option" means any Option other than an Incentive Option. (n) "Option" means a right to purchase Stock at a stated or formula price for a specified period of time. Options granted under the Plan shall be either Incentive Options or Non-Qualified Options. (o) "Option Certificate" shall have the meaning given to such term in Section 7.2 hereof. (p) "Option Holder" means a Participant who has been granted one or more Options under the Plan. (q) "Option Price" means the price at which each share of Stock subject to an Option may be purchased, determined in accordance with subsection 7.2(b). (r) "Participant" means an Eligible Employee or Eligible Consultant designated by the Committee from time to time during the term of the Plan to receive one or more of the Awards provided under the Plan. (s) "Qwest" means Qwest Communications International Inc. and any successor thereto. (t) "Restricted Stock Award" means an award of Stock granted to a Participant pursuant to Article VIII that is subject to certain restrictions imposed in accordance with the provisions of such Section. (u) "Share" means a share of Stock. (v) "Stock" means the $0.01 par value common stock of Qwest. (w) "Stock Appreciation Right" means the right, granted by the Committee pursuant to the Plan, to receive a payment equal to the increase in the Fair Market Value of a Share of Stock subsequent to the grant of such Award. 3 (x) "Stock Bonus" means either an outright grant of Stock or a grant of Stock subject to and conditioned upon certain employment or performance related goals. (y) "Stock Unit" means a measurement component equal to the Fair Market Value of one share of Stock on the date for which a determination is made pursuant to the provisions of this Plan. 2.2 Gender and Number. Except when otherwise indicated by the context, the masculine gender shall also include the feminine gender, and the definition of any term herein in the singular shall also include the plural. ARTICLE III PLAN ADMINISTRATION 3.1 General. The Plan shall be administered by the Committee. In accordance with the provisions of the Plan, the Committee shall, in its sole discretion, select the Participants from among the Eligible Employees and Eligible Consultants, determine the Awards to be made pursuant to the Plan, the number of Stock Units, Stock Appreciation Rights or shares of Stock to be issued thereunder and the time at which such Awards are to be made, fix the Option Price, period and manner in which an Option becomes exercisable, establish the duration and nature of Restricted Stock Award restrictions, establish the terms and conditions applicable to Stock Bonuses and Stock Units, and establish such other terms and requirements of the various compensation incentives under the Plan as the Committee may deem necessary or desirable and consistent with the terms of the Plan. The Committee shall determine the form or forms of the agreements with Participants that shall evidence the particular provisions, terms, conditions, rights and duties of Qwest and the Participants with respect to Awards granted pursuant to the Plan, which provisions need not be identical except as may be provided herein; provided, however, that Eligible Consultants shall not be eligible to receive Incentive Options. The Committee may from time to time adopt such rules and regulations for carrying out the purposes of the Plan as it may deem proper and in the best interests of the Company. The Committee may correct any defect, supply any omission or reconcile any inconsistency in the Plan or in any agreement entered into hereunder in the manner and to the extent it shall deem expedient and it shall be the sole and final judge of such expediency. No member of the Committee shall be liable for any action or determination made in good faith. The determinations, interpretations and other actions of the Committee pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. 3.2 Delegation by Committee. The Committee may, from time to time, delegate, to specified officers of Qwest, the power and authority to grant Awards under the Plan to specified groups of employees and consultants, subject to such restrictions and conditions as the Committee, in its sole discretion, may impose. The delegation shall be as broad or as narrow as the Committee shall determine. To the extent that the Committee has delegated the authority to determine certain terms and conditions of an Award, all references in the Plan to the Committee's exercise of authority in determining such terms and conditions shall be construed to include the Qwest officer or officers 4 to whom the Committee has delegated the power and authority to make such determination. The power and authority to grant Awards to any employee or consultant who is covered by Section 16(b) of the 1934 Act shall not be delegated by the Committee. ARTICLE IV STOCK SUBJECT TO THE PLAN 4.1 Number of Shares. The number of Shares that are authorized for issuance under the Plan in accordance with the provisions of the Plan and subject to such restrictions or other provisions as the Committee may from time to time deem necessary shall not exceed 35,000,000, subject to the provisions regarding changes in capital described below. The maximum number of Shares with respect to which a Participant may receive Options and Stock Appreciation Rights under the Plan in any calendar year is 20,000,000 Shares. The Shares may be either authorized and unissued Shares or previously issued Shares acquired by Qwest. This authorization may be increased from time to time by approval of the Board and by the stockholders of Qwest if, in the opinion of counsel for Qwest, stockholder approval is required. Shares of Stock that may be issued upon exercise of Options or Stock Appreciation Rights, that are issued as Restricted Stock Awards or Stock Bonuses, that are issued with respect to Stock Units, and that are issued as incentive compensation or other Stock grants under the Plan shall be applied to reduce the maximum number of Shares remaining available for use under the Plan. Qwest shall at all times during the term of the Plan and while any Options or Stock Units are outstanding retain as authorized and unissued Stock at least the number of Shares from time to time required under the provisions of the Plan, or otherwise assure itself of its ability to perform its obligations hereunder. 4.2 Other Shares of Stock. Any shares of Stock that are subject to an Option that expires or for any reason is terminated unexercised, any shares of Stock that are subject to an Award (other than an Option) and that are forfeited, and any shares of Stock withheld for the payment of taxes or received by Qwest as payment of the exercise price of an Option shall automatically become available for use under the Plan, provided, however, that no more than 20,000,000 shares of Stock may be awarded pursuant to Incentive Options. 4.3 Adjustments for Stock Split, Stock Dividend, Etc. If Qwest shall at any time increase or decrease the number of its outstanding Shares or change in any way the rights and privileges of such Shares by means of the payment of a stock dividend or any other distribution upon such shares payable in Stock, or through a stock split, subdivision, consolidation, combination, reclassification or recapitalization involving the Stock, then in relation to the Stock that is affected by one or more of the above events, the numbers, rights and privileges of the following shall be increased, decreased or changed in like manner as if they had been issued and outstanding, fully paid and nonassessable at the time of such occurrence: (i) the Shares as to which Awards may be granted under the Plan and (ii) the Shares then included in each outstanding Award granted hereunder. 4.4 Other Distributions and Changes in the Stock. If 5 (a) Qwest shall at any time distribute with respect to the Stock assets or securities of persons other than Qwest (excluding cash or distributions referred to in Section 4.3), or (b) Qwest shall at any time grant to the holders of its Stock rights to subscribe pro rata for additional shares thereof or for any other securities of Qwest, or (c) there shall be any other change (except as described in Section 4.3) in the number or kind of outstanding Shares or of any stock or other securities into which the Stock shall be changed or for which it shall have been exchanged, and if the Committee shall in its discretion determine that the event described in subsection (a), (b), or (c) above equitably requires an adjustment in the number or kind of Shares subject to an Option or other Award, an adjustment in the Option Price or the taking of any other action by the Committee, including without limitation, the setting aside of any property for delivery to the Participant upon the exercise of an Option or the full vesting of an Award, then such adjustments shall be made, or other action shall be taken, by the Committee and shall be effective for all purposes of the Plan and on each outstanding Option or Award that involves the particular type of stock for which a change was effected. Notwithstanding the foregoing provisions of this Section 4.4, pursuant to Section 8.3 below, a Participant holding Stock received as a Restricted Stock Award shall have the right to receive all amounts, including cash and property of any kind, distributed with respect to the Stock after such Restricted Stock Award was granted upon the Participant's becoming a holder of record of the Stock. 4.5 General Adjustment Rules. No adjustment or substitution provided for in this Article IV shall require Qwest to sell a fractional share of Stock under any Option, or otherwise issue a fractional share of Stock, and the total substitution or adjustment with respect to each Option and other Award shall be limited by deleting any fractional share. In the case of any such substitution or adjustment, the aggregate Option Price for the total number of shares of Stock then subject to an Option shall remain unchanged but the Option Price per share under each such Option shall be equitably adjusted by the Committee to reflect the greater or lesser number of shares of Stock or other securities into which the Stock subject to the Option may have been changed, and appropriate adjustments shall be made to other Awards to reflect any such substitution or adjustment. 4.6 Determination by the Committee, Etc. Adjustments under this Article IV shall be made by the Committee, whose determinations with regard thereto shall be final and binding upon all parties thereto. ARTICLE V CORPORATE REORGANIZATION; CHANGE IN CONTROL 5.1 Reorganization of Qwest. Except as provided otherwise by the Committee at the time an Award is granted, upon the occurrence of any of the following events, if the notice required by Section 5.2 shall have first been given, the Plan and all Options then outstanding hereunder shall 6 automatically terminate and be of no further force and effect whatsoever, and other Awards then outstanding shall be treated as described in Sections 5.2 and 5.3, without the necessity for any additional notice or other action by the Board or Qwest: (a) the merger or consolidation of Qwest with or into another corporation or other reorganization (other than a reorganization under the United States Bankruptcy Code) of Qwest (other than a consolidation, merger, or reorganization in which Qwest is the continuing corporation and which does not result in any reclassification or change of outstanding shares of Stock); or (b) the sale or conveyance of the property of Qwest as an entirety or substantially as an entirety (other than a sale or conveyance in which the Qwest continues as holding company of an entity or entities that conduct the business or business formerly conducted by Qwest); or (c) the dissolution or liquidation of Qwest. 5.2 Required Notice. At least 30 days' prior written notice of any event described in Section 5.1 shall be given by Qwest to each Option Holder and Participant unless (a) in the case of the events described in clauses (a) or (b) of Section 5.1, Qwest, or the successor or purchaser, as the case may be, shall make adequate provision for the assumption of the outstanding Options or the substitution of new options for the outstanding Options on terms comparable to the outstanding Options except that the Option Holder shall have the right thereafter to purchase the kind and amount of securities or property or cash receivable upon such merger, consolidation, other reorganization, sale or conveyance by a holder of the number of Shares that would have been receivable upon exercise of the Option immediately prior to such merger, consolidation, sale or conveyance (assuming such holder of Stock failed to exercise any rights of election and received per share the kind and amount received per share by a majority of the non-electing shares), or (b) Qwest, or the successor or purchaser, as the case may be, shall make adequate provision for the adjustment of outstanding Awards (other than Options) so that such Awards shall entitle the Participant to receive the kind and amount of securities or property or cash receivable upon such merger, consolidation, other reorganization, sale or conveyance by a holder of the number of Shares that would have been receivable with respect to such Award immediately prior to such merger, consolidation, other reorganization, sale or conveyance (assuming such holder of Stock failed to exercise any rights of election and received per share the kind and amount received per share by a majority of the non-electing shares). The provisions of this Article V shall similarly apply to successive mergers, consolidations, reorganizations, sales or conveyances. Such notice shall be deemed to have been given when delivered personally to a Participant or when mailed to a Participant by registered or certified mail, postage prepaid, at such Participant's address last known to the Company. 5.3 Acceleration of Exercisability. Participants notified in accordance with Section 5.2 may exercise their Options at any time before the occurrence of the event requiring the giving of notice (but subject to occurrence of such event), regardless of whether all conditions of exercise relating to length of service, attainment of financial performance goals or otherwise have been satisfied. Upon the giving of notice in accordance with Section 5.2, all restrictions with respect to Restricted Stock and other Awards shall lapse immediately, all Stock Units shall become payable immediately and all Stock Appreciation Rights shall become exercisable. Any Options, Stock Appreciation Rights or Stock Units that are not assumed or substituted under clauses (a) or (b) of Section 5.2 that have not been exercised prior to the event described in Section 5.1 shall automatically terminate upon the occurrence of such event. 7 5.4 Change in Control of Qwest. (a) In General. Unless provided otherwise by the Committee at the time of the grant of an Award, upon a change in control of Qwest as defined in subsection 5.4(b), then (i) all Options shall become immediately exercisable in full during the remaining term thereof, and shall remain so, whether or not the Participants to whom such Options have been granted remain employees or consultants of the Company; (ii) all restrictions with respect to outstanding Restricted Stock Awards shall immediately lapse; (iii) all Stock Units shall become immediately payable; and (iv) all other Awards shall become immediately exercisable or shall vest, as the case may be, without any further action or passage of time. (b) Definition. For purposes of this Plan, a "change in control" shall be deemed to have occurred if either (i) any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act), other than Anschutz Company, The Anschutz Corporation, any entity or organization controlled by Philip F. Anschutz (collectively, the "Anschutz Entities") or a trustee or other fiduciary holding securities under an employee benefit plan of the Company, acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of either (A) the then-outstanding shares of Stock ("Outstanding Shares") or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors ("Voting Power") or (ii) at any time during any period of three consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board (and any new director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof. 5.5 Reorganization of Affiliated Corporations. If an Affiliated Corporation is merged or consolidated with another corporation (other than a merger or consolidation pursuant to which the Affiliated Corporation continues to be, or the continuing corporation is, affiliated with Qwest through stock ownership or control), or if all or substantially all of the assets or more than fifty percent (50%) of the stock of the Affiliated Corporation is acquired by any other corporation, business entity or person (other than a transaction in which the successor is affiliated with Qwest through stock ownership or control), or in the case of a reorganization (other than a reorganization under the United States Bankruptcy Code) including a divisive reorganization under Section 355 of the Code, or liquidation of the Affiliated Corporation, the Committee may, as to outstanding Awards, make appropriate provision for the protection of outstanding Awards granted to Eligible Employees of, and Eligible Consultants to, the affected Affiliated Corporation by (i) providing for the assumption of outstanding Options or the substitution of new Options for outstanding Options by the successor on terms comparable to the outstanding Options, (ii) providing for the adjustment of outstanding Awards, or (iii) taking such other action with respect to outstanding Awards as the Committee deems appropriate. 8 ARTICLE VI PARTICIPATION Participants in the Plan shall be those Eligible Employees who, in the judgment of the Committee, are performing, or during the term of their incentive arrangement will perform, vital services in the management, operation and development of the Company, and significantly contribute, or are expected to significantly contribute, to the achievement of long-term corporate economic objectives. Eligible Consultants shall be selected from those non-employee consultants to the Company who are performing services important to the operation and growth of the Company. Participants may be granted from time to time one or more Awards; provided, however, that the grant of each such Award shall be separately approved by the Committee and receipt of one such Award shall not result in automatic receipt of any other Award. Upon determination by the Committee that an Award is to be granted to a Participant, written notice shall be given to such person, specifying the terms, conditions, rights and duties related thereto. Each Participant shall, if required by the Committee, enter into an agreement with Qwest, in such form as the Committee shall determine and which is consistent with the provisions of the Plan, specifying such terms, conditions, rights and duties. Awards shall be deemed to be granted as of the date specified in the grant resolution of the Committee, which date shall be the date of any related agreement with the Participant. In the event of any inconsistency between the provisions of the Plan and any such agreement entered into hereunder, the provisions of the Plan shall govern. ARTICLE VII OPTIONS 7.1 Grant of Options. Coincident with or following designation for participation in the Plan, a Participant may be granted one or more Options. The Committee in its sole discretion shall designate whether an Option is an Incentive Option or a Non-Qualified Option; provided, however, that only Non- Qualified Options may be granted to Eligible Consultants. The Committee may grant both an Incentive Option and a Non-Qualified Option to an Eligible Employee at the same time or at different times. Incentive Options and Non- Qualified Options, whether granted at the same time or at different times, shall be deemed to have been awarded in separate grants and shall be clearly identified, and in no event shall the exercise of one Option affect the right to exercise any other Option or affect the number of shares for which any other Option may be exercised. An Option shall be considered as having been granted on the date specified in the grant resolution of the Committee. 7.2 Stock Option Certificates. Each Option granted under the Plan shall be evidenced by a written stock option certificate or agreement (an "Option Certificate"). An Option Certificate shall be issued by Qwest in the name of the Participant to whom the Option is granted (the "Option Holder") and in such form as may be approved by the Committee. The Option Certificate shall incorporate and conform to the conditions set forth in this Section 7.2 as well as such other terms and conditions that are not inconsistent as the Committee may consider appropriate in each case. (a) Number of Shares. Each Option Certificate shall state that it covers a specified number of shares of Stock, as determined by the Committee. 9 (b) Price. The price at which each share of Stock covered by an Option may be purchased shall be determined in each case by the Committee and set forth in the Option Certificate, but, in the case of an Incentive Option, in no event shall the price be less than 100 percent of the Fair Market Value of the Stock on the date the Incentive Option is granted. (c) Duration of Options; Restrictions on Exercise. Each Option Certificate shall state the period of time, determined by the Committee, within which the Option may be exercised by the Option Holder (the "Option Period"). The Option Period must end, in all cases, not more than ten years from the date the Option is granted. The Option Certificate shall also set forth any installment or other restrictions on exercise of the Option during such period, if any, as may be determined by the Committee. Each Option shall become exercisable (vest) over such period of time, if any, or upon such events, as determined by the Committee. (d) Termination of Services, Death, Disability, Etc. The Committee may specify the period, if any, after which an Option may be exercised following termination of the Option Holder's services. The effect of this subsection 7.2(d) shall be limited to determining the consequences of a termination and nothing in this subsection 7.2(d) shall restrict or otherwise interfere with the Company's discretion with respect to the termination of any individual's services. If the Committee does not otherwise specify, the following shall apply: (i) If the services of the Option Holder are terminated within the Option Period for "cause", as determined by the Company, the Option shall thereafter be void for all purposes. As used in this subsection 7.2(d), "cause" shall mean willful misconduct, a willful failure to perform the Option Holder's duties, insubordination, theft, dishonesty, conviction of a felony or any other willful conduct that is materially detrimental to the Company or such other cause as the Board in good faith reasonably determines provides cause for the discharge of an Option Holder. (ii) If the Option Holder becomes Disabled, the Option may be exercised by the Option Holder within one year following the Option Holder's termination of services on account of Disability (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of the Option Holder's termination of services because of Disability. (iii) If the Option Holder dies during the Option Period while still performing services for the Company or within the one year period referred to in (ii) above or the three-month period referred to in (iv) below, the Option may be exercised by those entitled to do so under the Option Holder's will or by the laws of descent and distribution within one year following the Option Holder's death, (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of the Option Holder's death. (iv) If the services of the Option Holder are terminated (which for this purpose means that the Option Holder is no longer employed by the Company or performing 10 services for the Company) by the Company within the Option Period for any reason other than cause, Disability or the Option Holder's death, the Option may be exercised by the Option Holder within three months following the date of such termination (provided that such exercise must occur within the Option Period), but not thereafter. In any such case, the Option may be exercised only as to the shares as to which the Option had become exercisable on or before the date of termination of services. (e) Transferability. Each Option shall not be transferable by the Option Holder except by will or pursuant to the laws of descent and distribution. Each Option is exercisable during the Option Holder's lifetime only by him or her, or in the event of Disability or incapacity, by his or her guardian or legal representative. The Committee may, however, provide at the time of grant or thereafter that the Option Holder may transfer a Non-Qualified Option to a member of the Option Holder's immediate family, a trust of which members of the Option Holder's immediate family are the only beneficiaries, or a partnership of which members of the Option Holder's immediate family or trusts for the sole benefit of the Option Holder's immediate family are the only partners. Immediate family means the Option Holder's spouse, issue (by birth or adoption), parents, grandparents, and siblings (including half brothers and sisters and adopted siblings). During the Option Holder's lifetime the Option Holder may not transfer an Incentive Option under any circumstances. (f) Consideration for Grant of Option. Each Option Holder agrees to remain in the employment of the Company or to continue providing consulting services to the Company, as the case may be, at the pleasure of the Company, for a continuous period of at least one year after the date the Option is granted, at the rate of compensation in effect on the date of such agreement or at such changed rate as may be fixed, from time to time, by the Company. Nothing in this paragraph shall limit or impair the Company's right to terminate the employment of any employee or to terminate the consulting services of any consultant. (g) Exercise, Payments, Etc. (i) Manner of Exercise. The method for exercising each Option granted hereunder shall be by delivery to Qwest of written notice specifying the number of Shares with respect to which such Option is exercised. The purchase of such Shares shall take place at the principal offices of Qwest within thirty days following delivery of such notice, at which time the Option Price of the Shares shall be paid in full by any of the methods set forth below or a combination thereof. Except as set forth in the next sentence, the Option shall be exercised when the Option Price for the number of shares as to which the Option is exercised is paid to Qwest in full. If the Option Price is paid by means of a broker's loan transaction described in subsection 7.2(g)(ii)(D), in whole or in part, the closing of the purchase of the Stock under the Option shall take place (and the Option shall be treated as exercised) on the date on which, and only if, the sale of Stock upon which the broker's loan was based has been closed and settled, unless the Option Holder makes an irrevocable written election, at the time of exercise of the Option, to have the exercise treated as fully effective for all purposes upon receipt of the Option Price by Qwest regardless of whether or not the sale of the Stock by the broker is closed and settled. A properly executed certificate or certificates representing the Shares shall be delivered to or at the direction of the Option 11 Holder upon payment therefor. If Options on less than all shares evidenced by an Option Certificate are exercised, Qwest shall deliver a new Option Certificate evidencing the Option on the remaining shares upon delivery of the Option Certificate for the Option being exercised. (ii) The exercise price shall be paid by any of the following methods or any combination of the following methods at the election of the Option Holder, or by any other method approved by the Committee upon the request of the Option Holder: (A) in cash; (B) by certified check, cashier's check or other check acceptable to the Company, payable to the order of Qwest; (C) by delivery to Qwest of certificates representing the number of shares then owned by the Option Holder, the Fair Market Value of which equals the purchase price of the Stock purchased pursuant to the Option, properly endorsed for transfer to Qwest; provided however, that no Option may be exercised by delivery to Qwest of certificates representing Stock, unless such Stock has been held by the Option Holder for more than six months; for purposes of this Plan, the Fair Market Value of any shares of Stock delivered in payment of the purchase price upon exercise of the Option shall be the Fair Market Value as of the exercise date; the exercise date shall be the day of delivery of the certificates for the Stock used as payment of the Option Price; or (D) by delivery to Qwest of a properly executed notice of exercise together with irrevocable instructions to a broker to deliver to Qwest promptly the amount of the proceeds of the sale of all or a portion of the Stock or of a loan from the broker to the Option Holder required to pay the Option Price. (h) Date of Grant. An Option shall be considered as having been granted on the date specified in the grant resolution of the Committee. (i) Withholding. (i) Non-Qualified Options. Upon exercise of an Option, the Option Holder shall make appropriate arrangements with the Company to provide for the amount of additional withholding required by Sections 3102 and 3402 of the Code and applicable state income tax laws, including payment of such taxes through delivery of shares of Stock or by withholding Stock to be issued under the Option, as provided in Article XVII. (ii) Incentive Options. If an Option Holder makes a disposition (as defined in Section 424(c) of the Code) of any Stock acquired pursuant to the exercise of an Incentive Option prior to the expiration of two years from the date on which the Incentive Option was granted or prior to the expiration of one year from the date on which the Option was exercised, the Option Holder shall send written notice to the Company at the Company's principal place of business of the date of such disposition, the number of shares disposed of, the amount of proceeds received from such disposition and any other information relating to such disposition as the Company may 12 reasonably request. The Option Holder shall, in the event of such a disposition, make appropriate arrangements with the Company to provide for the amount of additional withholding, if any, required by Sections 3102 and 3402 of the Code and applicable state income tax laws. 7.3 Restrictions on Incentive Options. (a) Initial Exercise. The aggregate Fair Market Value of the Shares with respect to which Incentive Options are exercisable for the first time by an Option Holder in any calendar year, under the Plan or otherwise, shall not exceed $100,000. For this purpose, the Fair Market Value of the Shares shall be determined as of the date of grant of the Option. (b) Ten Percent Stockholders. Incentive Options granted to an Option Holder who is the holder of record of 10% or more of the outstanding Stock of Qwest shall have an Option Price equal to 110% of the Fair Market Value of the Shares on the date of grant of the Option and the Option Period for any such Option shall not exceed five years. 7.4 Shareholder Privileges. No Option Holder shall have any rights as a shareholder with respect to any shares of Stock covered by an Option until the Option Holder becomes the holder of record of such Stock, and no adjustments shall be made for dividends or other distributions or other rights as to which there is a record date preceding the date such Option Holder becomes the holder of record of such Stock, except as provided in Article IV. ARTICLE VIII RESTRICTED STOCK AWARDS 8.1 Grant of Restricted Stock Awards. Coincident with or following designation for participation in the Plan, the Committee may grant a Participant one or more Restricted Stock Awards consisting of Shares of Stock. The number of Shares granted as a Restricted Stock Award shall be determined by the Committee. 8.2 Restrictions. A Participant's right to retain a Restricted Stock Award granted to him under Section 8.1 shall be subject to such restrictions, including but not limited to his continuous employment by or performance of services for the Company for a restriction period specified by the Committee or the attainment of specified performance goals and objectives, as may be established by the Committee with respect to such Award. The Committee may in its sole discretion require different periods of service or different performance goals and objectives with respect to different Participants, to different Restricted Stock Awards or to separate, designated portions of the Shares constituting a Restricted Stock Award. In the event of the death or Disability of a Participant, or the retirement of a Participant in accordance with the Company's established retirement policy, all required periods of service and other restrictions applicable to Restricted Stock Awards then held by him shall lapse with respect to a pro rata part of each such Award based on the ratio between the number of full months of employment or services completed at the time of termination of services from the grant of each Award to the total number of months of employment or continued services 13 required for such Award to be fully nonforfeitable, and such portion of each such Award shall become fully nonforfeitable. The remaining portion of each such Award shall be forfeited and shall be immediately returned to Qwest. If a Participant's employment or consulting services terminate for any other reason, any Restricted Stock Awards as to which the period for which services are required or other restrictions have not been satisfied (or waived or accelerated as provided herein) shall be forfeited, and all shares of Stock related thereto shall be immediately returned to Qwest. 8.3 Privileges of a Stockholder, Transferability. A Participant shall have all voting, dividend, liquidation and other rights with respect to Stock in accordance with its terms received by him as a Restricted Stock Award under this Article VIII upon his becoming the holder of record of such Stock; provided, however, that the Participant's right to sell, encumber, or otherwise transfer such Stock shall be subject to the limitations of Section 13.2. 8.4 Enforcement of Restrictions. The Committee shall cause a legend to be placed on the Stock certificates issued pursuant to each Restricted Stock Award referring to the restrictions provided by Sections 8.2 and 8.3 and, in addition, may in its sole discretion require one or more of the following methods of enforcing the restrictions referred to in Sections 8.2 and 8.3: (a) Requiring the Participant to keep the Stock certificates, duly endorsed, in the custody of Qwest while the restrictions remain in effect; or (b) Requiring that the Stock certificates, duly endorsed, be held in the custody of a third party while the restrictions remain in effect. ARTICLE IX STOCK UNITS A Participant may be granted a number of Stock Units determined by the Committee. The number of Stock Units, the goals and objectives to be satisfied with respect to each grant of Stock Units, the time and manner of payment for each Stock Unit, and the other terms and conditions applicable to a grant of Stock Units shall be determined by the Committee. ARTICLE X STOCK APPRECIATION RIGHTS 10.1 Persons Eligible. The Committee, in its sole discretion, may grant Stock Appreciation Rights to Eligible Employees or Eligible Consultants. 10.2 Terms of Grant. The Committee shall determine at the time of the grant of a Stock Appreciation Right the time period during which the Stock Appreciation Right may be exercised and any other terms that shall apply to the Stock Appreciation Right. 14 10.3 Exercise. A Stock Appreciation Right shall entitle a Participant to receive a number of shares of Stock (without any payment to Qwest, except for applicable withholding taxes), cash, or Stock and cash, as determined by the Committee in accordance with Section 10.4 below. If a Stock Appreciation Right is issued in tandem with an Option, except as may otherwise be provided by the Committee, the Stock Appreciation Right shall be exercisable during the period that its related Option is exercisable. A Participant desiring to exercise a Stock Appreciation Right shall give written notice of such exercise to Qwest, which notice shall state the proportion of Stock and cash that the Participant desires to receive pursuant to the Stock Appreciation Right exercised. Upon receipt of the notice from the Participant, Qwest shall deliver to the person entitled thereto (i) a certificate or certificates for Stock and/or (ii) a cash payment, in accordance with Section 10.4 below. The date Qwest receives written notice of such exercise hereunder is referred to in this Article X as the "exercise date". The delivery of Stock or cash received pursuant to such exercise shall take place at the principal offices of Qwest within 30 days following delivery of such notice. 10.4 Number of Shares or Amount of Cash. Subject to the discretion of the Committee to substitute cash for Stock, or Stock for cash, the number of Shares that may be issued pursuant to the exercise of a Stock Appreciation Right shall be determined by dividing: (a) the total number of Shares of Stock as to which the Stock Appreciation Right is exercised, multiplied by the amount by which the Fair Market Value of one share of Stock on the exercise date exceeds the Fair Market Value of one Share of Stock on the date of grant of one Share of Stock Appreciation Right, by (b) the Fair Market Value of one Share of Stock on the exercise date; provided, however, that fractional shares shall not be issued and in lieu thereof, a cash adjustment shall be paid. In lieu of issuing Stock upon the exercise of a Stock Appreciation Right, the Committee in its sole discretion may elect to pay the cash equivalent of the Fair Market Value of the Stock on the exercise date for any or all of the Shares of Stock that would otherwise be issuable upon exercise of the Stock Appreciation Right. 10.5 Effect of Exercise. If a Stock Appreciation Right is issued in tandem with an Option, the exercise of the Stock Appreciation Right or the related Option will result in an equal reduction in the number of corresponding Options or Stock Appreciation Rights that were granted in tandem with such Stock Appreciation Rights and Options. 10.6 Termination of Services. Upon the termination of the services of a Participant, any Stock Appreciation Rights then held by such Participant shall be exercisable within the time periods, and upon the same conditions with respect to the reasons for termination of services, as are specified in Section 7.2(d) with respect to Options. ARTICLE XI STOCK BONUSES The Committee may award Stock Bonuses to such Participants, subject to such conditions and restrictions, as it determines in its sole discretion. Stock Bonuses may be either outright grants 15 of Stock, or may be grants of Stock subject to and conditioned upon certain employment or performance related goals. ARTICLE XII OTHER COMMON STOCK GRANTS From time to time during the duration of this Plan, the Board may, in its sole discretion, adopt one or more incentive compensation arrangements for Participants pursuant to which the Participants may acquire shares of Stock, whether by purchase, outright grant, or otherwise. Any such arrangements shall be subject to the general provisions of this Plan and all shares of Stock issued pursuant to such arrangements shall be issued under this Plan. ARTICLE XIII RIGHTS OF PARTICIPANTS 13.1 Service. Nothing contained in the Plan or in any Award, or other Award granted under the Plan shall confer upon any Participant any right with respect to the continuation of his employment by, or consulting relationship with, the Company, or interfere in any way with the right of the Company, subject to the terms of any separate employment agreement or other contract to the contrary, at any time to terminate such services or to increase or decrease the compensation of the Participant from the rate in existence at the time of the grant of an Award. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of service shall be determined by the Committee at the time. 13.2 Nontransferability. Except as provided otherwise at the time of grant or thereafter, no right or interest of any Participant in an Option, a Stock Appreciation Right, a Restricted Stock Award (prior to the completion of the restriction period applicable thereto), a Stock Unit, or other Award granted pursuant to the Plan, shall be assignable or transferable during the lifetime of the Participant, either voluntarily or involuntarily, or subjected to any lien, directly or indirectly, by operation of law, or otherwise, including execution, levy, garnishment, attachment, pledge or bankruptcy. In the event of a Participant's death, a Participant's rights and interests in Options, Stock Appreciation Rights, Restricted Stock Awards, other Awards, and Stock Units shall, to the extent provided in Articles VII, VIII, IX, X and XI, be transferable by will or the laws of descent and distribution, and payment of any amounts due under the Plan shall be made to, and exercise of any Options may be made by, the Participant's legal representatives, heirs or legatees. Notwithstanding the foregoing, the Option Holder may not transfer an Incentive Option during the Option Holder's lifetime. If in the opinion of the Committee a person entitled to payments or to exercise rights with respect to the Plan is disabled from caring for his affairs because of mental condition, physical condition or age, payment due such person may be made to, and such rights shall be exercised by, such person's guardian, conservator or other legal personal representative upon furnishing the Committee with evidence satisfactory to the Committee of such status. 16 13.3 No Plan Funding. Obligations to Participants under the Plan will not be funded, trusteed, insured or secured in any manner. The Participants under the Plan shall have no security interest in any assets of the Company, and shall be only general creditors of the Company. ARTICLE XIV GENERAL RESTRICTIONS 14.1 Investment Representations. Qwest may require any person to whom an Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, or Stock Bonus is granted, as a condition of exercising such Option or Stock Appreciation Right, or receiving such Restricted Stock Award, Stock Unit, or Stock Bonus, to give written assurances in substance and form satisfactory to Qwest and its counsel to the effect that such person is acquiring the Stock for his own account for investment and not with any present intention of selling or otherwise distributing the same, and to such other effects as Qwest deems necessary or appropriate in order to comply with Federal and applicable state securities laws. Legends evidencing such restrictions may be placed on the Stock certificates. 14.2 Compliance with Securities Laws. Each Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, and Stock Bonus grant shall be subject to the requirement that, if at any time counsel to Qwest shall determine that the listing, registration or qualification of the shares subject to such Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, or Stock Bonus grant upon any securities exchange or under any state or federal law, or the consent or approval of any governmental or regulatory body, is necessary as a condition of, or in connection with, the issuance or purchase of shares thereunder, such Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit or Stock Bonus grant may not be accepted or exercised in whole or in part unless such listing, registration, qualification, consent or approval shall have been effected or obtained on conditions acceptable to the Committee. Nothing herein shall be deemed to require Qwest to apply for or to obtain such listing, registration or qualification. 14.3 Changes in Accounting Rules. Except as provided otherwise at the time an Award is granted, notwithstanding any other provision of the Plan to the contrary, if, during the term of the Plan, any changes in the financial or tax accounting rules applicable to Options, Stock Appreciation Rights, Restricted Stock Awards, Stock Units or other Awards shall occur which, in the sole judgment of the Committee, may have a material adverse effect on the reported earnings, assets or liabilities of Qwest, the Committee shall have the right and power to modify as necessary, any then outstanding and unexercised Options, Stock Appreciation Rights, outstanding Restricted Stock Awards, outstanding Stock Units and other outstanding Awards as to which the applicable services or other restrictions have not been satisfied. 17 ARTICLE XV OTHER EMPLOYEE BENEFITS The amount of any compensation deemed to be received by a Participant as a result of the exercise of an Option or Stock Appreciation Right, the sale of shares received upon such exercise, the vesting of any Restricted Stock Award, receipt of Stock Bonuses, distributions with respect to Stock Units, or the grant of Stock shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such employee are determined, including without limitation benefits under any pension, profit sharing, 401(k), life insurance or salary continuation plan. ARTICLE XVI PLAN AMENDMENT, MODIFICATION AND TERMINATION The Board may at any time terminate, and from time to time may amend or modify the Plan provided, however, that no amendment or modification may become effective without approval of the amendment or modification by the shareholders if shareholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, or if Qwest, on the advice of counsel, determines that shareholder approval is otherwise necessary or desirable. No amendment, modification or termination of the Plan shall in any manner adversely affect any Options, Stock Appreciation Rights, Restricted Stock Awards, Stock Units, Stock Bonuses or other Award theretofore granted under the Plan, without the consent of the Participant holding such Options, Stock Appreciation Rights, Restricted Stock Awards, Stock Units, Stock Bonuses or other Awards. ARTICLE XVII WITHHOLDING 17.1 Withholding Requirement. Qwest's obligations to deliver shares of Stock upon the exercise of any Option, or Stock Appreciation Right, the vesting of any Restricted Stock Award, payment with respect to Stock Units, or the grant of Stock shall be subject to the Participant's satisfaction of all applicable federal, state and local income and other tax withholding requirements. 17.2 Withholding With Stock. At the time the Committee grants an Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, Stock Bonus, other Award, or Stock or at any time thereafter, it may, in its sole discretion, grant the Participant an election to pay all such amounts of tax withholding, or any part thereof, by electing (a) to have Qwest withhold from shares otherwise issuable to the Participant, shares of Stock having a value equal to the amount required to be withheld or such lesser amount as may be elected by the Participant; provided however, that the amount of Stock so withheld shall not exceed the minimum amount required to be withheld under the method of withholding that results in the smallest amount of withholding, or (b) to transfer to Qwest a number of shares of Stock that were acquired by the Participant more than six months prior to the transfer to Qwest and that have a value equal to the amount required to be withheld or 18 such lesser amount as may be elected by the Participant. All elections shall be subject to the approval or disapproval of the Committee. The value of shares of Stock to be withheld shall be based on the Fair Market Value of the Stock on the date that the amount of tax to be withheld is to be determined (the "Tax Date"). Any such elections by Participants to have shares of Stock withheld for this purpose will be subject to the following restrictions: (a) All elections must be made prior to the Tax Date. (b) All elections shall be irrevocable. (c) If the Participant is an officer or director of Qwest within the meaning of Section 16 of the 1934 Act ("Section 16"), the Participant must satisfy the requirements of such Section 16 and any applicable Rules thereunder with respect to the use of Stock to satisfy such tax withholding obligation. ARTICLE XVIII REQUIREMENTS OF LAW 18.1 Requirements of Law. The issuance of Stock and the payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. 18.2 Federal Securities Law Requirements. If a Participant is an officer or director of Qwest within the meaning of Section 16, Awards granted hereunder shall be subject to all conditions required under Rule 16b-3, or any successor rule promulgated under the 1934 Act, to qualify the Award for any exception from the provisions of Section 16(b) of the 1934 Act available under that Rule. Such conditions shall be set forth in the agreement with the Participant which describes the Award or other document evidencing or accompanying the Award. 18.3 Governing Law. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the State of Delaware. ARTICLE XIX DURATION OF THE PLAN Unless sooner terminated by the Board of Directors, the Plan shall terminate at the close of business on June 22, 2007, and no Option, Stock Appreciation Right, Restricted Stock Award, Stock Unit, Stock Bonus, other Award or Stock shall be granted, or offer to purchase Stock made, after such termination. Options, Stock Appreciation Rights, Restricted Stock Awards, other Awards, and Stock Units outstanding at the time of the Plan termination may continue to be exercised, or become free of restrictions, or paid, in accordance with their terms. 19 Dated:_____________, 1998. QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation By:_____________________________________________ 20 EX-10.38 3 AGREEMENT DATED JULY 18, 1999 THIS AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement"), entered into as of July 18, 1999, between --------- GLOBAL CROSSING HOLDINGS LTD., a corporation organized and existing under the laws of Bermuda and having its principal office in Hamilton, Bermuda (said company, and any permitted successor or assign hereunder, the "Grantor"), and ------- QWEST COMMUNICATIONS INTERNATIONAL INC., a corporation organized and existing under the laws of Delaware and having its principal office in Denver, Colorado (said company, and any permitted successor or assign hereunder, the "Purchaser"). The Grantor and the Purchaser are herein sometimes collectively --------- referred to as the "Parties". ------- W I T N E S S E T H: ------------------- WHEREAS, Atlantic Crossing Ltd. has constructed a fiber optic cable system connecting the United States, the United Kingdom, the Netherlands and Germany known as the Atlantic Crossing System or "AC-1"; Pacific Crossing Ltd. ---- is constructing a fiber optic cable system connecting the United States and Japan known as the Pacific Crossing System or "PC-1"; Mid-Atlantic Crossing Ltd. ---- is constructing a fiber optic cable system connecting New York, Florida and St. Croix, known as the Mid-Atlantic Crossing System or "MAC"; Pan American Crossing --- Ltd. is constructing a fiber optic cable system connecting California, Mexico, Panama, Venezuela and St. Croix, known as the Pan American Crossing System or "PAC" (PAC also includes a terrestrial network which connects certain major - ---- cities in Mexico); GC Pan European Crossing Holdings B.V. is constructing a fiber optic cable network connecting various principal cities in Europe, known as Pan-European Crossing or "PEC"; and South American Crossing Ltd. is --- constructing a submarine fiber optic cable system connecting Panama, Colombia, Peru, Chile, Argentina, Brazil and St. Croix, known as South American Crossing or "SAC"; --- WHEREAS, Atlantic Crossing Ltd., Pacific Crossing Ltd., Mid-Atlantic Crossing Ltd., Pan American Crossing Ltd., GC Pan European Crossing Holdings B.V. and South American Crossing Ltd. are referred to herein as the "System ------ Companies" and AC-1, PC-1, MAC, PAC, PEC and SAC are referred to herein as the - --------- "Systems"; ------- WHEREAS, Grantor is affiliated with each of the System Companies and can cause the System Companies to grant IRUs in capacity on the Systems to the Purchaser; WHEREAS, additional companies controlled by the Grantor may in the future construct other systems, though there is no obligation to do so, in which case such additional companies will, if the Purchaser elects, be deemed to be "System Companies" under this Agreement and such additional systems will, if the Purchaser elects, be deemed to be "Systems" under this Agreement; and WHEREAS, the Purchaser desires to acquire rights with respect to capacity on one or more of the Systems on an indefeasible right of use basis ("IRU"); NOW, THEREFORE, the Parties, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, covenant and agree with each other as follows: 1. DEFINITIONS. Unless otherwise defined herein, all terms which are commonly ----------- used in the undersea telecommunications industry shall have the meanings commonly given such terms in such industry. In addition to terms defined in the preamble, the recitals and in the text of this Agreement, the following terms shall have the following meanings: "Dollars" or "$" means United States Dollars. ------- - "Final Payment Date" means the last day of the Purchase Period. ------------------ "Minimum Capacity Unit" or "MCU" means, with respect to any System, the --------------------- --- minimum amount of capacity that is generally offered by the Grantor (or its applicable affiliate) on such System to purchasers; provided, however, such -------- ------- minimum capacity (for purposes of this Agreement) shall not be above the STM-1 level unless agreed to by the Purchaser in writing. "Purchase Period" means the period beginning on the date hereof and ending --------------- on the second anniversary of such date. 2. PURCHASE AGREEMENT. ------------------ (a) Purchaser hereby unconditionally and irrevocably agrees to purchase and pay for (and/or cause one or more of its Affiliates (as defined below) to purchase and pay for) MCUs on the Systems during the Purchase Period in an aggregate amount equal to $140,000,000 (the "Commitment"). The commitment ---------- contained herein to purchase MCUs is in addition to, and separate from, any and all other commitments of the Purchaser and/or any of its affiliates to purchase capacity on the Systems. For the avoidance of doubt, (i) a purchase of an MCU hereunder will not be deemed to reduce or fulfill any other contractual commitment or other obligation to purchase capacity on any System and (ii) a purchase of an MCU by the Purchaser or any of its affiliates pursuant to any other contractual commitment or other obligation shall not be credited toward the Commitment. The Grantor hereby unconditionally and irrevocably agrees to sell or cause the System Companies to sell MCUs to the Purchaser and/or its Affiliates pursuant to, and in accordance with the terms of, this Agreement. (b) The price for MCUs on any System purchased pursuant to Section 2(a) hereof shall be at the lower of (i) the best "Tier 3" published prices available as at the date hereof for such System and (ii) the best available "top Tier" published prices (currently "Tier 3") for such System on the date the applicable capacity purchase agreement is executed for such MCUs. (c) Purchases of capacity on any System pursuant to this Agreement shall be effected by Purchaser executing, delivering and complying with a Capacity Purchase Agreement ("CPA") with the particular System Company or one of its affiliates, such CPA to contain substantially the same terms and conditions regarding capacity as set forth in the Capacity Purchase Agreement, dated as of December 29, 1998, between Atlantic Crossing Ltd. and an affiliate of the Purchaser and in the schedules and exhibits attached thereto. (d) If, on the Final Payment Date, the Purchaser has paid less than the entire Commitment to the Grantor by purchasing MCUs under this Agreement, the Purchaser shall pay to the Grantor (or any of the Grantor's affiliates designated by the Grantor), in immediately available funds, on the Final Payment Date, the amount equal to the difference between (x) $140,000,000 and (y) the actual amount paid by the Purchaser for MCUs under this Agreement (such difference being referred to herein as the "Unutilized Amount"). Such payment ----------------- shall be irrevocable; provided, however, during the period from the Final -------- ------- Payment Date to and including the fourth anniversary of the date of this Agreement, the Purchaser may utilize all or any portion of the Unutilized Amount as a credit to purchase MCUs pursuant to a CPA, such CPA to contain substantially the same terms and conditions regarding capacity as set forth in the Capacity Purchase Agreement, dated as of December 29, 1998, between Atlantic Crossing Ltd. and an affiliate of the Purchaser and in the schedules and exhibits attached thereto. 3. REPRESENTATIONS --------------- (a) The Grantor hereby represents and warrants to Purchaser that (i) Grantor is a corporation duly organized and validly existing under the laws of Bermuda; (ii) the execution, delivery and performance of this Agreement by Grantor has been duly authorized by all necessary corporate action on the part of Grantor and this Agreement is a valid, binding and enforceable obligation of Grantor enforceable with its terms and (iii) the execution, delivery and performance of this Agreement by Grantor does not violate, conflict with or constitute a breach of, the organizational documents or any order, decree or judgment of any court, tribunal or governmental authority binding on Grantor. The Grantor hereby further represents, warrants and covenants that it is affiliated with each of the System Companies and shall cause the applicable System Companies to grant IRUs in MCUs on the Systems to the Purchaser and/or its Affiliates pursuant to, and in accordance with the terms of, this Agreement. (b) Purchaser hereby represents and warrants to Grantor that (i) Purchaser is a corporation duly organized and validly existing under the laws of its jurisdiction of organization; (ii) the execution, delivery and performance of this Agreement by Purchaser has been duly authorized by all necessary corporate action on the part of Purchaser and this Agreement is a valid, binding and enforceable obligation of Purchaser enforceable in accordance with its terms; and (iii) the execution, delivery and performance of this Agreement by Purchaser does not violate, conflict with or constitute a breach of, the organizational documents or any order, decree or judgment of any court, tribunal or governmental authority binding on Purchaser. 4. SETTLEMENT OF DISPUTES. ---------------------- (a) The Parties shall endeavor to settle amicably by mutual discussions any disputes, differences, or claims whatsoever related to this Agreement. (b) Failing such amicable settlement, any controversy, claim or dispute arising under or relating to this Agreement, including the existence, validity, interpretation, performance, termination or breach thereof, shall finally be settled by arbitration in accordance with the International Arbitration Rules of the American Arbitration Association ("AAA"). There shall be three (3) arbitrators (the "Arbitration Tribunal"), the first of which shall be appointed by the claimant in its notice of arbitration, the second of which shall be appointed by the respondent within thirty (30) days of the appointment of the first arbitrator and the third of which shall be jointly appointed by the party- appointed arbitrators within thirty (30) days thereafter. The language of the arbitration shall be English. The Arbitration Tribunal shall issue a written opinion and will not have authority to award punitive damages to either party. Each party shall bear its own expenses, but the parties shall share equally the expenses of the Arbitration Tribunal and the AAA. This Agreement shall be enforceable, and any arbitration award shall be final, and judgment thereon may be entered in any court of competent jurisdiction. The arbitration shall be held in New York, New York, USA. 5. GOVERNING LAW . ------------- THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, UNITED STATES OF AMERICA. 6. NO THIRD PARTY BENEFICIARIES ---------------------------- This Agreement does not provide and is not intended to provide third parties (including, but not limited to, customers of the Purchaser) with any remedy, claim, liability, reimbursement, cause of action, or any other right. 7. ASSIGNMENT. ---------- (a) This Agreement and all of the provisions hereof shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. (b) The Grantor shall solely be responsible for complying with all of the terms binding on the "Grantor" hereunder and shall not be permitted to assign, transfer or otherwise dispose of any or all of its right, title or interest hereunder or delegate any or all of its obligations hereunder to any person or entity except that the Grantor shall be permitted to assign, transfer or ------ otherwise dispose of any or all of its rights hereunder and delegate any or all of its obligations hereunder to any present or future entity controlled by, under the same control as, or controlling, the Grantor. The Grantor shall give the Purchaser notice of any such assignment, transfer or other disposition or any such delegation. (c) The Purchaser shall solely be responsible for complying with all of the terms binding on the "Purchaser" hereunder and shall not be permitted to assign, transfer or otherwise dispose of any or all of its right, title or interest hereunder or delegate any or all of its obligations hereunder to any person or entity; provided, that Purchaser may assign the right to enter into a CPA with -------- System Companies to any present or future entity controlled by, under the same control as, or controlling the Purchaser (its "Affiliates"). ---------- (d) Any assignment, transfer or other disposition by either Party which is in violation of this Section shall be void and of no force and effect. 8. NOTICES. ------- Each notice, demand, certification or other communication given or made under this Agreement shall be in writing and shall be delivered by hand or sent by registered mail or by facsimile transmission to the address of the respective Party as shown below (or such other address as may be designated in writing to the other party hereto in accordance with the terms of this Section): If to the Purchaser: Qwest Communications International, Inc. 700 Qwest Tower 555 Seventeenth Street Denver, Colorado 80202 Attn: General Counsel Fax No. 303-992-1044 If to the Grantor: Global Crossing Holdings Ltd. Wessex House 45 Reid Street Hamilton HM12, Bermuda Attn: President Fax No.: 441-296-8606 Any change to the name, address and facsimile numbers may be made at any time by giving fifteen (15) days prior written notice in accordance with this Section. Any such notice, demand or other communication shall be deemed to have been received, if delivered by hand, at the time of delivery or, if posted, at the expiration of seven (7) days after the envelope containing the same shall have been deposited in the post maintained for such purpose, postage prepaid, or, if sent by facsimile, at the date of transmission if confirmed receipt is followed by postal notice. 9. SEVERABILITY. ------------ If any provision of this Agreement is found by an arbitral, judicial or regulatory authority having jurisdiction to be void or unenforceable, such provision shall be deemed to be deleted from this Agreement and the remaining provisions shall continue in full force and effect. 10. HEADINGS -------- The Section headings of this Agreement are for convenience of reference only and are not intended to restrict, affect or influence the interpretation or construction of provisions of such Section. 11. COUNTERPARTS. ------------ This Agreement may be executed in counterparts, each of which when executed and delivered shall be deemed an original. Such counterparts shall together (as well as separately) constitute one and the same instrument. 12. ENTIRE AGREEMENT ---------------- This Agreement supersedes all prior or written understandings between the parties hereto and constitutes the entire agreement with respect to the subject matter herein. This Agreement shall not be modified or amended except by a writing signed by authorized representatives of the parties hereto. 13. PUBLICITY AND CONFIDENTIALITY. ----------------------------- The provisions of this Agreement and any non-public information, written or oral, with respect to this Agreement ("Confidential Information") will be kept confidential and shall not be disclosed, in whole or in part, to any person other than affiliates, officers, directors, employees, agents or representatives of a party (collectively, "Representatives") who need to know such Confidential Information for the purpose of negotiating, executing and implementing this Agreement. Each party agrees to inform each of its Representatives of the non- public nature of the Confidential Information and to direct such persons to treat such Confidential Information in accordance with the terms of this Section. Nothing herein shall prevent a party from disclosing Confidential Information (i) upon the order of any court or administrative agency, (ii) upon the request or demand of, or pursuant to any regulation of, any regulatory agency or authority, (iii) to the extent reasonably required in connection with the exercise of any remedy hereunder, (iv) to a party's legal counsel or independent auditors, (v) to prospective lenders to the Grantor, (vi) to the extent necessary, to the operator, maintainor and administrator of any System and/or (vii) to any actual or proposed assignee, transferee or lessee of all or part of its rights hereunder provided that such actual or proposed assignee agrees in writing to be bound by the provisions of this Section. 14. LIMITATION OF LIABILITY. ----------------------- In no event shall the Purchaser or any Grantor be liable to the other for consequential, incidental, indirect or special damages, including, but not limited to, loss of revenue, loss of business opportunity, or the costs associated therewith. IN WITNESS WHEREOF, the Parties have executed this Agreement in the jurisdictions set forth beneath their signatures, effective on the date first written above. GLOBAL CROSSING HOLDINGS LTD. By: ________________________________ Name: Title: Jurisdiction: QWEST COMMUNICATIONS INTERNATIONAL INC. By: _____________________________ Name: Title: Jurisdiction: EX-27 4 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1999 AND CONSOLIDATED STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 INCLUDED IN THE COMPANY'S FORM 10-Q, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1,437 0 727 63 0 2,341 3,413 253 10,000 943 2,311 0 0 7 6,457 10,000 1,752 1,752 974 1,599 10 0 71 72 49 23 0 0 0 23 0.03 0.03
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