-----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, HAtNiuOKlDBVZQq1ki4U9iXs0y2kSqhAPrzGnXESnpXsjmkyF5QVDitK4RSRVjrg U8M4VO3u+0FJ6xo2uLEZ9A== 0000950109-97-003042.txt : 19970421 0000950109-97-003042.hdr.sgml : 19970421 ACCESSION NUMBER: 0000950109-97-003042 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19970418 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 841339282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-25391 FILM NUMBER: 97583153 BUSINESS ADDRESS: STREET 1: 555 17TH STREET SUITE 1000 CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032911400 FORMER COMPANY: FORMER CONFORMED NAME: QUEST COMMUNICATIONS INTERNATIONAL INC DATE OF NAME CHANGE: 19970416 S-1 1 FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM S-1 REGISTRATION STATEMENT Under THE SECURITIES ACT OF 1933 QWEST COMMUNICATIONS INTERNATIONAL INC. ---------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ---------------- DELAWARE 4813 84-1339282 (STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER JURISDICTION OF INDUSTRIAL IDENTIFICATION NO.) INCORPORATION OR CLASSIFICATION CODE ORGANIZATION) NO.) 555 SEVENTEENTH STREET, SUITE 1000 DENVER, COLORADO 80202 (303) 291-1400 (ADDRESS AND TELEPHONE NUMBER OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) ---------------- ROBERT S. WOODRUFF EXECUTIVE VICE PRESIDENT--FINANCE QWEST COMMUNICATIONS INTERNATIONAL INC. 555 SEVENTEENTH STREET, SUITE 1000 DENVER, COLORADO 80202 (303) 291-1400 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE FOR THE REGISTRANT) COPIES TO: MARTHA D. REHM, ESQ. DAVID J. BEVERIDGE, HOLME ROBERTS & OWEN LLP ESQ. 1700 LINCOLN STREET, SUITE 4100 SHEARMAN & STERLING DENVER, COLORADO 80203 599 LEXINGTON AVENUE (303) 861-7000 NEW YORK, NEW YORK 10022-6069 (212) 848-4000 ---------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. As soon as practical after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [_]............................................... If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]..................... If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]...................................................... If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]............................................. CALCULATION OF REGISTRATION FEE - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE AMOUNT OF SECURITIES TO BE TO BE OFFERING PRICE OFFERING REGISTRATION REGISTERED REGISTERED(1) PER UNIT(2) PRICE(2) FEE - ----------------------------------------------------------------------------------- Common Stock, par value $.01 per share......... shares $ $287,500,000 $87,121.21
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) Includes shares of Common Stock issuable pursuant to a 30-day option granted to the Underwriters solely to cover over-allotments. (2) Estimated solely for the purpose of calculating the registration fee. ---------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- EXPLANATORY NOTE This Registration Statement contains two prospectus cover pages; one to be used for a prospectus in connection with a United States and Canadian offering (the "U.S. Prospectus") and one to be used for a prospectus in connection with a concurrent international offering (the "International Prospectus"). The International Prospectus will be identical to the U.S. Prospectus except that it will have a different front cover page and back cover page, a different section entitled "Underwriting" and an added section entitled "Certain United States Federal Tax Consequences to Non-United States Holders." The front cover page, back cover page, "Underwriting" section and "Certain United States Federal Tax Consequences to Non-United States Holders" section to be used in the International Prospectus are located at the end of the U.S. Prospectus and have been labeled "Alternate Page for International Prospectus." ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION , 1997 PROSPECTUS SHARES QWEST COMMUNICATIONS INTERNATIONAL INC. [LOGO OF QWEST COMMUNICATIONS COMMON STOCK INTERNATIONAL APPEARS HERE] ($.01 PAR VALUE) All of the shares of Common Stock offered hereby (the "Shares") are being sold by Qwest Communications International Inc. (the "Company" or "Qwest"). Of the Shares being offered, Shares are being offered by the U.S. Underwriters (as defined herein) in the United States and Canada (the "U.S. Offering") and Shares are being offered by the International Underwriters (as defined herein) in a concurrent international offering outside the United States and Canada (the "International Offering" and, collectively with the U.S. Offering, the "Offerings"), subject to transfers between the U.S. Underwriters and the International Underwriters (collectively, the "Underwriters"). The Price to Public and the Underwriting Discount per Share will be identical for the U.S. Offering and International Offering. See "Underwriting." The closing of the U.S. Offering and the International Offering are conditioned upon each other. Prior to the Offerings, there has been no public market for the Common Stock. See "Underwriting" for factors to be considered in determining the Price to Public. Application will be made for listing of the Common Stock on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol " ." PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 10. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT COMPANY(1) Per Share................................... $ $ $ Total(2).................................... $ $ $ - --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated to be $ . (2) The Company has granted to the U.S. Underwriters and the International Underwriters 30-day options to purchase up to an aggregate of additional shares of Common Stock at the Price to Public, less Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such options in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The Shares are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Shares will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1997. SALOMON BROTHERS INC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. The date of this Prospectus is , 1997. CERTAIN PERSONS PARTICIPATING IN THE OFFERINGS MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING OVER-ALLOTMENT, STABILIZING AND SHORT-COVERING TRANSACTIONS IN THE COMMON STOCK, AND THE IMPOSITION OF A PENALTY BID, DURING AND AFTER THE OFFERINGS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information, including the Consolidated Financial Statements and the notes thereto, appearing elsewhere in this Prospectus. A glossary of relevant terms used in the telecommunications business is included at the end of this Prospectus. References to "Qwest" mean Qwest Communications International Inc. and its predecessors, and references to the "Company" mean Qwest together with its subsidiaries, including Qwest Corporation ("QC") and Qwest Communications Corporation ("QCC"). THE COMPANY The Company is a facilities-based provider of communications services to interexchange carriers and other communications entities ("Carrier Services") and to businesses and consumers ("Commercial Services"), and it constructs and installs fiber optic communications systems for interexchange carriers and other communications entities, as well as for its own use ("Network Construction Services"). The Company is expanding its existing long distance network into an approximately 13,000 route mile coast-to-coast, technologically advanced, fiber optic telecommunications network (the "Qwest Network"). The Company will employ, throughout substantially all of the Qwest Network, a self- healing SONET ring architecture equipped with the most advanced commercially available fiber manufactured by Lucent Technologies ("Lucent") together with advanced transmission electronics. The Qwest Network's advanced fiber and transmission electronics are expected to provide the Company with lower installation, operating and maintenance costs than older fiber systems generally in commercial use today. In addition, the Company has entered into construction contracts for the sale of dark fiber along the route of the Qwest Network, which will reduce the Company's net cost per fiber mile with respect to the fiber it retains for its own use. As a result of these cost advantages, the Company believes it will be well-positioned to capture market share and take advantage of the rapidly growing demand for long haul voice and data transmission capacity. Construction of the Qwest Network is scheduled to be completed by late 1998. Under the Company's plans, the Qwest Network will extend approximately 13,000 route miles coast-to-coast and connect 92 metropolitan areas that represent approximately 65% of the originating and terminating long distance traffic in the United States. Through a combination of the Qwest Network and leased facilities, the Company will continue to offer interstate services in all 48 contiguous states. The Company believes that demand from interexchange carriers and other communications entities for advanced, high bandwidth voice, data and video transmission capacity will increase over the next several years due to regulatory and technical changes and other industry developments. These anticipated changes and developments include: (i) continued growth in demand for existing long distance services; (ii) entry into the market of new communications providers; (iii) requirements of the four principal nationwide carriers (AT&T, MCI, Sprint and WorldCom) to replace or augment portions of their older systems; (iv) reform in regulation of domestic access charges and international settlement rates, which the Company expects will lower long distance rates and fuel primary demand for long distance services; and (v) continued growth in the capacity requirements of the Internet, data transmission and other new technologies and applications. THE QWEST NETWORK The Company's network infrastructure already includes, among other assets: (i) approximately 4,900 route miles of conduit in place, consisting of approximately 900 route miles of lit fiber systems, one in California (the "Cal-Fiber" system) carrying traffic between Los Angeles and Sacramento, and the other 3 in Texas connecting Dallas and Houston, approximately 2,250 route miles of dark fiber installed in conduit, and approximately 1,750 route miles of vacant conduit; (ii) right-of-way agreements in place for approximately 5,500 additional route miles of planned construction for the Qwest Network; (iii) an approximately 3,500 mile operating digital microwave system (the "Microwave System"); (iv) approximately 15,000 DS-3 miles of fiber transmission capacity leased by the Company from other carriers, used primarily to extend the Company's switched services for originating and terminating traffic beyond the boundaries of the Company's lit fiber network; and (v) five digital switches. Upon completion, key characteristics of the Qwest Network will include: . Technologically Advanced Platform. The Company is installing technologically advanced fiber optic cable and electronic equipment in a uniform configuration throughout the entire Qwest Network, which will provide full coast-to-coast SONET ring protection. The Company is deploying an advanced network management system that will give the Company's carrier customers the ability to monitor and reconfigure their leased capacity on a real time basis from their own network management centers. This new technology also will allow Qwest to provide bandwidth on demand for both its carrier and commercial customers, significantly reducing the time typically associated with installation of services. The Qwest Network's technologies include Lucent's non-zero dispersion shifted fiber equipped for dense wave division multiplexing and SONET technology at high optical carrier ("OC") levels (OC-48 level or higher) that enable high capacity transmission. . High Security and Reliability. The Qwest Network is designed for superior security and reliability, based on (i) bi-directional SONET ring architecture, a self-healing system that allows for instantaneous rerouting and virtually eliminates downtime in the event of a fiber cut; (ii) fiber cable installed in high density polyethylene conduit generally buried 42^-56^ below the ground; and (iii) extensive use of railroad rights-of-way, which typically offer greater protection of the fiber system than other systems built over more public rights-of-way such as highways, telephone poles or overhead power transmission lines. . Additional Capacity and Flexibility. The Qwest Network will contain two conduits along substantially all of its route. The first conduit will contain a cable generally housing at least 96 fibers, and the second conduit will serve as a spare. The spare conduit will allow for future technology upgrades and expansion of capacity at costs significantly below the cost of new construction. After existing and anticipated dark fiber sales, the Company generally plans to retain a minimum of 48 fibers for its own use in the Qwest Network. With the combined use of non-zero dispersion shifted fiber, dense wave division multiplexing and high bit rate transmission electronics, each of the fibers retained by the Company can achieve substantially greater capacity per fiber than standard, single mode fiber now in use. STRATEGY The Company's objective is to become a leading, coast-to-coast facilities- based provider of communications services to other communications providers, businesses and consumers. To achieve this objective, the Company intends to: . Deploy a Technologically Advanced Network. The Company believes the technical characteristics of the Qwest Network will enable it to provide highly reliable services to interexchange carriers and other communications entities at low per unit costs as it expands its customer base and increases network traffic volume. For instance, the Qwest Network's 4 advanced fiber optic cable and electronic equipment permit high capacity transmission over longer distances between regeneration/amplifier facilities than older fiber systems. This translates into generally lower installation and operating costs. These costs typically constitute a significant portion of the overall cost of providing telecommunications services. . Build on Network Construction Expertise and Existing Network Assets. The Company has built over 5,000 route miles of telecommunications conduit systems over the last eight years for itself and major interexchange carriers including AT&T, MCI, Sprint and WorldCom. Network Construction Services currently employs over 530 experienced construction personnel led by a six-member senior construction management team with combined construction experience of over 140 years. The Company utilizes its own fleet of railroad equipment and has in place railroad and other right-of- way agreements covering over 80% of the Qwest Network and already has installed approximately 39% of the route miles of conduit required for the Qwest Network. In addition, the Company has a fixed-price supply agreement for the provision of all the fiber necessary to complete the Qwest Network. . Establish Low Cost Position. The Company has entered into two construction contracts for the sale of dark fiber in the Qwest Network that will allow the Company to achieve a low net capital investment in the Qwest Network and share future operating and maintenance costs. Earnings from these agreements will reduce the Company's net cost per fiber mile with respect to the fiber that it retains for its own use. The Company believes that this network cost advantage, coupled with the operating and maintenance cost advantages of owning an entirely new network with advanced fiber and equipment uniformly deployed systemwide, will enable it to establish a low cost position in the long distance industry relative to its competitors. . Build on Management Experience. The Company's management team and board of directors include individuals with significant experience at major telecommunications companies. Mr. Joseph Nacchio became the Company's President and Chief Executive Officer in January 1997. Mr. Nacchio was Executive Vice President of the Consumer and Small Business Division at AT&T, where he was employed for 27 years prior to joining the Company. Mr. Nacchio has extensive management experience in marketing, sales, network operations and engineering, having served as Chief Engineer and a Vice President of Network Operations at AT&T. Mr. Richard T. Liebhaber, who was a Director and served as Executive Vice President and Chief Strategy and Technology Officer of MCI until his retirement in 1995, is a Director of Qwest. He is providing technical advisory services to the Company under a consulting agreement. See "Management." . Grow Carrier Revenue Base. The Company is currently focusing on expanding Carrier Services to increase its revenue stream and reduce per unit costs, targeting short-term capacity sales on a segment-by-segment basis as the Qwest Network is deployed and activated, and is increasingly seeking longer-term, high volume capacity agreements from major carriers. In addition to traditional telecommunications carriers, the Company is marketing to Internet service providers and other data service companies. . Develop Commercial Services. The Company plans to build on its Carrier Services experience to expand its presence in the Commercial Services market by creating a distinctive brand identity for "Qwest" and aggressively marketing its existing and planned voice, data and other transmission products and services. The Company plans to build direct end user relationships by developing strong distribution channels, providing competitive pricing and superior network quality and offering enhanced, market-driven services to businesses and consumers. 5 DARK FIBER SALES The Company entered into agreements in 1996 with both Frontier and WorldCom whereby each is purchasing certain dark fiber along the route of the Qwest Network. Proceeds from these dark fiber agreements will provide cash for a significant portion of the total estimated costs to construct the Qwest Network and complete construction relating to the dark fiber sold to Frontier and WorldCom and are expected to provide the Company with a strategic network cost advantage on the fibers that the Company retains for the Qwest Network. The Frontier agreement provides that the Company will construct and install a fiber optic network of approximately 13,000 route miles. In addition, Frontier has an option to purchase additional dark fiber along the entire route of the Qwest Network for additional consideration. This option expires in April 1997. The Company's revenue estimates in its build-out plan for the Qwest Network do not include the additional revenue that would be realized if this option were exercised. The Company believes that significant opportunities exist to sell additional dark fiber throughout the Qwest Network, and management has identified, and is in various stages of negotiations with, potential customers. The Company intends to retain ownership of at least 48 fibers for its own use along substantially all of the route of the Qwest Network. BUILD-OUT PLAN FOR THE QWEST NETWORK The Company estimates the total cost to construct and activate the Qwest Network and complete construction of the dark fiber sold to Frontier and WorldCom will be approximately $1.4 billion. Total anticipated costs include approximately $217.7 million already expended by the Company. The Company anticipates remaining total cash outlays for these purposes of approximately $671.5 million in 1997 and $483.6 million in 1998. The 1997 amount includes the Company's commitment to purchase a minimum quantity of materials for approximately $257.0 million in the year ended December 31, 1997, subject to quality and performance specifications. The Company also anticipates approximately $90.0 million of capital expenditures in 1997 and 1998 to support growth in Carrier Services and Commercial Services. Aggregate amounts already paid or contracted to be paid to the Company under the Frontier and WorldCom contracts and additional smaller construction contracts for sales of dark fiber constitute approximately $575.2 million. In addition to payments under the existing dark fiber contracts, the Company expects to finance the construction of the Qwest Network primarily through a combination of: (i) proceeds from the Offerings; (ii) remaining proceeds from the sale on March 31, 1997 of $250.0 million in principal amount of the Company's 10 7/8% Senior Notes Due 2007 (the "Notes"); (iii) proceeds from additional construction or sale contracts for dark fiber; (iv) additional debt or equity financings, including equipment financings; and (v) any available cash flow from operations. 6 THE OFFERINGS Common Stock offered by the Company: U.S. Offering............................................ shares International Offering................................... shares ------------------------ Total(1)............................................. shares Common Stock to be outstanding after the Offerings(1)(2).. shares $ million ($ million if the Underwriters' over- allotment options are Net Proceeds.............................................. exercised in full). Use of Proceeds........................................... Primarily to fund capital expenditures required to construct the Qwest Network and purchase fiber cable and other materials, including electronic equipment necessary to light the segments of the Qwest Network and also to repay approximately $28.0 million in outstanding advances from the Company's parent. Nasdaq National Market symbol.............................
- -------- (1) Does not include up to an aggregate of shares of Common Stock subject to over-allotment options granted to the U.S. Underwriters and International Underwriters. See "Underwriting." (2) Based on shares outstanding as of March 31, 1997, adjusted to account for an increase in the authorized capital stock of Qwest and a stock dividend effected prior to the Offerings, and excluding approximately shares of Common Stock issuable pursuant to the Company's Growth Share Plan. RISK FACTORS PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY CERTAIN FACTORS RELATING TO AN INVESTMENT IN THE SHARES. SEE "RISK FACTORS." 7 SUMMARY CONSOLIDATED FINANCIAL AND OPERATING DATA The selected data presented below under the captions "Statement of Operations Data," "Other Financial Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1996 are derived from the Consolidated Financial Statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Consolidated Financial Statements of the Company as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 are included elsewhere in this Prospectus. The information set forth below should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------------------------------ 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DATA: Revenue: Carrier services(1)(2)(3)... $ 41,561 $ 53,064 $ 50,240 $ 67,789 $ 57,573 Commercial services......... -- 969 8,712 20,412 34,265 -------- -------- -------- -------- -------- 41,561 54,033 58,952 88,201 91,838 Network construction services(4)................ 11,751 15,294 11,921 36,901 139,158 -------- -------- -------- -------- -------- Total revenue............... 53,312 69,327 70,873 125,102 230,996 -------- -------- -------- -------- -------- Operating expenses: Telecommunications services................... 31,557 41,240 48,239 81,215 80,368 Network construction services................... 9,730 15,515 9,369 32,754 87,542 Selling, general and administrative(5).......... 12,270 18,222 21,516 37,195 58,855 Depreciation and amortization............... 5,020 5,270 2,364 9,994 16,245 -------- -------- -------- -------- -------- Total operating expenses.... 58,577 80,247 81,488 161,158 243,010 -------- -------- -------- -------- -------- Loss from operations......... (5,265) (10,920) (10,615) (36,056) (12,014) Gain on sale of telecommunications service agreements(2)............... -- -- -- -- 6,126 Gain on sale of network(1)... -- 126,521 -- -- -- Interest income (expense), net......................... (2,687) (3,127) (28) (2,466) (4,373) Other income (expense), net.. (610) (763) (42) 55 60 -------- -------- -------- -------- -------- Earnings (loss) before income taxes....................... (8,562) 111,711 (10,685) (38,467) (10,201) Income tax expense (benefit)................... (1,988) 43,185 (3,787) (13,336) (3,234) -------- -------- -------- -------- -------- Net earnings (loss).......... $ (6,574) $ 68,526 $ (6,898) $(25,131) $ (6,967) ======== ======== ======== ======== ======== Earnings (loss) per share(6).................... Weighted average number of shares outstanding(6) ...... OTHER FINANCIAL DATA: EBITDA(7).................... $ (855) $ (824) $ (6,338) $(26,007) $ 6,912 Net cash provided by (used in) operating activities.... $ 1,377 $ (7,125) $ 3,306 $(56,635) $ 32,524 Net cash provided by (used in) investing activities.... $(11,202) $107,496 $(41,712) $(58,858) $(52,622) Net cash provided by (used in) financing activities.... $ 11,549 $(95,659) $ 34,264 $113,940 $ 25,519 Capital expenditures(8)...... $ 11,000 $ 3,794 $ 40,926 $ 48,732 $ 85,842 AS OF DECEMBER 31, 1996 ----------------------- OPERATING DATA: Route miles of conduit installed................... 3,650 Route miles of dark fiber installed................... 1,800 Route miles of lit fiber installed................... 900 Switches..................... 5 Minutes of Use(9)............ 382,000,000 AS OF DECEMBER 31, ------------------------------------------------ 1992 1993 1994 1995 1996 -------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.... $ 2,467 $ 7,179 $ 3,037 $ 1,484 $ 6,905 Property and equipment, net.. $ 34,628 $ 23,666 $ 63,009 $114,748 $186,535 Total assets................. $ 52,735 $ 60,754 $ 89,489 $184,178 $264,259 Long-term debt, including current portion............. $ 27,600 $ 2,141 $ 27,369 $ 90,063 $134,461 Total liabilities............ $ 51,482 $ 48,675 $ 64,908 $157,703 $254,817 Total stockholder's equity... $ 1,253 $ 12,079 $ 24,581 $ 26,475 $ 9,442
8 (1) In November 1993, the Company sold substantially all of its then owned fiber optic network capacity and related equipment and assets to a third- party purchaser for $185.0 million (the "1993 Capacity Sale"). After deducting the carrying value of the assets sold and direct costs associated with the 1993 Capacity Sale, the Company recognized a gain of approximately $126.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." (2) In July 1996, the Company sold the telecommunications service agreements of its dedicated line customer business on leased capacity to an unrelated third party for $5.5 million and had received $4.5 million of the purchase price in cash as of December 31, 1996. As a result of the sale, the Company recognized a gain of approximately $6.1 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) The Company acquired the Microwave System through its purchase of Qwest Transmission Inc. in January 1995, and the acquired company contributed $13.2 million to total revenue for the year ended December 31, 1995. (4) In 1996, the Company entered into construction contracts for sales of dark fiber with Frontier and WorldCom whereby the Company agreed to sell dark fiber along the route of the Qwest Network for a purchase price of approximately $545.0 million. As a result of the activity under these agreements, the Company recorded Network Construction Services revenue of approximately $121.0 million in 1996. See "Business--The Qwest Network-- Dark Fiber and High Volume Capacity Sales." (5) Selling, general and administrative expenses include the following nonrecurring expenses incurred by the Company: (i) $5.6 million in 1993 to provide for the transfer of customers to leased capacity as a result of the 1993 Capacity Sale; (ii) $2.0 million in 1994 to relocate its corporate headquarters from San Francisco to Denver and consolidate its administrative functions in Denver; and (iii) $2.6 million in 1996 to restructure its operations, including the direct sales group. (6) Earnings (loss) per share and weighted average number of shares outstanding are adjusted to reflect an increase in the authorized capital stock of Qwest and a stock dividend of shares effected prior to the Offerings. (7) EBITDA represents net earnings (loss) before interest, income taxes, depreciation and amortization, certain nonrecurring expenses described in note 5 above, gain on sale of telecommunications service agreements in 1996 and gain on the 1993 Capacity Sale (which are nonrecurring). EBITDA includes earnings from the construction contracts for the sale of dark fiber that the Company will use to provide cash for the construction cost of the Qwest Network. EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net earnings (loss) as an indicator of the Company's operating performance or as an alternative to cash flows as a source of liquidity and may not be comparable with EBITDA as defined by other companies. The Company believes that EBITDA is commonly used by financial analysts and others in the telecommunications industry. (8) Capital expenditures include expenditures for property and equipment, accrued capital expenditures and initial obligations under capital leases. (9) Represents total minutes of use for the year ended December 31, 1996. 9 RISK FACTORS In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating the Company and its businesses before purchasing the Shares. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements that include, among others, statements concerning the Company's plans to complete the Qwest Network, expectations as to funding its capital requirements, anticipated expansion of carrier and commercial services and other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. Management cautions the reader that these forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by the statements. The most important factors that could prevent the Company from achieving its stated goals include, but are not limited to, failure by the Company to (i) obtain substantial amounts of additional capital and financing at reasonable costs and on satisfactory terms and conditions, (ii) manage effectively and cost efficiently the construction of the route segments, (iii) access markets and enter into additional customer contracts to sell dark fiber or provide high volume capacity and otherwise expand its telecommunications customer base on the Qwest Network and (iv) obtain additional rights-of-way and maintain all necessary rights-of-way. RISKS RELATED TO COMPLETING THE QWEST NETWORK; INCREASING TRAFFIC VOLUME The Company's ability to achieve its strategic objective will depend in large part upon the successful, timely and cost-effective completion of the Qwest Network, as well as on achieving substantial traffic volumes on the Qwest Network. The construction of the Qwest Network will be affected by a variety of factors, uncertainties and contingencies. Many of these factors are beyond the Company's control. There can be no assurance that the entire Qwest Network will be completed as planned for the costs and in the time frame currently estimated or at all. Although the Company believes that its cost estimates and the build-out schedule are reasonable, there can be no assurance that the actual construction costs or time required to complete the Qwest Network will not substantially exceed current estimates. In addition, the Company must substantially increase its current traffic volume in order to realize the anticipated cash flow, operating efficiencies and cost benefits of the Qwest Network. There can be no assurance that the Company will be able to achieve such increased traffic volume. See "--Competition" and "--Pricing Pressures and Industry Capacity." The successful and timely completion of the Qwest Network will depend, among other things, upon the Company's ability to (i) obtain substantial amounts of additional capital and financing, at reasonable costs and on satisfactory terms and conditions, (ii) effectively and efficiently manage the construction of the route segments, (iii) access markets and enter into additional customer contracts to sell dark fiber or lease high volume capacity on the Qwest Network and (iv) obtain additional rights-of-way. Successful construction of the Qwest Network also will depend upon the timely performance by third-party contractors of their obligations. There can be no assurance that the Company will obtain sufficient capital and financing to fund its currently planned capital expenditures, successfully manage construction, sell fiber and capacity to additional customers or acquire the remaining necessary rights-of- way. Any of the foregoing may significantly delay or prevent completion of the Qwest Network, which would have a material adverse effect on the Company's financial condition and results of operations. OPERATING LOSSES AND WORKING CAPITAL DEFICITS The Company's operations have generated operating losses in recent years and insufficient cash flow to enable it to meet its debt service requirements, capital expenditures and other cash needs. The 10 Company also had working capital deficits of $69.4 million, $2.6 million, $11.9 million, $11.5 million and $5.6 million for each of the years ended December 31, 1996, 1995, 1994, 1993 and 1992, respectively. The Company's working capital deficits limit its cash resources, resulting in reduced liquidity. There can be no assurance that the Company will be able to achieve or sustain operating profitability. SUBSTANTIAL CAPITAL REQUIREMENTS After the Offerings the Company will continue to require substantial additional capital to fund construction of the Qwest Network. The Company's expectations of required future capital requirements are based on the Company's current estimates. There can be no assurance that actual expenditures will not significantly differ from such estimates. The Company expects to fund such additional capital requirements through additional construction or sale contracts for dark fiber, high volume capacity leases and external capital sources, including offerings of debt or equity securities. The Company is in various stages of discussions and negotiations with potential customers for sales of additional dark fiber and leases of high volume capacity (in addition to its existing dark fiber contracts and current customer base) and is actively seeking financing from certain other sources, including equipment vendors. There can be no assurance, however, that the Company will sell additional fiber or lease capacity, or that additional external capital will be available on acceptable terms or at all. If the Company fails to obtain all of the capital required to complete the Qwest Network, the Company could modify its plans and defer building certain portions of the Qwest Network. The failure of the Company, however, to raise the substantial capital required to complete the Qwest Network would have a material adverse effect on the Company's business, financial condition and results of operations. See "--Operating Losses and Working Capital Deficits" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." SUBSTANTIAL INDEBTEDNESS The Company is highly leveraged. As of December 31, 1996, the Company had approximately $134.5 million of long-term debt (including the current portion thereof) and stockholder's equity of approximately $9.4 million. On March 31, 1997, Qwest issued the Notes in the principal amount of $250.0 million, receiving net proceeds of approximately $242.0 million. Qwest applied a portion of such proceeds to repay certain indebtedness of its subsidiaries. On a pro forma basis, after giving effect to the Offerings at an offering price of $ per Share and the sale of the Notes and application of a portion of the net proceeds therefrom to repay certain indebtedness of subsidiaries, the Company would have had approximately $278.1 million of long-term debt (including the current portion thereof), approximately $ million of stockholder's equity and a debt-to-equity ratio of to at December 31, 1996. In addition, the Indenture relating to the Notes (the "Indenture") and certain debt instruments to which Qwest's subsidiaries are parties limit but do not prohibit the incurrence of additional indebtedness by the Company, and the Company expects substantial additional indebtedness to be incurred by Qwest or its subsidiaries in the future. However, there can be no assurance that the Company will be successful in obtaining additional borrowings when required, or that the terms of such indebtedness will not impair the ability of the Company to develop its business. The Company's significant debt burden could have several important consequences to the Company, including, but not limited to the following: (i) the cash received from operations may be insufficient to meet the principal and interest on the Company's debt as the same become due; (ii) a significant portion of the Company's cash flow from operations must be used to service its debt instead of being used in the Company's business; and (iii) the Company's flexibility to obtain additional financing in the future may be impaired by the amount of debt outstanding and the restrictions imposed by the covenants contained in the Indenture and other debt instruments of Qwest or its subsidiaries. See "Description of Certain Indebtedness." 11 The ability of the Company to meet its obligations will be subject to financial, business and other factors, including factors beyond its control, such as prevailing economic conditions. In addition, the ability of Qwest's operating subsidiaries to pay dividends or to make other payments to Qwest may be restricted by the terms of various credit arrangements entered into by such operating subsidiaries, as well as legal restrictions, and such payments may have adverse tax consequences. The Indenture and other debt instruments governing existing and future indebtedness contain, or may contain, covenants that limit the operating and financial flexibility of Qwest and its subsidiaries. Failure to generate sufficient cash flow may impair the Company's ability to obtain additional equity or debt financing or to meet its debt service requirements. In such circumstances, the Company may be required to renegotiate the terms of the instruments relating to its long-term debt or to refinance all or a portion thereof. There can be no assurance that the Company would be able to renegotiate successfully such terms or refinance its indebtedness when required or that the terms of any such refinancing would be acceptable to management. If the Company were unable to refinance its indebtedness or obtain new financing under these circumstances, it would have to consider other options such as the sale of certain assets to meet its debt service obligations, the sale of equity, negotiations with its lenders to restructure applicable indebtedness or other options available to it under the law. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." COMPETITION The telecommunications industry is highly competitive. Many of the Company's existing and potential competitors in the Carrier Services, Commercial Services and Network Construction Services markets have financial, personnel, marketing and other resources significantly greater than those of the Company, as well as other competitive advantages. Increased consolidation and strategic alliances in the industry resulting from the Telecommunications Act of 1996 (the "Telecom Act of 1996") could give rise to significant new competitors to the Company. The success of the Company's business plan depends in large part on significant increases in its share of the Carrier Services and Commercial Services markets in the medium and long term. In the Carrier Services market, the Company's primary competitors are other carrier service providers. Within the Carrier Services market, the Company competes with large and small facilities-based interexchange carriers. For high volume capacity services, the Company competes primarily with other coast-to-coast and regional fiber optic network providers. There are currently four principal facilities-based long distance fiber optic networks (AT&T, MCI, Sprint and WorldCom). The Company is aware that others are planning additional networks that, if constructed, could employ similar advanced technology as the Qwest Network. Upon completion of the Qwest Network, Frontier will have a fiber network similar to that of the Company. Another competitor is constructing, and has already obtained a significant portion of the financing for, a fiber optic network. As publicly announced, the scope of that competitor's network is less than that of the Company. Nevertheless it is expected to compete directly with the Qwest Network for many of the same customers along a significant portion of the same routes. The Company also sells switched services to both facilities-based carriers and nonfacilities-based carriers (switchless resellers), competing with facilities-based carriers such as AT&T, MCI, Sprint, WorldCom and certain regional carriers. The Company competes in the Carrier Services market on the basis of price, transmission quality, network reliability, and customer service and support. The ability of the Company to compete effectively in this market will depend upon its ability to maintain high quality services at prices equal to or below those charged by its competitors. In the Commercial Services market, the Company's primary competitors include AT&T, MCI, Sprint and WorldCom, all of whom specialize in the long distance market. In addition, the Telecom Act of 1996 will allow the RBOCs and others to enter the long distance market. There can be no assurance that the Company will be able to compete successfully with existing competitors or new entrants in its Commercial Services markets. Failure by the Company to do so would have a material adverse effect on the Company's business, financial condition and results of operations. 12 DEPENDENCE ON SIGNIFICANT CUSTOMERS The Company has substantial business relationships with a few large customers. During 1996, the Company's top 10 customers accounted for approximately 69.3% of its consolidated gross revenue. Frontier and WorldCom accounted for 26.3% and 27.8% of such revenue, respectively, attributable primarily to construction contracts for the sale of dark fiber to these customers that extend through 1998. The Frontier contract provides for reduced payments and varying penalties for late delivery of route segments, and allows Frontier, after expiration of substantial grace periods (ranging generally from 12 to 18 months depending on the reason for late delivery and the segment affected), to delete such non-delivered segment from the system route to be delivered. See "Business--The Qwest Network--Dark Fiber and High Volume Capacity Sales." A significant reduction in the level of services the Company provides for any of its large customers could have a material adverse effect on the Company's results of operations or financial condition. In addition, the Company's business plan assumes increased revenue from its Carrier Services operations to fund the expansion of the Qwest Network. Many of the Company's customer arrangements are subject to termination on short notice and do not provide the Company with guarantees that service quantities will be maintained at current levels. The Company is aware that certain interexchange carriers are constructing or considering new networks. Accordingly, there can be no assurance that any of the Company's Carrier Services customers will increase their use of the Company's services, or will not reduce or cease their use of the Company's services, which could have a material adverse effect on the Company's ability to fund the expansion of the Qwest Network. MANAGING RAPID GROWTH Part of the Company's strategy is to achieve rapid growth by completing the Qwest Network and using the Qwest Network to exploit opportunities expected to arise from regulatory and technological changes and other industry developments. As a result of its strategy, the Company is experiencing rapid expansion that management expects will continue for the foreseeable future. This growth has increased the operating complexity of the Company. The Company's ability to manage its expansion effectively will depend on, among other things: (i) expansion, training and management of its employee base, including attracting and retaining highly skilled personnel; (ii) expansion and improvement of the Company's customer interface systems and improvement or cost-effective outsourcing of the Company's operational and financial systems; (iii) development, introduction and marketing of new products, particularly in Commercial Services; and (iv) control of the Company's expenses related to the expansion of Carrier Services and Commercial Services. Failure of the Company to satisfy these requirements, or otherwise manage its growth effectively, would have a material adverse effect on the Company's business, financial condition and results of operations. PRICING PRESSURES AND INDUSTRY CAPACITY The long distance transmission industry has generally been characterized as having overcapacity and declining prices since shortly after the AT&T divestiture in 1984. Although the Company believes that, in the last several years, increasing demand has resulted in a shortage of capacity and slowed the decline in prices, the Company anticipates that prices for Carrier Services and Commercial Services will continue to decline over the next several years due primarily to (i) installation by the Company's competitors (certain of whom are expanding capacity and constructing or considering new networks) of fiber that provides substantially more transmission capacity than will be needed over the short or medium term, since the cost of fiber is a relatively small portion of construction cost, (ii) recent technological advances that permit substantial increases in the transmission capacity of both new and existing fiber, and (iii) strategic alliances or similar transactions, such as long distance capacity purchasing alliances among certain RBOCs, that increase the parties' purchasing power. Also, the Company's existing construction contracts for the sale of dark fiber and other potential contracts or arrangements with other carriers will increase supply and may lower prices for traffic on the Qwest 13 Network. Such pricing pressure could have a material adverse effect on the business of the Company, including its ability to complete the Qwest Network in a successful and timely manner, and on its financial condition and results of operations. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RAPID TECHNOLOGICAL CHANGES The telecommunications industry is subject to rapid and significant changes in technology. For instance, recent technological advances permit substantial increases in transmission capacity of both new and existing fiber, and the introduction of new products or emergence of new technologies may reduce the cost or increase the supply of certain services similar to those provided by the Company. While the Company believes that for the foreseeable future technology changes will neither materially affect the continued use of fiber optic cable nor materially hinder the Company's ability to acquire necessary technologies, the effect of technological changes on the Company's operations cannot be predicted and could have a material adverse effect on the Company's business, financial condition and results of operations. NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY Although the Company already has right-of-way agreements covering over 80% of the Qwest Network, the Company must obtain additional rights-of-way and other permits to install underground conduit from railroads, utilities, state highway authorities, local governments and transit authorities. There can be no assurance that the Company will be able to maintain all of its existing rights and permits or to obtain and maintain the additional rights and permits needed to implement its business plan on acceptable terms. Loss of substantial rights and permits or the failure to enter into and maintain required arrangements for the Qwest Network could have a material adverse effect on the Company's business, financial condition and results of operations. REGULATION RISKS The Company's operations are subject to extensive federal and state regulation. Carrier Services and Commercial Services (but not Network Construction Services) are subject to the provisions of the Communications Act of 1934, as amended, including the Telecom Act of 1996, and the FCC regulations thereunder, as well as the applicable laws and regulations of the various states, including regulation by Public Utility Commissions ("PUCs") and other state agencies. Federal laws and FCC regulations apply to interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities have jurisdiction over telecommunications both originating and terminating within a state. Generally, the Company must obtain and maintain certificates of authority from regulatory bodies in most states where it offers intrastate services and must obtain prior regulatory approval of tariffs for its intrastate services in most of these jurisdictions. Regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. Moreover, as deregulation at the federal level occurs, some states are reassessing the level and scope of regulation that may be applicable to the Company. All of the Company's operations are also subject to a variety of environmental, safety, health and other governmental regulations. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on the Company, that domestic or international regulators or third parties will not raise material issues with regard to the Company's compliance or noncompliance with applicable regulations, or that regulatory activities will not have a material adverse effect on the Company. A recent federal legislative change, the Telecom Act of 1996, may have potentially significant effects on the operations of the Company. The Telecom Act of 1996, among other things, allows the 14 RBOCs and the General Telephone Operating Companies to enter the long distance business and enables other entities, including entities affiliated with power utilities and ventures between LECs and cable television companies, to provide an expanded range of telecommunications services. Entry of such companies into the long distance business would result in substantial competition in Commercial Services and Carrier Services, affecting the Company and its customers, which may have a material adverse effect on the Company and such customers. However, the Company believes that entry by the RBOCs and other companies into the market will create opportunities for the Company to sell fiber or lease long distance high volume capacity. The Company monitors compliance with federal, state and local regulations governing the discharge and disposal of hazardous and environmentally sensitive materials, including the emission of electromagnetic radiation. Although the Company believes that it is in compliance with such regulations, there can be no assurance that any such discharge, disposal or emission might not expose the Company to claims or actions that could have a material adverse effect on the Company. See "Regulation." RELIANCE ON KEY PERSONNEL The Company's operations are managed by a small number of key executive officers, the loss of any of whom could have a material adverse effect on the Company. The Company believes that its growth and future success will depend in large part on its continued ability to attract and retain highly skilled and qualified personnel. The competition for qualified personnel in the telecommunications industry is intense and, accordingly, there can be no assurance that the Company will be able to hire or retain necessary personnel. The loss of senior management or the failure to recruit additional qualified personnel in the future could significantly impede attainment of the Company's financial, expansion, marketing and other objectives. See "Management." CONCENTRATION OF VOTING POWER; POTENTIAL CONFLICTS OF INTEREST After completion of the Offerings, Philip F. Anschutz, a Director and Chairman of the Company, will beneficially own % of the outstanding Common Stock. As a result, Mr. Anschutz will have the power to elect all the directors of the Company and to control the vote on all other matters, including significant corporate actions. Also, Mr. Anschutz is a director and holds approximately 5% of the stock of Union Pacific Railroad Company, subsidiaries of which own railroad rights-of-way on which a significant portion of the Qwest Network will be built. In recent years, the Company has relied upon capital contributions, advances and guarantees from its parent and affiliates. The Company intends to finance its own operations in the future through internally and externally generated funds without financial support from its parent. See "--Substantial Capital Requirements" and "--Operating Losses and Working Capital Deficits." ANTI-TAKEOVER PROVISIONS The Company's Certificate of Incorporation (the "Certificate of Incorporation") and By-laws (the "By-laws") include certain provisions that may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. Such provisions also may render the removal of directors and management more difficult. The Company's Certificate of Incorporation places certain restrictions on who may call a special meeting of stockholders. In addition, the Company's Board of Directors has the authority to issue up to shares of preferred stock (the "Preferred Stock") and to determine the price, rights, preferences, and privileges of those shares without any further vote or actions by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of such shares of Preferred Stock, while potentially providing desirable flexibility in connection with possible acquisitions and serving other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to 15 acquire, a majority of the outstanding voting stock of the Company. The Company has no present intention to issue such shares of Preferred Stock. In addition, the Company is subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law (the "DGCL"), which will prohibit the Company from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder unless the business combination is approved in a prescribed manner. The application of Section 203 also could have the effect of delaying or preventing a change of control of the Company. Furthermore, certain provisions of the Company's By-laws, including provisions that provide that the exact number of directors shall be determined by a majority of the Board of Directors and that vacancies on the Board of Directors may be filled by a majority vote of the directors then in office (though less than a quorum), may have the effect of delaying or preventing changes in control or management of the Company, and could adversely affect the market price of the Common Stock. Additionally, certain Federal regulations require prior approval of certain transfers of control which could also have the effect of delaying, deferring or preventing a change of control. See "Description of Capital Stock." DIVIDEND POLICY; RESTRICTION ON PAYMENT OF DIVIDENDS The Company does not anticipate paying cash dividends in the foreseeable future. See "Dividend Policy." The Company's ability to pay dividends is limited by the Indenture and other debt instruments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Description of Certain Indebtedness." DILUTION The public offering price is substantially higher than the tangible book value of the outstanding Common Stock. Purchasers of Shares in the Offerings will therefore experience immediate and substantial dilution in tangible book value per share, and the existing stockholder will receive a material increase in the tangible book value per share of its shares of Common Stock. The dilution to new investors will be $ per share. NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE Prior to the Offerings, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or be sustained. The offering price has been determined by negotiations between the Company and the Underwriters and there can be no assurance that the prices at which the Common Stock will sell in the public market after the Offerings will not be lower than the price at which the Common Stock is sold in the Offerings. See "Underwriting." Historically, the market prices for securities of emerging companies in the telecommunications industry have been highly volatile. The trading price of the Common Stock after the Offerings could be subject to wide fluctuations in response to numerous factors, including, but not limited to, quarterly variations in operating results, competition, announcements of technological innovations or new products by the Company or its competitors, product enhancements by the Company or its competitors, regulatory changes, any differences in actual results and results expected by investors and analysts, changes in financial estimates by securities analysts and other events or factors. In addition, the stock market has experienced volatility that has affected the market prices of equity securities of many companies and that often has been unrelated to the operating performance of such companies. These broad market fluctuations may adversely affect the market price of the Common Stock. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offerings, the Company will have approximately shares of Common Stock outstanding, including shares of Common Stock offered hereby and 16 "restricted" shares of Common Stock. The shares of Common Stock offered hereby will be freely tradeable without restriction or further registration under the Securities Act of 1933, as amended (the "Securities Act"), by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. Holders of restricted shares generally will be entitled to sell these shares in the public securities market without registration under the Securities Act to the extent permitted by Rule 144 (or Rule 145, as applicable) promulgated under the Securities Act or any exemption under the Securities Act. Of the restricted shares, shares of Common Stock generally will be eligible for sale under Rule 144 as currently in effect beginning in through . The Company and its parent will, and it is expected that the directors and principal officers of the Company will, enter into "lock-up" agreements with the Underwriters providing that, subject to certain exceptions, they will not, for a period of days after the date of this Prospectus, without the prior written consent of the Representatives, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce the offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. See "Underwriting." Sales of a substantial amount of Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Common Stock prevailing from time to time in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities. See "Shares Eligible for Future Sale." USE OF PROCEEDS The net proceeds of the Offerings are estimated to be approximately $ million. The Company intends to use substantially all of such proceeds to fund capital expenditures required to construct the Qwest Network and purchase fiber cable and other materials, including electronic equipment necessary to light segments of the Qwest Network. The Company also will use a portion of the proceeds to repay approximately $28.0 million in outstanding advances from the Company's parent. Pending the application of the net proceeds of the Offerings as described above, the Company will invest such proceeds in short- term, interest-bearing U.S. government securities and certain other short- term, investment grade securities. As described elsewhere in this Prospectus, the Company will require substantial amounts of additional capital to complete the Qwest Network and to implement its business strategy. See "Summary--Build- Out Plan for the Qwest Network" and "Risk Factors--Substantial Capital Requirements." DIVIDEND POLICY The Company does not anticipate paying dividends in the foreseeable future. The terms of the Notes and the Indenture and certain debt instruments of Qwest's subsidiaries also place limitations on the Company's ability to pay dividends. Future dividends, if any, will be at the discretion of the Board and will depend upon, among other things, the Company's operations, capital requirements and surplus, general financial condition, contractual restrictions and such other factors as the Board may deem relevant. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Certain Indebtedness." 17 DILUTION At December 31, 1996, the historical net tangible book value of the Company was $ million or $ per share of Common Stock, as adjusted to account for an increase in the authorized capital stock of the Company and a stock dividend effected prior to the Offerings. "Historical net tangible book value per share" represents the Company's net worth less intangible assets of $ million divided by shares of Common Stock outstanding on December 31, 1996, adjusted as stated above. After giving effect to the sale by the Company of Shares pursuant to the Offerings and after deducting the underwriting discount and expenses of the Offerings, the pro forma net tangible book value of the Company at December 31, 1996, would have been $ , or $ per share of Common Stock. Such amount represents an immediate increase in pro forma net tangible book value of $ per share of Common Stock to the existing stockholder and an immediate dilution to new investors of $ per share of Common Stock. The following table illustrates the dilution in pro forma net tangible book value per share to new investors: Public offering price per Share......................... $ Historical net tangible book value per share at December 31, 1996...................................... $ Increase in net tangible book value per share attributable to net proceeds of the Offerings.......... ------- Pro forma net tangible book value per share after the Offerings.............................................. ------- Dilution to new investors............................... $ =======
The foregoing table assumes no exercise of the Underwriters' over-allotment options to purchase an additional Shares at less the underwriting discount. 18 CAPITALIZATION The following table sets forth as of December 31, 1996 (i) the historical consolidated capitalization of the Company, (ii) the pro forma capitalization reflecting an increase in the authorized capital stock of the Company, a stock dividend effected prior to the Offerings and the sale of the Notes and the application of the net proceeds therefrom and (iii) the capitalization as adjusted to reflect the foregoing and the sale of Shares offered hereby and the application of the net proceeds therefrom. No exercise of the over- allotment options by the Underwriters has been reflected herein. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Prospectus.
AS OF DECEMBER 31, 1996 ------------------------------- PRO PRO FORMA ACTUAL FORMA AS ADJUSTED -------- -------- ----------- (IN THOUSANDS) Advances from parent........................... $ 19,138 $ 19,138 $ Current portion of long-term debt.............. 25,193 15,788 15,788 -------- -------- -------- Total short-term debt...................... $ 44,331 $ 34,926 $ ======== ======== ======== Long-term debt................................. $109,268 $ 12,360 $ 12,360 Notes.......................................... -- 250,000 250,000 -------- -------- -------- Total long-term debt (excluding current portion).................................. 109,268 262,360 262,360 -------- -------- -------- Stockholder's equity: Preferred stock, $.01 par value; shares authorized; no shares issued and outstanding................................. -- -- -- Common stock, $.01 par value; shares authorized; shares issued and outstanding................................. -- -- Additional paid-in capital................... $ 55,892 $ 55,892 Accumulated deficit.......................... (46,450) (46,450) -------- -------- -------- Total stockholder's equity................. 9,442 9,442 -------- -------- -------- Total capitalization..................... $118,710 $271,802 $ ======== ======== ========
19 SELECTED CONSOLIDATED FINANCIAL DATA The selected data presented below under the captions "Statement of Operations Data," "Other Financial Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended December 31, 1996 are derived from the Consolidated Financial Statements of the Company, which financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. Consolidated Financial Statements of the Company as of December 31, 1996 and 1995 and for each of the years in the three-year period ended December 31, 1996 are included elsewhere in this Prospectus. The information set forth below should be read in conjunction with the discussion under "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business" and the Consolidated Financial Statements of the Company and the notes thereto, appearing elsewhere in this Prospectus.
YEAR ENDED DECEMBER 31, ------------------------------------------------- 1992 1993 1994 1995 1996 --------- -------- -------- -------- -------- (IN THOUSANDS) STATEMENT OF OPERATIONS DA- TA: Revenue: Carrier servic- es(1)(2)(3)............. $ 41,561 $ 53,064 $ 50,240 $ 67,789 $ 57,573 Commercial services...... -- 969 8,712 20,412 34,265 --------- -------- -------- -------- -------- 41,561 54,033 58,952 88,201 91,838 Network construction services(4)............. 11,751 15,294 11,921 36,901 139,158 --------- -------- -------- -------- -------- Total revenue.......... 53,312 69,327 70,873 125,102 230,996 --------- -------- -------- -------- -------- Operating expenses: Telecommunications serv- ices.................... 31,557 41,240 48,239 81,215 80,368 Network construction services................ 9,730 15,515 9,369 32,754 87,542 Selling, general and ad- ministrative(5)......... 12,270 18,222 21,516 37,195 58,855 Depreciation and amorti- zation.................. 5,020 5,270 2,364 9,994 16,245 --------- -------- -------- -------- -------- Total operating ex- penses................ 58,577 80,247 81,488 161,158 243,010 --------- -------- -------- -------- -------- Loss from operations....... (5,265) (10,920) (10,615) (36,056) (12,014) Gain on sale of telecommu- nications service agree- ments(2).................. -- -- -- -- 6,126 Gain on sale of net- work(1)................... -- 126,521 -- -- -- Interest income (expense), net....................... (2,687) (3,127) (28) (2,466) (4,373) Other income (expense), net....................... (610) (763) (42) 55 60 --------- -------- -------- -------- -------- Earnings (loss) before in- come taxes................ (8,562) 111,711 (10,685) (38,467) (10,201) Income tax expense (bene- fit)...................... (1,988) 43,185 (3,787) (13,336) (3,234) --------- -------- -------- -------- -------- Net earnings (loss)........ $ (6,574) $ 68,526 $ (6,898) $(25,131) $ (6,967) ========= ======== ======== ======== ======== Earnings (loss) per share(6).................. Average number of shares outstanding(6)............ OTHER FINANCIAL DATA: EBITDA(7).................. $ (855) $ (824) $ (6,338) $(26,007) $ 6,912 Net cash provided by (used in) operating activities.. $ 1,377 $ (7,125) $ 3,306 $(56,635) $ 32,524 Net cash provided by (used in) investing activities.. $ (11,202) $107,496 $(41,712) $(58,858) $(52,622) Net cash provided by (used in) financing activities.. $ 11,549 $(95,659) $ 34,264 $113,940 $ 25,519 Capital expenditures(8).... $ 11,000 $ 3,794 $ 40,926 $ 48,732 $ 85,842 AS OF DECEMBER 31, ------------------------------------------------- 1992 1993 1994 1995 1996 --------- -------- -------- -------- -------- (IN THOUSANDS) BALANCE SHEET DATA: Cash and cash equivalents.. $ 2,467 $ 7,179 $ 3,037 $ 1,484 $ 6,905 Property and equipment, net....................... $ 34,628 $ 23,666 $ 63,009 $114,748 $186,535 Total assets............... $ 52,735 $ 60,754 $ 89,489 $184,178 $264,259 Long-term debt, including current portion........... $ 27,600 $ 2,141 $ 27,369 $ 90,063 $134,461 Total liabilities.......... $ 51,482 $ 48,675 $ 64,908 $157,703 $254,817 Stockholder's equity....... $ 1,253 $ 12,079 $ 24,581 $ 26,475 $ 9,442
20 (1) After deducting the carrying value of the assets sold and direct costs associated with the 1993 Capacity Sale, the Company recognized a gain of approximately $126.5 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business." (2) In July 1996, the Company sold the telecommunications service agreements of its dedicated line customer business on leased capacity to an unrelated third party for $5.5 million and had received $4.5 million of the purchase price in cash as of December 31, 1996. As a result of the sale, the Company recognized a gain of approximately $6.1 million. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." (3) The Company acquired the Microwave System through its purchase of Qwest Transmission Inc. in January 1995, and the acquired company contributed $13.2 million to total revenue for the year ended December 31, 1995. (4) In 1996, the Company entered into construction contracts for the sale of dark fiber with Frontier and WorldCom whereby the Company agreed to sell dark fiber along the route of the Qwest Network for a purchase price of approximately $545.0 million. As a result of the activity under these agreements, the Company recorded Network Construction Services revenue of approximately $121.0 million in 1996. See "Business--The Qwest Network-- Dark Fiber and High Volume Capacity Sales." (5) Selling, general and administrative expenses include the following nonrecurring expenses incurred by the Company: (i) $5.6 million in 1993 to provide for the transfer of customers to leased capacity as a result of the 1993 Capacity Sale; (ii) $2.0 million in 1994 to relocate its corporate headquarters from San Francisco to Denver and consolidate its administrative functions in Denver; and (iii) $2.6 million in 1996 to restructure its operations, including the direct sales group. (6) Earnings (loss) per share and weighted average number of shares outstanding are adjusted to reflect an increase in the authorized capital stock of Qwest and a stock dividend of shares effected prior to the Offering. (7) EBITDA represents net earnings (loss) before interest, income taxes, depreciation and amortization, certain nonrecurring expenses described in note 5 above, gain on sale of telecommunications service agreements in 1996 and gain on the 1993 Capacity Sale (which are nonrecurring). EBITDA includes earnings from the construction contracts for the sale of dark fiber that the Company will use to provide cash for the construction cost of the Qwest Network. EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net earnings (loss) as an indicator of the Company's operating performance or as an alternative to cash flows as a source of liquidity and may not be comparable with EBITDA as defined by other companies. The Company believes that EBITDA is commonly used by financial analysts and others in the telecommunications industry. (8) Capital expenditures include expenditures for property and equipment, accrued capital expenditures and initial obligations under capital leases. (9) For purposes of calculating the ratio of earnings to fixed charges, earnings consist of earnings (loss) before income taxes, plus fixed charges excluding capitalized interest. Fixed charges consist of interest expensed and capitalized, plus amortization of deferred financing costs, plus the portion of rent expense under operating leases deemed by the Company to be representative of the interest factor, plus preferred stock dividends on preferred stock of QCC (increased to an amount representing the pre-tax earnings which would be required to cover such dividend requirements). The Company had a deficiency of earnings to fixed charges of $12.6 million, $40.3 million, $11.0 million and $14.5 million in 1996, 1995, 1994 and 1992, respectively. Excluding the effect of the gains arising from the sale of telecommunications service agreements in 1996 and the 1993 Capacity Sale, the deficiency of earnings would have been $18.7 million and $27.6 million in 1996 and 1993, respectively. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the Company's audited Consolidated Financial Statements and the notes thereto appearing elsewhere in this Offering Memorandum. OVERVIEW The Company provides communications services to interexchange carriers and other telecommunications entities, businesses and consumers and constructs and installs fiber optic communications systems for interexchange carriers and other telecommunications entities, as well as for its own use. The Company is expanding its existing long distance network into the Qwest Network, a coast- to-coast, technologically advanced, fiber optic telecommunications network. Management believes that the Qwest Network will position the Company to take advantage of the rapidly growing demand for long haul voice and data transmission capacity. Founded in 1988 as Southern Pacific Telecommunications Company, a subsidiary of Southern Pacific Transportation Company ("Southern Pacific"), the Company began operations by constructing fiber optic conduit systems along Southern Pacific's railroad rights-of-way primarily for major long distance carriers in exchange for cash and capacity rights. Since then, the Company has used its construction operations as a platform to expand into the business of providing telecommunications services. In 1995, the Company enhanced its ability to provide telecommunications services by acquiring the Microwave System through its purchase of Qwest Transmission Inc. for $18.8 million and by completing and activating the Cal-Fiber system. The Company derives its revenue from Carrier Services, Commercial Services and Network Construction Services. Carrier Services. Carrier Services provide high volume and conventional dedicated line services over the Company's owned capacity and switched services over owned and leased capacity to interexchange carriers and other telecommunications providers. The Company entered the Carrier Services market in 1988 by marketing and providing dedicated line services to other carriers using the long distance capacity that it had received under construction contracts to build conduit systems principally for MCI. Through the acquisition of a carrier's carrier in 1990, the Company increased its presence in the Carrier Services market and expanded its geographic coverage of digital dedicated line services to other long distance companies. The Company sold substantially all of its owned capacity rights and related equipment in 1993 in exchange for $185.0 million and the right to use excess capacity free of charge to provide service to its dedicated line customers for the twelve-month period following the date of the sale (the "1993 Capacity Sale"). As a result of this arrangement, the Company's cost of providing dedicated line services to its carrier customers as a percentage of revenue was lower in 1994 than in subsequent years. When this arrangement expired, the cost of providing dedicated line services on a resale basis became substantially greater than the cost of providing dedicated line services over the Company's owned network. The Company sold a substantial portion of its resale dedicated line services in July 1996 to another long distance company, retaining primarily those dedicated line customers it serviced on its owned network. The Company expects to increase Carrier Services gross margins upon completion of segments of the Qwest Network as additional owned capacity becomes available and the Company expands its Carrier Services customer base through increased sales and marketing efforts. Revenues from Carrier Services are derived from high volume capacity services, dedicated line services and switched services. The Company provides high volume transmission capacity services through service agreements for terms of one year or longer. Dedicated line services are generally offered under service agreements for an initial term of one year. High volume capacity service agreements and dedicated line service agreements generally provide for "take or pay" monthly payments at fixed rates 22 based on the capacity and length of circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. Revenues from carrier customers that are billed on a minutes-of-use basis have the potential to fluctuate significantly based on changes in usage that are highly dependent on differences between the prices charged by the Company and its competitors. The Company, however, has not experienced significant fluctuations to date. For the year ended December 31, 1996, the Company's five largest carrier customers accounted for approximately 35.0% of Carrier Services revenue. Commercial Services. Commercial Services provide long distance voice, data and video services to businesses and consumers. The Company entered the Commercial Services market in June 1993 by offering and selling switched services principally to small- and medium-sized businesses using one switch located in Dallas, Texas. The Company added switching capacity late in 1995 and during 1996 in Denver, Los Angeles, Tampa, and Indianapolis. The Company anticipates adding more switching capacity to the Qwest Network as it becomes operational and as minutes of traffic increase. Revenue from Commercial Services is recognized primarily on a minutes-of-use basis. The Commercial Services market is highly competitive and generally subject to significant customer churn. The Company's churn rates vary by product line and sales channel, and the Company typically has experienced an average monthly churn rate ranging from 4% to 9%. The Company is implementing various customer retention programs designed to reduce its churn rate, and expects that such churn rate will decline as it builds brand identity and increasingly targets high volume users. Network Construction Services. Network Construction Services consist of the construction and installation of fiber optic communication systems for interexchange carriers and other telecommunications providers, as well as for the Company's own use. The Company began operations in 1988 constructing fiber optic conduit systems primarily for major long distance carriers in exchange for cash and capacity rights. In 1996, the Company entered into major construction contracts for the sale of dark fiber to Frontier and WorldCom whereby the Company has agreed to install and provide dark fiber to each along the Qwest Network. After completion of the Qwest Network, the Company expects that revenues from Network Construction Services will be less significant to the Company's operations. See "Business--The Qwest Network--Dark Fiber and High Volume Capacity Sales." Revenues from Network Construction Services generally are recognized under the percentage of completion method as performance milestones relating to the contract are satisfactorily completed. Losses, if any, on uncompleted contracts are expensed in the period in which they are identified and any revisions to estimated profits on a contract are recognized in the period in which they become known. Pricing. The Company believes that prices in the telecommunication services industry will continue to decline as a result of reforms prompted by the Telecom Act of 1996 and reform of the rules governing access charges and international settlement rates. The Company also believes that such decreases in prices will be partially offset by increased demand for telecommunications services, and that the low cost base of the Qwest Network will enable it to compete effectively. Operating Expenses. The Company's principal operating expenses consist of expenses for network construction incurred by Network Construction Services, telecommunications services, selling, general and administrative ("SG&A"), and depreciation and amortization. Expenses for Network Construction Services primarily consist of the costs attributable to conduit and dark fiber construction contracts, including conduit, fiber cable, construction crews and rights-of-way. These expenses have significantly increased since 1994 primarily due to activity associated with a major construction contract in 1995 and the Frontier and WorldCom construction contracts in 1996. The Company expects these expenses will continue to increase as the Company enters into additional construction contracts for the 23 sale of dark fiber along the Qwest Network. Costs attributable to the construction of the Qwest Network for the Company's own use are capitalized. Expenses for telecommunications services primarily consist of the cost of leased capacity, LEC access charges, engineering and operating costs. Since the Company currently provides dedicated line services only over its own network, the cost of providing these services generally does not include the cost of leased capacity or LEC access charges. Expenses for switched services, however, include these costs. The Company leases capacity from other carriers to extend its switched services for originating and terminating traffic beyond its own network boundaries. LEC access charges, which are variable, represent a significant portion of the total cost for switched services. Due in part to these costs, revenues from switched services have lower gross margins than revenues from dedicated line services provided by the Company. When the Qwest Network is completed and activated, the Company will be able to serve more customer needs over its own capacity on the Qwest Network. Furthermore, with additional switched traffic on the Qwest Network, the Company believes it will realize economies of scale and thereby lower its cost of sales as a percentage of revenue. SG&A expenses include the cost of salaries, benefits, occupancy costs, commissions, sales and marketing expenses and administrative expenses. In March 1996, the Company changed the focus of its sales efforts for Commercial Services from regional sales offices to agent and direct mail sales channels. The Company redirected its sales efforts in order to reduce the fixed selling expenses associated with having its own commercial sales offices and sales employees and to concentrate on other sales channels that the Company believed would be more cost effective in generating sales to the Company's target market at that time. Notwithstanding the closure of its sales offices and related cutbacks, SG&A expenses have continued to increase over the years, which is consistent with the development of the network and the growth of the Company's Carrier Services and Commercial Services. The Company expects this trend to continue and that additional SG&A expenses will be necessary to realize the anticipated growth in revenue for Carrier Services and Commercial Services as the Company develops the Qwest Network. The Company intends to open commercial sales offices in selected major geographic markets to implement the Company's strategy, as segments of the Qwest Network become operational. In addition, SG&A expenses will increase as the Company continues to recruit experienced telecommunications industry personnel to implement the Company's strategy. See "Management." RESULTS OF OPERATIONS The table set forth below summarizes the Company's percentage of revenue by source and operating expenses as a percentage of total revenues:
YEAR ENDED DECEMBER 31, --------------------------------- 1992 1993 1994 1995 1996 ----- ----- ----- ----- ----- Revenue: Carrier services........................... 78.0% 76.5% 70.9% 54.2% 24.9% Commercial services........................ -- 1.4 12.3 16.3 14.8 ----- ----- ----- ----- ----- 78.0 77.9 83.2 70.5 39.7 Network construction services.............. 22.0 22.1 16.8 29.5 60.3 ----- ----- ----- ----- ----- Total revenue............................ 100.0% 100.0% 100.0% 100.0% 100.0% Operating Expenses: Telecommunications services................ 59.2% 59.5% 68.1% 64.9% 34.8% Network construction services.............. 18.3 22.4 13.2 26.2 37.9 Selling, general and administrative........ 23.0 26.3 30.4 29.7 25.5 Depreciation and amortization.............. 9.4 7.6 3.3 8.0 7.0 ----- ----- ----- ----- ----- Total operating expenses................. 109.9% 115.8% 115.0% 128.8% 105.2%
24 YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenue. Total revenue increased $105.9 million, or 84.7%, to $231.0 million in 1996 from $125.1 million in 1995 due primarily to significantly higher revenue from Network Construction Services, as well as increased revenue from Commercial Services, offset in part by lower revenue from Carrier Services. Revenue from Network Construction Services increased $102.3 million, or 277.1%, to $139.2 million in 1996 from $36.9 million in 1995 due to network construction revenue from dark fiber sales of approximately $121.0 million to WorldCom and Frontier. Commercial Services revenue increased $13.9 million, or 67.9%, to $34.3 million in 1996 from $20.4 million in 1995. This increase is largely attributable to growth in switched services provided to small- and medium-sized businesses and consumers as a result of the expansion of the Company's agent, telemarketing and direct mail sales channels. Carrier Services revenue decreased $10.2 million, or 15.1%, to $57.6 million in 1996 from $67.8 million in 1995 primarily due to decreases in revenue resulting from the Company's sale of a portion of its dedicated line services on leased capacity on July 1, 1996. The sold business generated revenues of $18.8 million for the six months ended June 30, 1996 and $39.7 million for the year ended December 31, 1995. The decrease in Carrier Services revenue was partially offset by an increase in revenue from carrier switched services, which increased to $19.4 million in 1996 from $13.8 million in 1995. Operating Expenses. Total operating expenses increased $81.9 million, or 50.8%, to $243.0 million in 1996 from $161.2 million in 1995 due primarily to increases in Network Construction Services and SG&A expenses. Expenses for telecommunications services decreased $0.8 million, or 1.0%, to $80.4 million in 1996 from $81.2 million in 1995. The sale on July 1, 1996 of the Company's dedicated line services on leased capacity generated a reduction in expenses, which was partially offset by telecommunications services expenses associated with the growth in switched services and servicing the Qwest Network. Expenses for Network Construction Services increased $54.8 million, or 167.3%, to $87.5 million in 1996 from $32.8 million in 1995. This increase was due to cost of construction contracts relating to dark fiber sales. SG&A expenses increased $21.7 million, or 58.2%, to $58.9 million in 1996 from $37.2 million in 1995. A signification portion of this increase is attributable to the realization of additional compensation expenses of approximately $14.1 million, including approximately $13.1 million relating to the Company's Growth Share Plan. The Company incurred additional SG&A expenses as a result of growth in the Company's telecommunications services and the construction of the Qwest Network, including additional sales commissions on higher revenue, expenses incurred in the implementation of the Company's direct mail sales channel and expenses for customer service personnel added to support the Company's expansion of its commercial customer base. The SG&A expenses in 1996 also included restructuring expenses of $1.6 million incurred by the Company as a result of its decision to close 13 sales offices and the termination of approximately 130 employees involved in sales, marketing and administrative functions. As a result of this restructuring, the Company experienced a reduction in payroll, commissions and rental expense. The Company anticipates that as it deploys the Qwest Network and expands its Carrier Services and Commercial Services, SG&A expenses will continue to increase. The Company's depreciation and amortization expense increased $6.3 million, or 62.5%, to $16.2 million in 1996 from $10.0 million in 1995. This increase was primarily due to the Company's investment in the Qwest Network. The Company expects that depreciation and amortization expense will continue to increase in subsequent periods as the Company continues to invest in the Qwest Network. Interest and Other Income (Expense). The Company's net interest and other expenses increased $1.9 million, or 78.9%, to $4.3 million in 1996 from $2.4 million in 1995. This increase was primarily attributable to additional debt incurred in 1996 to finance capital expenditures and to provide working capital. 25 Income Taxes. The Company is included in the consolidated federal income tax return of Anschutz Company, and a tax sharing agreement provides for allocation of tax liabilities and benefits to the Company, in general, as though it filed a separate tax return. The Company's effective tax rate in 1996 and 1995 approximated the statutory federal rate. The difference between the income tax benefit of $13.3 million in 1995 compared to $3.2 million benefit in 1996 resulted from a $28.3 million decrease in loss before income tax benefit from $38.5 million in 1995 to $10.2 million in 1996. Net Loss. The Company experienced a net loss of $7.0 million in 1996 compared to a net loss of $25.1 million in 1995 as a result of the factors discussed above. YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994 Revenue. Total revenue increased $54.2 million, or 76.5%, to $125.1 million in 1995 from $70.9 million in 1994 due to growth in revenue in each of the three services provided by the Company. Revenue from Carrier Services increased $17.5 million, or 34.9%, to $67.8 million in 1995 from $50.2 million in 1994 primarily as a result of the Company's acquisition of the Microwave System, which contributed $13.2 million in revenue in 1995. Commercial Services revenue increased $11.7 million, or 134.3%, to $20.4 million in 1995 from $8.7 million in 1994 due to increased business arising from the Company's marketing efforts. Revenue from Network Construction Services increased $25.0 million, or 209.5%, to $36.9 million in 1995 from $11.9 million in 1994, primarily due to increased revenue under a contract with MCI for the construction of fiber optic conduit routes. Operating Expenses. Total operating expenses increased $79.7 million, or 97.8%, to $161.2 million in 1995 from $81.5 million in 1994. Expenses for telecommunications services increased $33.0 million, or 68.4%, to $81.2 million in 1995 from $48.2 million in 1994 primarily due to increased costs of providing long distance and dedicated line services associated with growth in volume and the expiration of free leased capacity under the facility agreement related to the 1993 Capacity Sale, partially offset by savings derived from transferring dedicated line services customers from leased capacity to the Cal-Fiber system. Expenses for Network Construction Services increased $23.4 million, or 249.6%, to $32.8 million in 1995 compared to $9.4 million in 1994. The increase in operating expenses was due in large part to increased construction activity under a contract with MCI for the construction of conduit routes. SG&A expenses increased $15.7 million, or 72.9%, to $37.2 million in 1995 from $21.5 million in 1994. This increase was primarily attributable to the expansion in the Company's sales and marketing efforts and an increase in administrative expenses due to the expansion of the Company's administrative organization to support the growth in revenue. Depreciation and amortization expense increased $7.6 million, or 322.8%, to $10.0 million in 1995 from $2.4 million in 1994 primarily due to the investment in the Microwave System and the Cal-Fiber system becoming fully operational in early 1995. Interest and Other Income (Expense). The Company's net interest and other expenses increased $2.3 million to $2.4 million in 1995 from $0.1 million in 1994 as a result of additional debt incurred in 1995 to finance the acquisition of the Microwave System and the interest charges related to financing the Cal-Fiber system. Interest charges related to the Cal-Fiber system were capitalized during the construction period, which was completed in February 1995. Income Taxes. The Company is included in the consolidated federal income tax return of Anschutz Company, and a tax sharing agreement provides for allocation of tax liabilities and benefits to the Company, in general, as though it filed a separate tax return. The Company's effective tax rate in 1995 and 1994 approximated the statutory federal rate. 26 Net Loss. The Company experienced a net loss of $25.1 million in 1995 compared to a net loss of $6.9 million in 1994 as a result of the factors discussed above. LIQUIDITY AND CAPITAL RESOURCES From 1994 through 1996, the Company has funded capital expenditures, debt service and cash used in operations through a combination of stockholder advances, capital contributions and external borrowings supported by collateral owned by its parent or affiliates, as well as external borrowings collateralized by certain of the Company's assets. The Company intends to finance its operations in the future through internally generated and external funds without relying on cash advances, contributions or guarantees from its parent. The Company's operations generated insufficient cash flows in 1994 through 1996 to enable it to meet its capital expenditures, debt service and other cash needs. Aggregate cash amounts used during this three-year period to fund capital expenditures, repayments of long-term debt to third parties, operations, and the acquisition of the Microwave System were approximately $144.4 million, $23.8 million, $20.8 million and $12.5 million, respectively. Aggregate cash amounts provided during this three-year period by loans secured by collateral owned by its parent or an affiliate and capital contributions from its parent were approximately $60.0 million and $48.9 million, respectively. In addition, during this same period, the Company's net cash provided by secured borrowings under long-term debt agreements with third parties aggregated $93.0 million. At December 31, 1996, 1995 and 1994, the Company had working capital deficits of approximately $69.4 million, $2.6 million and $11.9 million, respectively. The Company's working capital deficits limit its cash resources, resulting in reduced liquidity. Completion of the Qwest Network will require substantial amounts of additional capital as described below and elsewhere in this Offering Memorandum. See "Risk Factors-- Substantial Capital Requirements." In June 1994, the Company entered into a $27.6 million network credit facility to finance the construction of the Cal-Fiber system. The loan was scheduled to mature on the last business day of July 2001. At February 28, 1997, the outstanding principal balance of the facility was $26.3 million, which was repaid in full with a portion of the proceeds of the sale of the Notes. In April 1995, the Company entered into a secured construction loan facility with Bank of Nova Scotia used to fund certain conduit installation projects. Borrowings under the facility are secured by certain construction contracts and notes payable to the Company. The facility converted into term loans, with $4.1 million maturing November 27, 1997 and $10.9 million maturing February 27, 1998. Borrowings bear interest at the Company's option at either: (i) the higher of a floating base rate announced by the lender or the federal funds rate plus one half of one percent plus an applicable margin; or (ii) LIBOR plus an applicable margin. In 1992, 1995 and 1996, the Company entered into three equipment loans totalling $12.6 million, with final maturity dates ranging from September 2000 to October 2001. At February 28, 1997, the aggregate principal amount outstanding under these equipment loans was $9.4 million, all of which has been, or after applicable prepayment procedures are completed will be, repaid with a portion of the proceeds of the sale of the Notes. In July 1995, the Company issued two term notes totaling $12.0 million, which were scheduled to mature on September 30, 2000. At February 28, 1997, the outstanding principal amount under these notes was $8.9 million, which was repaid in full with a portion of the proceeds of the sale of the Notes. In April 1996, the Company entered into a $100.0 million three-year revolving credit facility, as amended in September 1996, that converts to a two-year term loan maturing on April 2, 2001. At February 28, 1997, the Company had drawn $66.0 million under the revolving facility, which increased 27 by $14.0 million to $80.0 million on March 25, 1997, all of which was repaid with a portion of the proceeds of the sale of the Notes. No amounts have been reborrowed to date under this facility. In February 1997, the Company entered into a one-year $50.0 million line of credit from a commercial bank. At February 28, 1997 and as of the date hereof, no amounts were or are outstanding under this credit line. As indicated above, the Company intends to use a portion of the proceeds from the sale of the Notes to repay all outstanding indebtedness described above, other than the loan with Bank of Nova Scotia. The Company anticipates that it will terminate the latter two existing credit facilities totalling $150.0 million as soon as practicable. The Company intends to obtain new credit facilities, which may be secured or unsecured, as permitted under the Indenture, and the Company is in discussions with various potential lenders in this regard. The Company may reborrow the amounts being repaid or otherwise borrow under its existing credit facilities or new facilities that may be established. Following the Offerings, the Company will remain highly leveraged. As of December 31, 1996, on a pro forma basis after giving effect to the issuance of the Notes and the use of proceeds therefrom as described above, the Company would have had, on a consolidated basis, approximately $297.3 million in principal amount of indebtedness outstanding. The Indenture and other debt instruments to which Qwest's subsidiaries are parties limit but do not prohibit the incurrence of additional indebtedness by the Company, and the Company expects that Qwest or its subsidiaries may incur substantial additional indebtedness in the future. See "Capitalization" and "Risk Factors--Substantial Indebtedness." During 1996, 1995 and 1994, capital expenditures, including accrued capital expenditures and assets capitalized under capital leases, of the Company totaled $85.8 million, $48.7 million and $40.9 million, respectively. These expenditures were funded principally through project financing and other external borrowings and, beginning in the fourth quarter of 1994, also through advances and capital contributions from Anschutz Company and earnings from contracts relating to dark fiber sales. The Company estimates the total cost to construct and activate the Qwest Network and complete construction relating to the dark fiber sold to Frontier and WorldCom will be approximately $1.4 billion. Total anticipated costs include approximately $217.7 million already expended by the Company. The Company anticipates remaining total cash outlays for these purposes of approximately $671.5 million in 1997 and $483.6 million in 1998. The 1997 amount includes the Company's commitment to purchase a minimum quantity of materials for approximately $257.0 million in the year ended December 31, 1997, subject to quality and performance specifications. The Company also anticipates approximately $90.0 million of capital expenditures in 1997 and 1998 to support growth in Carrier Services and Commercial Services. Aggregate amounts already paid or contracted to be paid to the Company under the Frontier and WorldCom contracts and additional smaller construction contracts for sales of dark fiber constitute approximately $575.2 million. Of the estimated total cost of $1.4 billion to construct and activate the Qwest Network and complete construction relating to the dark fiber sold to Frontier and WorldCom, approximately $ million in capital expenditures remain to be funded after accounting for $217.7 million already expended, approximately $575.2 million already paid or contracted to be paid to the Company under the Frontier and WorldCom contracts and additional smaller construction contracts for sales of dark fiber, $117.4 million of the net proceeds from the sale of the Notes and $ million in net proceeds of the Offerings. The Company believes that the net proceeds of the Offerings, together with net proceeds from the sale of the Notes, borrowing capacity under its existing credit facilities and cash flow from operations, will be sufficient to satisfy its anticipated cash requirements at least through the end of 1997. After utilizing the net proceeds of the Offerings and the net proceeds from the sale of the Notes, the Company expects to fund its capital requirements to complete the Qwest Network and fulfill its contractual commitments through a combination of the proceeds from additional construction or sale 28 contracts for dark fiber, additional debt or equity financings (including equipment financings) and available cash flow from operations. Management is pursuing and believes that it will be successful in obtaining the necessary financing and completing the dark fiber sales that will permit it to complete the Qwest Network and fulfill its contractual commitments. If all such financing is not obtained or sufficient sales not consummated, the Company could modify its plans and defer certain portions of the project. IMPACT OF INFLATION Inflation has not significantly affected the Company's operations during the past three years. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Prospectus contains forward-looking statements that include, among others, statements concerning the Company's plans to complete the Qwest Network, expectations as to funding its capital requirements, anticipated expansion of carrier and commercial services and other statements of expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. Management cautions the reader that these forward-looking statements are subject to risks and uncertainties that could cause actual events or results to differ materially from those expressed or implied by the statements. The most important factors that could prevent the Company from achieving its stated goals include, but are not limited to, failure by the Company to (i) obtain substantial amounts of additional capital and financing at reasonable costs and on satisfactory terms and conditions, (ii) manage effectively and cost efficiently the construction of the route segments, (iii) access markets and enter into additional customer contracts to sell dark fiber or provide high volume capacity and otherwise expand its telecommunications customer base on the Qwest Network and (iv) obtain additional rights-of-way and maintain all necessary rights-of-way. 29 INDUSTRY OVERVIEW GENERAL The telecommunications industry involves the transmission of voice, data and video communications from the point of origination to the point of termination. The industry has been undergoing rapid change due to deregulation, the construction of additional infrastructure and the introduction of new technologies, which has resulted in increased competition and demand for telecommunications services. United States Domestic Long Distance. The structure of the domestic long distance telecommunications industry was strongly influenced by a 1982 court decree that required the divestiture by AT&T of its seven RBOCs and divided the country into approximately 200 LATAs that range in size from metropolitan areas to entire states. The seven RBOCs were initially limited to providing local telephone service, access to long distance carriers and "in-region" long distance service (service within a LATA). The right to provide inter-LATA service was initially ceded to AT&T and other long distance carriers, as well as to LECs other than the RBOCs. However, under the Telecom Act of 1996, the RBOCs may now provide inter-LATA long distance service, subject to certain conditions. See "Regulation--General Regulatory Environment." For each long distance call, the originating and terminating LECs charge the long distance carrier an access fee to carry the call across their local networks. The long distance carrier charges the customer a fee for its transmission of the call, a portion of which consists of the access fees charged by the originating and terminating LECs. To encourage the development of competition in the long distance market, the LECs are required to provide all long distance carriers with access to local exchange service that is "equal in type, quality and price" to that provided to AT&T. These "equal access" and related provisions were intended to prevent preferential treatment of AT&T and to require that the LECs charge the same access fees to all long distance carriers, regardless of their volume of traffic. These provisions, along with the development and evolution of fiber optic technology with its increased capacity and transmission quality, have helped smaller long distance carriers emerge as alternatives to the largest companies for long distance telecommunications services. See "Regulation--General Regulatory Environment." United States International Long Distance. The United States international long distance industry is large and growing. The onset of competition gave rise to deregulation and a decrease in prices, which led to the initial growth in the market and improvements in service offerings and customer service. Subsequent growth has been largely attributable to the worldwide trend toward deregulation and privatization, technological improvements, the expansion of telecommunications infrastructure and the globalization of the world's economies. The profitability of the United States international long distance market is principally driven by the difference between settlement rates (i.e., the rates paid to other carriers to terminate an international call) and billed revenue. The difference in cost between providing domestic long distance and international service is minimal, and increased worldwide competition has already brought about certain reductions in settlement rates and end user prices, thereby reducing overseas termination costs for United States-based carriers. However, it is believed that certain foreign countries use settlement rates to subsidize their domestic call rates, contributing to significantly higher rates for certain international calls compared to domestic long distance calls. The FCC has proposed measures intended to overhaul the system of international settlements, although such proposals have not yet been enacted and remain subject to modification or appeal to the courts or both. Additionally, recent worldwide trade negotiations may lead to reduced settlement rates. See "Regulation--General Regulatory Environment." 30 Multimedia. Continuing developments in multimedia applications are bringing new entrants to the telecommunications market. Internet service providers and cable television, entertainment and data transmission companies, for instance, are potential customers for voice, data and video communications over high bandwidth networks such as the Qwest Network. LONG DISTANCE CALL ROUTING An inter-LATA long distance telephone call begins with the caller's LEC transmitting the call by means of its local network to a point of connection with a long distance carrier. As a result of the equal access provisions described above, customers may initiate their calls via their chosen long distance carrier by using simple "1 plus" dialing, rather than having to dial longer access or identification numbers and codes. The long distance carrier, through its switching and transmission network, transmits the call to the called party's LEC, which then completes the call over its local facilities. The following diagram illustrates the routing of an inter-LATA telephone call. [DIAGRAM OF TYPICAL LONG DISTANCE CALL ROUTING APPEARS HERE] 31 TELECOMMUNICATIONS TECHNOLOGY The market for video, voice and data communications is served primarily through fiber optic and coaxial copper cables, microwave systems and satellites. Before the 1980s, telecommunications traffic generally was transmitted through satellites, microwave radio or copper cable installed undersea or buried in the ground. By 1990, copper cable had been largely replaced by fiber optic systems that provided greater capacity at lower cost with higher quality and reliability. . Fiber Optic Systems. Fiber optic systems use laser-generated light to transmit voice, data and video in digital format through ultra-thin strands of glass. Fiber optic systems are characterized generally by large circuit capacity, good sound quality, resistance to external signal interference and direct interface to digital switching equipment or digital microwave systems. A pair of modern fiber optic strands, using the most advanced technology commercially available, is capable of carrying OC-192 level capacity, equal to over 129,000 simultaneous telephone calls. Because fiber optic signals disperse over distance, they must be regenerated/amplified at sites located along the fiber optic cable. Fiber optic systems using earlier generation fiber, as compared to the more advanced fiber being installed in the Qwest Network, require frequent intervals between regeneration/amplifier sites, typically between 20 and 45 miles. The Company's advanced fiber allows for greater distances between regeneration/amplifier sites, and the Qwest Network is designed to use a maximum of 60-mile intervals. Greater distances between regeneration/amplifier sites generally translate into substantially lower installation and operating costs. . Microwave Systems. Although limited in capacity compared with fiber optic systems, digital microwave systems (such as the Company's Microwave System) offer an effective and reliable means of transmitting lower volume and narrower bandwidths of voice, data and video signals. Generally no more than 21 DS-3s can be transmitted by microwave between two antennae. Microwaves are very high frequency radio waves that can be reflected, focused and beamed in a line-of-sight transmission path. Because of their electro-physical properties, microwaves can be used to transmit signals through the air, with relatively little power, in much the same way that electrical signals are transmitted through a copper wire. To create a communications circuit, microwave signals are transmitted through a focusing antenna, received by an antenna at the next station in the network, then amplified and retransmitted. Microwaves disperse as they travel through the air, and as a result this transmission process must be repeated at repeater stations, which consist of radio equipment, antennae and back-up power sources, located on average every 22 miles along the transmission network. . Satellite Systems. Although satellites initially were used for point-to- point long distance telephone and television transmissions, fiber optic cables have proven to be a more cost effective delivery method for high volume point-to-point applications. Currently, satellites are primarily used for transmissions that must reach many locations over vast distances simultaneously, such as the distribution of television programming, for point-to-point traffic in developing countries lacking terrestrial networks and for other point-to-point traffic that cannot be connected efficiently or cost-effectively by terrestrial transmission systems. TELECOMMUNICATIONS MARKETS Companies in the domestic long distance market generated estimated total revenue of $72 billion in 1995. AT&T is the dominant long distance carrier with an estimated 53% of total market revenue in 1995, while MCI and Sprint held the number two and three market positions with approximately 17.8% and 10% of 1995 market revenues, respectively. These three carriers, together with WorldCom, constitute what are generally referred to as the "Tier 1" companies in the long distance market. Long distance companies may generally be categorized as "facilities-based" carriers and "nonfacilities-based" carriers. The four Tier 1 companies are facilities-based carriers because each 32 operates a network principally using its own transmission facilities and extensive geographically dispersed switching equipment. The completed Qwest Network would enable the Company to become this type of facilities-based carrier generally. All of the Tier 1 carriers, including AT&T, lease some of their transmission facilities from other carriers to back up their service routing, augment areas where they may have traffic bottlenecks or cover a particular geographic area not covered by their own networks. Medium-sized long distance companies, some with national capabilities, constitute the "Tier 2" companies in the long distance market. Certain Tier 2 carriers are known as "partial facilities-based" carriers in that they own some of their own transmission facilities but operate using mostly leased facilities. However, most Tier 2 carriers are nonfacilities-based carriers in that they lease all of their transmission facilities. Tier 2 carriers design, manage and operate their own networks just as the Tier 1 carriers, but generally on a smaller regional scale, focusing on selling traffic originating in their target geographic area. These carriers are also generally referred to as "switch-based" or "switched" because they typically operate their own switches. Some of these carriers lease high volume DS-3 capacity and resell lower volume DS-1 capacity to other carriers at higher unit prices. DS-3 level capacity is generally only sold by carriers that own facilities on the route on which the service is sold. The "Tier 3" carriers, often called "switchless" resellers, neither operate networks nor own facilities, but rather resell "minutes" of service which they purchase from other carriers. These companies, which vary significantly in size, are primarily sales and marketing companies that generate their margins by buying in large volumes to obtain a low price per minute from switch-based carriers and reselling at higher prices. These companies may receive an invoice from their underlying carrier and bill the end user or, in some cases, the underlying carrier may bill the end user directly. The barriers to entry into this segment of the long distance market are minimal and there are currently numerous Tier 3 companies providing long distance services. As its business increases, a Tier 3 company may install its own switch and move into the Tier 2 category. According to data included in Long Distance Market Shares, Third Quarter 1996, an FCC report issued in January 1997, while long distance revenue grew at a compound annual rate of approximately 6% during the period from 1989 through 1995, the revenue of all carriers other than the Tier 1 carriers grew in the aggregate at a compound rate of approximately 17% during the same period. This analysis also stated that the Tier 2 and Tier 3 carriers increased their market share fivefold over an 11-year period, increasing from less than 3% in 1984 to more than 14% in 1995. The Tier 2 and Tier 3 carriers generated 1995 revenue of approximately $10.2 billion. Operator services companies concentrate on providing operator services and other communications services to long distance industry, private pay phone operators, prisons and credit card companies. These carriers also manage their own networks and switching networks and switching equipment while leasing virtually all of their facilities. Competition in the retail long distance industry is based upon pricing, customer service, network quality and valued-added services, creating opportunities for smaller long distance providers. Sales efforts of long distance companies focus increasingly on telemarketing and the use of independent contractors rather than full-time employees. This has created an opportunity for smaller companies to compete in certain segments of the long distance market, and many of them are quickly able to build sizable customer bases on the strength of their marketing efforts and distribution channels. 33 BUSINESS The Company is a facilities-based provider of communications services to interexchange carriers and other communications entities, businesses and consumers, and it constructs and installs fiber optic communications systems for interexchange carriers and other communications entities, as well as for its own use. The Company is expanding its existing long distance network into the Qwest Network, a coast-to-coast, technologically advanced, fiber optic telecommunications network. The Company will employ, throughout substantially all of the Qwest Network, a self-healing SONET ring architecture equipped with the most advanced commercially available fiber manufactured by Lucent together with advanced transmission electronics. The Qwest Network's advanced fiber and transmission electronics are expected to provide the Company with lower installation, operating and maintenance costs than older fiber systems in commercial use today. In addition, the Company has entered into construction contracts for the sale of dark fiber along the route of the Qwest Network, which will reduce the Company's net cost per fiber mile with respect to the fiber it retains for its own use. As a result of these cost advantages, the Company believes it will be well-positioned to capture market share and take advantage of the rapidly growing demand for long haul voice and data transmission capacity. The executive offices of Qwest Communications International Inc., a Delaware corporation, are located at 555 Seventeenth Street, Suite 1000, Denver, CO 80202, and its telephone number is (303) 291-1400. The Company's web site is http://www.qwest.net. OPPORTUNITIES The Company believes that demand from interexchange carriers and other communications entities for advanced, high bandwidth voice, data and video transmission capacity will increase over the next several years due to regulatory and technical changes and other industry developments. These anticipated changes and developments include: (i) continued growth in demand for existing long distance services; (ii) entry into the market of new communications providers; (iii) requirements of the four principal nationwide carriers (AT&T, MCI, Sprint and WorldCom) to replace or augment portions of their older systems; (iv) reform in regulation of domestic access charges and international settlement rates, which the Company expects will lower long distance rates and fuel primary demand for long distance services; and (v) continued growth in the capacity requirements of the Internet, data transmission and other new technologies and applications. . Base Growth of Existing Providers. The domestic long distance industry generated approximately $72 billion in total revenue in 1995, according to a report published by the FCC. The report states that total long distance revenue grew at a compound annual rate of approximately 6% during the period 1989 through 1995, while the revenue of all carriers other than the four Tier 1 carriers, many of which lease network capacity from facilities-based carriers such as the Company, grew in the aggregate at a compound annual rate of over 17% during the same period. The carrier wholesale services segment of the industry generated revenue of approximately $4.4 billion in 1995 according to a report by the Yankee Group, a leading market research firm, which represented an increase of 7% over 1994 revenue. The revenue increases were achieved against a backdrop of declining unit prices for most telecommunications services, which suggests that the demand for telecommunications bandwidth has increased at an even higher rate. The Company believes that these growth trends generally will continue and that certain companies that do not own most of their networks have potential needs to invest in network facilities or lease high bandwidth network capacity in order to remain competitive. In addition, the Company believes that the Qwest Network will allow the Company to offer an attractive alternative for leased capacity simply to meet current levels of demand for wholesale telecommunications services. . Capacity Required by New Entrants. Competition and deregulation are bringing new entrants into the telecommunications market. The Company anticipates that this trend will accelerate as a result of the Telecom Act of 1996. The Telecom Act of 1996 allows the RBOCs and the General Telephone Operating Companies to enter the long distance business and enables other entities, including entities affiliated with power utilities and ventures between LECs and cable 34 television companies, to provide an expanded range of telecommunications services. As these entities emerge as long distance competitors, the Company believes they will need their own facilities and additional high- bandwidth capacity to compete effectively with facilities-based providers. . Augmentation of Older Systems. The coast-to-coast fiber systems currently operated by the Tier 1 carriers were constructed for the most part prior to 1990, using standard, single mode fiber. Most of these systems were buried directly in the ground without protective conduit. The conversion of these older systems to the use of SONET ring architecture requires increasingly more bandwidth over additional route miles. Accordingly, the Company believes that the Tier 1 carriers will generally need to replace or augment parts of their networks to add more capacity, route diversity and redundancy to their systems and to lower their overall operating costs. The Company believes that the older, legacy systems operated by certain of the Tier 1 carriers generally face certain other disadvantages when compared to the Qwest Network, such as: (i) lower transmission speeds, lower overall capacity and shorter distances between regeneration/amplifier facilities; (ii) more costly maintenance requirements; (iii) greater susceptibility to system interruption from physical damage to the network infrastructure; and (iv) greater difficulty in upgrading to more advanced fiber due to lack of a spare conduit. . Access Charge and International Settlement Rate Reform. The Company anticipates that primary demand for long distance services will be stimulated by reforms of domestic access charges and international settlement rates and recent international trade negotiations. As long distance prices decline, the Company expects that overall demand for its services by carriers, businesses and consumers will increase. . Accommodation of the Internet and Other New Applications. The Company believes that additional network transmission capacity and faster response times will be required to accommodate multimedia (voice, data and video) and other potential high-bandwidth applications, such as increasing use of the Internet by commercial users, the deployment of corporate intranets and the use of telecommunications infrastructure for providing cable television and other entertainment services. The Company believes this growth will result in increased demand for high-bandwidth dedicated circuits and other network services provided by the Company (such as Frame Relay and ATM). STRATEGY The Company's objective is to become a leading, coast-to-coast facilities- based provider of communications services to other communications providers, businesses and consumers. To achieve this objective, the Company intends to: . Deploy a Technologically Advanced Network. The Company believes the technical characteristics of the Qwest Network will enable it to provide highly reliable services to interexchange carriers and other communications entities at low per unit costs as it expands its customer base and increases network traffic volume. For instance, the Qwest Network's advanced fiber optic cable and electronic equipment permit high capacity transmission over longer distances between regeneration/amplifier facilities than older fiber systems. This translates into generally lower installation and operating costs. These costs typically constitute a significant portion of the overall cost of providing telecommunications services. . Build on Network Construction Expertise and Existing Network Assets. The Company has built over 5,000 route miles of telecommunications conduit systems over the last eight years for itself and major interexchange carriers including AT&T, MCI, Sprint and WorldCom. Network Construction Services currently employs over 530 experienced construction personnel led by a six-member senior construction management team with combined construction experience of over 140 years. The Company utilizes its own fleet of railroad equipment and has in place railroad and other right-of- way agreements covering over 80% of the Qwest Network and already has installed approximately 39% of the route miles of conduit required for the Qwest Network. In addition, the Company has a fixed-price supply agreement for the provision of all the fiber necessary to complete the Qwest Network. 35 . Establish Low Cost Position. The Company has entered into two construction contracts for the sale of dark fiber in the Qwest Network that will allow the Company to achieve a low net capital investment in the Qwest Network and share future operating and maintenance costs. Earnings from these agreements will reduce the Company's net cost per fiber mile with respect to the fiber that it retains for its own use. The Company believes that this network cost advantage, coupled with the operating and maintenance cost advantages of owning an entirely new network with advanced fiber and equipment uniformly deployed systemwide, will enable it to establish a low cost position in the long distance industry relative to its competitors. . Build on Management Experience. The Company's management team and board of directors include individuals with significant experience at major telecommunications companies. Mr. Joseph Nacchio became the Company's President and Chief Executive Officer in January 1997. Mr. Nacchio was Executive Vice President of the Consumer and Small Business Division at AT&T, where he was employed for 27 years prior to joining the Company. Mr. Nacchio has extensive management experience in marketing, sales, network operations and engineering, having served as Chief Engineer and a Vice President of Network Operations at AT&T. Mr. Richard T. Liebhaber, who was a Director and served as Executive Vice President and Chief Strategy and Technology Officer of MCI until his retirement in 1995, is a Director of Qwest. He is providing technical advisory services to the Company under a consulting agreement. See "Management." . Grow Carrier Revenue Base. The Company is currently focusing on expanding Carrier Services to increase its revenue stream and reduce per unit costs, targeting short-term capacity sales on a segment-by-segment basis as the Qwest Network is deployed and activated, and is increasingly seeking longer-term, high volume capacity agreements from major carriers. In addition to traditional telecommunications carriers, the Company is marketing to Internet service providers and other data service companies. . Develop Commercial Services. The Company plans to build on its Carrier Services experience to expand its presence in the Commercial Services market by creating a distinctive brand identity for "Qwest" and aggressively marketing its existing and planned voice, data and other transmission products and services. The Company plans to build direct end user relationships by developing strong distribution channels, providing competitive pricing and superior network quality and offering enhanced, market-driven services to businesses and consumers. THE QWEST NETWORK The Company's network infrastructure already includes, among other assets: (i) approximately 4,900 route miles of conduit in place, consisting of approximately 900 route miles of lit fiber systems, one in California, the Cal-Fiber system, carrying traffic between Los Angeles and Sacramento, and the other in Texas connecting Dallas and Houston, approximately 2,250 route miles of dark fiber installed in conduit, and approximately 1,750 route miles of vacant conduit; (ii) right-of-way agreements in place for approximately 5,500 additional route miles of planned construction for the Qwest Network; (iii) an approximately 3,500 mile operating digital microwave system (the "Microwave System"); (iv) approximately 15,000 DS-3 miles of fiber transmission capacity leased by the Company from other carriers, used primarily to extend the Company's switched services for originating and terminating traffic beyond the boundaries of the Company's lit fiber network; and (v) five digital switches. Construction of the Qwest Network is scheduled to be completed by late 1998. Under the Company's current plans, the Qwest Network will extend approximately 13,000 route miles coast-to-coast and connect 92 metropolitan areas that represent approximately 65% of the originating and terminating long distance traffic in the United States. Through a combination of the Qwest Network and leased facilities, the Company will continue to offer interstate services in all 48 contiguous states. 36 The Company plans to transfer carrier and retail switched services provided on leased facilities onto the Qwest Network as the Company activates its own facilities. As the Qwest Network is completed, the Company may use the Microwave System to serve certain smaller markets contiguous to the Qwest Network and to feed traffic onto the Qwest Network. The physical components of the Qwest Network are: (i) high density polyethylene conduit, which is hollow tubing 1 1/2^ to 2^ in diameter; (ii) fiber optic cable, which consists of fiber strands placed inside a plastic sheath and strengthened by metal; (iii) electronic equipment necessary to activate the fiber for transmission; (iv) switches that enable the Company to provide switched services to carrier and commercial customers; and (v) 92 points of presence, which allow the Company to concentrate customers' traffic at locations where the Company does not have switches and carry the traffic to switching centers over the Qwest Network. Advanced Technology. The Company is installing technologically advanced fiber optic cable and electronic equipment uniformly throughout the Qwest Network, using an advanced network management system. The Qwest Network's technologies include Lucent non-zero dispersion shifted fiber equipped for dense wave division multiplexing and SONET technology at OC-48 level or higher levels that enable high capacity transmission. The Qwest Network is designed for superior security and reliability, based on (i) bi-directional SONET ring architecture, a self-healing system that allows for instantaneous rerouting and virtually eliminates downtime in the event of a fiber cut; (ii) fiber cable installed in high density polyethylene conduit generally buried 42^-56^ below the ground; and (iii) extensive use of railroad rights-of-way, which typically offer greater protection of the fiber system than other systems built over more public rights-of-way such as highways, telephone poles or overhead power transmission lines. The Qwest Network is designed for expandability and flexibility and will contain two conduits along substantially all of its route. The first conduit will contain a cable generally housing at least 96 fibers, and the second conduit will serve as a spare. The spare conduit will allow for future technology upgrades and expansion of capacity at costs significantly below the cost of new construction. After existing and anticipated dark fiber sales, the Company generally plans to retain a minimum of 48 fibers for its own use in the Qwest Network. With the combined use of non-zero dispersion shifted fiber, dense wave division multiplexing and high bit rate transmission electronics, each of the fibers retained by the Company can achieve substantially greater capacity per fiber than standard, single mode fiber now in use. The Company monitors its current network, and will monitor the Qwest Network, 24 hours a day, seven days a week from its Network Management Center in Denver, Colorado. This facility provides centralized network surveillance, troubleshooting and customer service, using technology that enables the Company to reduce service costs and customer downtime. The system currently allows the Company's technicians to detect a component malfunction in the Qwest Network, quickly reroute the customer to an available alternate path and effect an expedited repair. Upon completion of the Qwest Network with its SONET ring architecture, the rerouting function will be fully automated. In addition, the Company is deploying new management tools that will give the Company's Carrier Services customers the ability to monitor and reconfigure their leased capacity on a real time basis from their own site. The Company also has a facility in Dallas that monitors the Microwave System. The Company currently maintains a staff of approximately 170 technicians and other related personnel across the system to provide maintenance and technical support services. Railroad Rights-of-Way. The Company has right-of-way agreements in place that provide it with access to over 30,000 track miles. The Company believes that use of the railroad rights-of-way, along with the protective conduit, give the Company inherent advantages over other systems built over more public rights-of-way, such as highways, telephone poles or overhead transmission lines. These advantages include higher security for the Qwest Network and greater protection of the fiber system. 37 Railroad rights-of-way also provide the Qwest Network generally with a direct, continuous route between cities. This eliminates the potential need, and the associated time and costs, to piece together rights-of-way using a combination of agreements with private owners and state or municipal agencies. In addition, railroad rights-of-way typically extend into downtown areas of cities that are strategically important to the Company. The Company's right- of-way agreements provide for continuing cash payments, exchanges of rights- of-way for network capacity or a combination of both. The Company has other right-of-way agreements in place, where necessary or economically preferable, with highway commissions, utilities, political subdivisions and others. Between 70% and 80% of the Qwest Network will be installed on railroad rights-of-way. The Company has in place agreements for over 80% of the rights- of-way needed for completion of the Qwest Network. Network Installation. The Company's network installation process along railroad rights-of-way combines traditional railroad activities and modern engineering and building techniques. The Company employs over 530 experienced construction personnel and uses its own fleet of railroad equipment. The Company supplements these personnel with independent contractors. The Company generally installs conduit on railroad rights-of-way with a "plow train." Plow trains consist of locomotives, plow cars and several supply cars. The locomotives are used in a traditional manner to pull the plow train along the railroad track. The plow cars are engineered to accommodate a large plow that extends from the side of the car. The plow is lowered into the ground and digs a trench as the locomotives pull the plow train forward. The supply cars carry the supply of conduit and other construction materials needed to construct the fiber route and are designed to continuously feed supplies to the plow cars. A plow car travels along the railroad track and simultaneously plows a trench approximately 42^-56^ deep and a minimum of 10 feet from the center rail line, feeds multiple conduits into the trench, buries a warning tape approximately a foot from the surface, and backfills the land to its original contour. A plow can cover up to 4 miles a day, depending on the availability of track time and the severity of the terrain. In situations where the conduit must be laid across a bridge or through a tunnel, the Company typically places the conduit in a galvanized steel pipe, and the pipe is attached to the side of the bridge or along the tunnel floor or wall. When the conduit must be run under rivers or other obstructions, the Company's installation personnel use directional boring techniques to bore small tunnels underneath the rivers or obstructions and feed the conduit through the completed tunnels. After the conduit has been buried along the railroad track (or attached to a bridge or tunnel), the fiber optic cable is installed or "pulled" through the conduit. The Company accomplishes this through the use of access boxes that are installed along the Qwest Network at approximately one mile intervals. These access boxes also allow Company employees to make repairs or replace or install additional fiber. The access boxes typically contain an additional loop of the fiber cable to provide slack in the system to accommodate displacement, disruption or movement of the conduit as a result of digging or excavation activities, floods, earthquakes or other events. The presence of the additional fiber cable reduces the risk that the cable will be cut or broken. For routes not using railroad rights-of-way, the Company uses "tractor plows." Tractor plows are tractor pulled plow vehicles equipped to plow trenches and install conduit. Tractor plows also may be used in certain places along railroad rights-of-way depending on space, availability of track time and other factors. These tractor plows generally perform the same functions in a similar manner as the rail plows. 38 Railroad rights-of-way, which are usually less accessible to the public than highways and less vulnerable to physical damage than aerial systems installed along telephone poles or overhead power transmission lines, reduce the risk of outside interference or damage to the Company's conduit. The Company has also implemented a "Call Before U Dig" ("CBUD") program, backed up by its 24-hour Network Management Center to reduce the risk of damage to the conduit or fiber system. Additionally, above ground markers are placed at frequent intervals along the route of the Qwest Network. Dark Fiber Sales. The Company has entered into agreements with both Frontier and WorldCom whereby each is purchasing dark fiber along the Qwest Network. The proceeds from construction contracts for the sale of dark fiber will provide cash for a significant portion of the total estimated costs to construct the Qwest Network and complete construction relating to the dark fiber sold to Frontier and WorldCom, and are expected to provide the Company with a strategic network cost advantage on the fibers that the Company retains for the Qwest Network. The agreements provide for the purchase by Frontier and WorldCom, respectively, of 24 fibers along all, in the case of Frontier, and selected segments, in the case of WorldCom, of the route of the Qwest Network. In addition, Frontier has an option to purchase additional dark fiber along the entire route of the Qwest Network for additional consideration. This option expires in April 1997. Each contract requires the purchaser to pay an aggregate price consisting of an initial payment followed by installments during the construction period based on the Company's achievement of certain milestones (e.g., conduit installation and fiber splicing), with final payment for each segment made at the time of acceptance. Both agreements contain provisions establishing construction specifications and fiber splicing, testing and acceptance procedures and requiring the Company to maintain rights-of-way with respect to the system route for the economically useful life of the fibers sold. Each agreement also provides for the sharing of certain maintenance costs. The Frontier contract also provides for sharing of certain operating costs. The agreements establish anticipated delivery dates for construction and delivery of segments along the route of the Qwest Network. Delivery may be extended under both contracts for force majeure events. The Frontier contract provides for reduced payments in the event of delay or non-delivery of segments and, in certain circumstances, penalties of varying amounts depending upon the reason for the delay or non-delivery, and allows Frontier to delete any non-delivered segment from the system route to be delivered. The Company has executed performance bonds in favor of Frontier. In addition, if Frontier fails to make payment with respect to any segment, the Company may terminate Frontier's rights relating to all remaining undelivered segments. Frontier's parent company, Frontier Corporation, has guaranteed payment of Frontier's payment obligations under the contract. The Company believes that significant opportunities exist to sell additional dark fiber throughout the Qwest Network and management has identified and is in various stages of negotiations with potential customers. These potential customers include other interexchange carriers, cable, entertainment and data transmission companies, RBOCs, ISPs, LECs and CLECs. The Company believes that these potential customers will view the Company, with its construction capabilities and emphasis on being a "carrier's carrier," as an attractive source for certain of their long distance transmission needs. In order to meet the needs of this diverse group of customers, the Company expects to offer a wide variety of pricing and system options to meet specific needs of each customer. For example, customers may purchase or lease dark fiber or purchase capacity on a short- or long-term basis. The Company intends to retain ownership of at least 48 fibers along substantially all of the Qwest Network for its own use. Build-Out Plan for the Qwest Network. The Company estimates the total cost to construct and activate the Qwest Network and complete construction relating to the dark fiber sold to Frontier and WorldCom, will be approximately $1.4 billion. Total anticipated costs include approximately $217.7 million already expended by the Company. The Company anticipates remaining total cash outlays for these purposes of approximately $671.5 million in 1997 and $483.6 million in 1998. The 1997 amount includes the Company's commitment to purchase a minimum quantity of materials for approximately 39 $257.0 million in the year ended December 31, 1997, subject to quality and performance specifications. The Company also anticipates approximately $90.0 million of capital expenditures in 1997 and 1998 to support growth in Carrier Services and Commercial Services. Aggregate amounts already paid or contracted to be paid to the Company under the Frontier and WorldCom contracts and additional smaller construction contracts for sales of dark fiber constitute approximately $575.2 million. In addition to payments received under the existing dark fiber contracts, the Company expects to finance the construction of the Qwest Network primarily through a combination of: (i) proceeds from the Offerings; (ii) remaining proceeds from the sale of the Notes; (iii) proceeds from additional construction or sale contracts for dark fiber; (iv) additional debt or equity financing, including equipment financings; and (v) any available cash flow from operations. CARRIER SERVICES General. The Company has been positioned historically in the long distance business as a "carrier's carrier," providing dedicated line and switched services to other carriers over the Company's owned or leased fiber optic network facilities. Management believes that the Company has earned a reputation of providing quality services at competitive prices to meet specific customer needs. Total revenues from Carrier Services were approximately $57.6 million, $67.8 million and $50.2 million for the years 1996, 1995 and 1994, respectively. Products. Products offered by Carrier Services fall into three primary categories: (i) high volume capacity services; (ii) conventional dedicated line services; and (iii) switched services. . High Volume Capacity Services. The Company provides high volume transmission capacity at or above the OC-3 level (or its equivalent) through service agreements for terms of one year or longer. As the Qwest Network is deployed, the Company also is targeting potential large users in the inter-LATA market that may seek to augment their own networks or provide diverse routing alternatives in strategic areas of their systems. . Conventional Dedicated Line Services. The Company currently provides dedicated line services on owned capacity to a wide range of customers at capacities below the OC-3 level generally for terms of one year or less. The Company expects the Qwest Network will enable the Company to offer these services over a significantly expanded geographic area. . Switched Services. The Company currently provides switched terminating services over its switched service network to large and small long distance carriers. The carrier switched terminating service business is specifically used to increase volume on the Company's switched service network to allow for more efficient "trunking" of calls. While the carrier switched services generate revenue at lower margins than the dedicated line services, such services facilitate cost effective management of the Qwest Network. Customers. Carrier Services' customer base in the inter-LATA carrier market consists of the following: . Tier 1 and Tier 2 Carriers. The Company offers high volume transmission capacity, conventional dedicated line services and dedicated switched services to the Tier 1 and Tier 2 carriers on a national or regional basis. As RBOCs enter the long distance market, the Company believes they will be potential customers to lease high volume capacity from the Company on a national basis. . Tier 3 Carriers. The Company currently offers switchless resale services to Tier 3 carriers on a limited basis. The Company anticipates that this business will expand as coverage of the Company's switched network grows. . Internet Service Providers. The Company believes that ISPs will become customers for significant high volume capacity. The Company is providing capacity at the OC-3 level on its Cal-Fiber system under a recently signed contract with an ISP. 40 . Operator Services Companies and Other Niche Companies. These companies concentrate on providing operator services and other communications services to the long distance industry, private payphone operators, prisons and credit card companies. These carriers also manage their own networks and switching equipment while leasing virtually all of their transmission facilities. The Company provides transmission services to these carriers. Service Agreements. The Company provides high volume transmission capacity services through service agreements for terms of one year or longer. Dedicated line services are generally offered under service agreements for an initial term of one year. High volume capacity service agreements and dedicated line service agreements generally provide for "take or pay" monthly payments at fixed rates based on the capacity and length of circuit used. Customers are typically billed on a monthly basis and also may incur an installation charge or certain ancillary charges for equipment. After contract expiration, the contracts may be renewed or the services may be provided on a month-to-month basis. Switched services agreements are generally offered on a month-to-month basis and the service is billed on a minutes-of-use basis. Revenues from carrier customers that are billed on a minutes-of-use basis have the potential to fluctuate significantly based on changes in usage that are highly dependent on differences between the prices charged by the Company and its competitors. The Company, however, has not experienced significant fluctuations to date. COMMERCIAL SERVICES General. The Company began offering Commercial Services in 1993. Commercial Services focuses primarily on the sale of inter-LATA long distance services to the retail market, principally to small- and medium-sized businesses and to consumers. The Company currently provides facilities-based services along the Cal-Fiber and Texas routes, and is a switch based reseller elsewhere. Total revenues from Commercial Services were approximately $34.3 million, $20.4 million and $8.7 million in 1996, 1995 and 1994, respectively. The Company plans to transfer carrier and commercial switched traffic from leased facilities onto the Qwest Network as it is activated. As traffic volumes increase and the Company carries a greater percentage of traffic on the Qwest Network, the Company believes it will realize economies of scale and thereby lower its cost of sales as a percentage of revenue. See "Risk Factors--Risks Related to Completing the Qwest Network; Increasing Traffic Volume." Products. The Company markets the following products: . One Plus. This basic service offers customers the ability to make outbound long distance calls from any local telephone line by simply dialing a 1, plus the area code and phone number. Customers select the Company as their primary long distance provider by placing an order with it. This service may be used for both domestic and international calling. . 10XXX. This service allows the customer to access the Qwest Network by dialing 10056 plus 1, plus the area code and phone number, with no need to change their primary long distance provider. These customers are solicited through direct mailing and receive a sticker to place on their phones. . Dedicated Access Service. These lines are designed for larger users with enough traffic volume to warrant the use of a dedicated access line to originate calls. Instead of a switched access line that is shared by many users, this service uses a high capacity line that is used exclusively to connect between the end user and the long distance carrier's switch. This results in lower originating access cost and reduced rates to the user. . Toll Free 800/888. This inbound service, where the receiving party pays for the call, is accessed by dialing an 800/888 area code. This is used in a wide variety of applications, many of which generate revenue for the user (such as reservation centers or customer service centers). The Company plans to introduce additional enhanced features such as call routing by origination point, time of day routing and other premium, high-margin features in 1997. 41 . Calling Card. These traditional, basic telephone calling cards allow the user to place calls from anywhere in the United States or Canada. The Company offers additional higher margin features such as conference calling, international origination, information service access (such as weather or stock quotes), speed dialing and voice messaging. . Prepaid Card. Prepaid cards allow a customer to purchase and pay in advance for a card with a fixed amount of calling time. The card is then used as a standard calling card. Prepaid cards may be purchased with enhanced features similar to those of calling cards and also may be renewed by purchasing additional time. . International Callback. This service operates by allowing a customer in a foreign country to place a toll-free call to the U.S. and be "called back" by the Company's equipment. The Company charges a rate similar to that which the customer would pay if the call were originally initiated in the U.S., allowing the customer to take advantage of the fact that the rates for calling from the U.S. to many foreign destinations are lower than the cost of the same call if it were originated in the foreign country. . Media Express(TM). This is an exclusive switched digital broadband service that provides variable bandwidth for video communications and other data applications on demand and allows users to control all the required components of a video conference from a personal computer. Other services offered by Commercial Services include audio conferencing, operator services, directory assistance, special rate structures, custom services, special contract pricing and special local access arrangements in selected markets. In addition, the Company intends to develop and offer additional value-added services to its customers, particularly business customers, to differentiate the Company from its competitors and enhance Commercial Services' profit margins. The Company also is evaluating and intends to introduce in the future a variety of services specifically designed to capture a share of the growing data networking market. Customers. The Company is currently targeting businesses spending up to $1,000 per month on long distance and intends to expand this target segment in early 1998 to businesses spending from $2,000 to $10,000 per month on long distance. The strategy of Commercial Services is to develop a customer base in geographic proximity to the Qwest Network. NETWORK CONSTRUCTION SERVICES General. The Company's Network Construction Services operations commenced in 1988 with the construction of conduit systems for major interexchange carriers. Since then, Network Construction Services has served as the platform for the Company's expansion into Carrier Services and, since 1993, Commercial Services. Total revenue from Network Construction Services were approximately $139.2 million, $36.9 million and $11.9 million for the years ended 1996, 1995 and 1994, respectively. The Company has built for other carriers approximately 5,000 route miles of telecommunications conduit systems principally along railroad rights-of-way. Management believes that this experience and expertise create competitive advantages for the Company in the construction, ongoing maintenance and operation of the Qwest Network. Products. The principal product of Network Construction Services historically has been turn-key conduit systems built for other carriers. In most cases, while fulfilling customer contracts, the Company installed additional conduit that it retained for its own use. The Company is using its Network Construction Services resources to implement its strategic plan to complete the Qwest Network, in addition to providing Network Construction Services to third party customers along Qwest Network routes. Commencing in 1996, the Company began selling dark fiber to telecommunications entities to help fund development of the Qwest Network. In 1996, the Company's Network Construction Services 42 revenue was derived largely from two principal dark fiber sales contracts with Frontier and WorldCom. The Company expects that these two contracts will generate the majority of Network Construction Services revenue in 1997 and 1998. In addition, the Company expects to generate additional revenue through the sale of dark fiber along various segments of the Qwest Network to other carriers. Customers. Network Construction Services customers historically have been primarily interexchange carriers, as well as major LECs and other telecommunications companies. For the year ended December 31, 1996, WorldCom was the Company's largest single Network Construction Services customer, accounting for 27.8% of the Company's consolidated gross revenue, and Frontier accounted for 26.3% of the Company's consolidated gross revenue. No other customers accounted for more than 10% of consolidated gross revenue. For the year ended December 31, 1995, MCI was the Company's largest single customer, accounting for 35.4% of consolidated gross revenue. No other customer accounted for more than 10% of consolidated gross revenue in 1995. For the year ended December 31, 1994, WorldCom was the Company's largest single customer, accounting for 18% of consolidated gross revenue. No other customer accounted for more than 10% of consolidated gross revenue in 1994. SALES AND MARKETING The Company sells network dedicated and switched services to carriers through its carrier sales organization. This organization consists of senior level management personnel and experienced sales representatives with extensive knowledge of the industry and key contacts within the industry at various levels in the carrier organizations. Contacts are made through individual premises visits and at meetings of trade associations that serve large carriers. The Company also markets its construction services for dark fiber and conduit systems through its carrier sales organization. Contacts are made primarily through individual premises visits and at meetings of trade associations that serve large carriers. In Commercial Services, the Company currently solicits targeted businesses through telemarketing personnel and independent contractors and will establish a direct sales channel as it expands its targeted segment to higher volume users. Consumer customers currently are solicited by the Company through a combination of direct marketing and independent contractors. The Company plans to build on its Carrier Services experience to expand its presence in the Commercial Services market by creating a distinctive brand identity for "Qwest" and aggressively marketing its existing and planned voice, data and other transmission products and services. The Company plans to build direct end user relationships by developing strong distribution channels, providing competitive pricing and superior network quality and offering enhanced, market-driven services to businesses and consumers. COMPETITION There are currently four principal facilities-based long distance fiber optic networks. The Company is aware that others are planning additional networks that, if constructed, could employ similar advanced technology as the Qwest Network. Upon completion of the Qwest Network, Frontier will have a fiber network similar to that of the Company. Another competitor is constructing, and has already obtained a significant portion of the financing for, a fiber optic network. The scope and capacity of that competitor's network, as publicly announced, is less than that of the Company, and does not contain all of the advanced technologies designed for the Qwest Network, but nevertheless is expected to compete directly with the Qwest Network for many of the same customers along a significant portion of the same routes. The Company's competitors in Carrier Services include many large and small interexchange carriers. The Company's Carrier Services business competes primarily on the basis of pricing, transmission quality, reliability and customer service and support. Commercial Services has been and 43 expects to continue to be a provider of high quality, low cost service primarily to small- and medium-sized business customers and consumers. The Company intends to move into the market for higher volume business customers as the Qwest Network is completed and new products are introduced. In recent years the small- and medium-sized business market has experienced increased competition. The industry wide changes in technology and the effects of deregulation resulting from the Telecom Act of 1996 are likely to further increase competition. Many of the Company's competitors and potential competitors have financial, personnel and other resources substantially greater than those of the Company. See "Risk Factors--Competition" and "Industry Overview--Telecommunications Markets." In the future, the Company may be subject to additional competition due to the development of new technologies and increased supply of domestic and international transmission capacity. The telecommunications industry is in a period of rapid technological evolution, marked by the introduction of new product and service offerings and increasing satellite transmission capacity for services similar to those provided by the Company. The Company cannot predict which of many possible future product and service offerings will be important to maintain its competitive position or what expenditures will be required to develop and provide such products and services. High initial network cost and low marginal costs of carrying long distance traffic have led to a trend among nonfacilities-based carriers to consolidate in order to achieve economies of scale. Such consolidation could result in larger, better capitalized competitors. However, the Company believes that such competitors would also be stronger prospects as potential Carrier Services customers. The Company believes that its railroad rights-of-way offer a more secure route for the Qwest Network than other types of rights-of-way. There can be no assurance that competitors will not obtain rights to use railroad rights-of- way for expansion of their networks, although the Company believes that it would involve significant time and effort for competitors to assemble railroad rights-of-way comparable to those that the Company already has available for the Qwest Network. PROPERTIES The Qwest Network in progress and its component assets are the principal properties owned by the Company. The Company owns substantially all of the telecommunications equipment required for its business. The Company's installed fiber optic cable is laid under the various rights-of-way held by the Company. Other fixed assets are located at various leased locations in geographic areas served by the Company. The Company's executive, administrative and sales offices and its Network Management Center are located at its principal office in Denver, Colorado. Qwest leases this space from an affiliate of Anschutz Company at market rates under an agreement that expires in August 1999. The Company leases additional space in Dallas, Texas, housing the headquarters for operation of its Microwave System. In December 1995, the Company entered into an agreement (as amended in January 1997) with Ferrocarriles Nacionales de Mexico whereby the Company was granted easements for the construction of multiple conduit systems along railroad rights-of-way within Mexico for consideration of approximately $7.7 million, including $1.1 million in value-added taxes. The Company has capitalized total costs, including rights-of-way, equipment, construction and design costs, relating to this investment of approximately $13.0 million as of December 31, 1996. EMPLOYEES As of December 31, 1996, the Company employed approximately 720 employees of which 100 perform corporate and administrative services, 360 provide Network Construction Services, 80 provide Commercial Services, 10 provide Carrier Services, and 170 perform network engineering and related functions. The Company uses the services of independent contractors for installation and maintenance of portions of the Qwest Network. None of the Company's employees are currently represented by a collective bargaining agreement. The Company believes that its relations with its employees are good. 44 LEGAL PROCEEDINGS The Company and its subsidiaries are subject to various claims and proceedings in the ordinary course of business. Based on information currently available, the Company believes that none of such current claims or proceedings, individually or in the aggregate, will have a material adverse effect on the Company's financial condition or results of operations, although there can be no assurances in this regard. 45 REGULATION GENERAL REGULATORY ENVIRONMENT The Company's operations are subject to extensive federal and state regulation. Carrier Services and Commercial Services (but not Network Construction Services) are subject to the provisions of the Communications Act of 1934, as amended, including the Telecom Act of 1996, and the FCC regulations thereunder, as well as the applicable laws and regulations of the various states, including regulation by PUCs and other state agencies. Federal laws and FCC regulations apply to interstate telecommunications (including international telecommunications that originate or terminate in the United States), while state regulatory authorities have jurisdiction over telecommunications both originating and terminating within the state. The regulation of the telecommunications industry is changing rapidly, and the regulatory environment varies substantially from state to state. Moreover, as deregulation at the federal level occurs, some states are reassessing the level and scope of regulation that may be applicable to the Company. All of the Company's operations are also subject to a variety of environmental, safety, health and other governmental regulations. There can be no assurance that future regulatory, judicial and legislative changes will not have a material adverse effect on the Company, that domestic or international regulators or third parties will not raise material issues with regard to the Company's compliance or noncompliance with applicable regulations, or that regulatory activities will not have a material adverse effect on the Company. A recent federal legislative change, the Telecom Act of 1996, may have potentially significant effects on the operations of the Company. The Telecom Act of 1996, among other things, allows the RBOCs and the General Telephone Operating Companies to enter the long distance business, and enables other entities, including entities affiliated with power utilities and ventures between LECs and cable television companies, to provide an expanded range of telecommunications services. Entry of such companies into the long distance business would result in substantial competition to the Company's Commercial Services and Carrier Services customers, and may have a material adverse effect on the Company and such customers. However, the Company believes that the RBOCs' and other companies' participation in the market will provide opportunities for the Company to sell fiber or lease long distance high volume capacity. Under the Telecom Act of 1996, the RBOCs may immediately provide long distance service outside those states in which they provide local exchange service ("out-of-region" service) and long distance service within the regions in which they provide local exchange service ("in-region" service) upon meeting certain conditions. The General Telephone Operating Companies may enter the long distance market without regard to limitations by region. The Telecom Act of 1996 does, however, impose certain restrictions on, among others, the RBOCs and General Telephone Operating Companies in connection with their provision of long distance services. Out-of-region services by RBOCs are subject to receipt of any necessary state and/or federal regulatory approvals that are otherwise applicable to the provision of intrastate and/or interstate long distance service. In-region services by RBOCs are subject to specific FCC approval and satisfaction of other conditions, including a checklist of pro- competitive requirements. The RBOCs may provide long distance services only through separate subsidiaries with separate books and records, financing, management and employees, and all affiliate transactions must be conducted on an arm's length and nondiscriminatory basis. The RBOCs are also prohibited from jointly marketing local and long distance services, equipment and certain information services unless competitors are permitted to offer similar packages of local and long distance services in their market. Further, the RBOCs must obtain in-region long distance authority before jointly marketing local and long distance services in a particular state. Additionally, AT&T and other major carriers serving more than 5% of presubscribed long distance access lines in the United States are also restricted from packaging other long distance services and local services provided over RBOC facilities. The General Telephone Operating Companies are subject to the provisions of the Telecom Act of 1996 that impose interconnection and other 46 requirements on LECs. General Telephone Operating Companies providing long distance services must obtain regulatory approvals otherwise applicable to the provision of long distance services. FEDERAL REGULATION The FCC has classified QCC, the Company's principal operating subsidiary, as a non-dominant carrier. Generally, the FCC has chosen not to exercise its statutory power to closely regulate the charges, practices or classifications of non-dominant carriers. However, the FCC has the power to impose more stringent regulation requirements on the Company and to change its regulatory classification. In the current regulatory atmosphere, the Company believes that the FCC is unlikely to do so with respect to the Company's domestic service offerings. The FCC regulates many of the charges, practices and classifications of dominant carriers to a greater degree than non-dominant carriers. Among domestic carriers, large LECs and the RBOCs are currently considered dominant carriers for the provision of interstate access services, while all other interstate service providers are considered non-dominant carriers. In July 1996, the FCC ordered on an interim basis that the RBOCs offering out-of- region services be regulated as non-dominant carriers, provided such services are offered in compliance with the structural separation requirements mentioned above. AT&T was classified as a dominant carrier, but AT&T successfully petitioned the FCC for non-dominant status in the domestic interstate interexchange market in October 1995 and in the international market in May 1996. Therefore, certain pricing restrictions that once applied to AT&T have been eliminated. A number of parties have, however, sought the FCC's reconsideration of AT&T's status. The Company is unable to predict the outcome of these proceedings on its operations. As a non-dominant carrier, QCC may install and operate facilities for the transmission of domestic interstate communications without prior FCC authorization, so long as QCC obtains all necessary authorizations from the FCC for use of any radio frequencies. Non-dominant carriers are required to obtain prior FCC authorization to provide international telecommunications, and the Company has obtained such authorization for international switched resale services. The FCC also imposes prior approval requirements on certain transfers of control and assignments of operating authorizations. Non-dominant carriers are required to file periodic reports with the FCC concerning their interstate circuits and deployment of network facilities. The Company is required to offer its interstate services on a nondiscriminatory basis, at just and reasonable rates, and remains subject to FCC complaint procedures. While the FCC generally has chosen not to exercise direct oversight over cost justification or levels of charges for services of non-dominant carriers, the FCC acts upon complaints against such carriers for failure to comply with statutory obligations or with the FCC's rules, regulations and policies. The Company or any of its operating subsidiaries could be subject to legal actions seeking damages, assessment of monetary forfeitures and/or injunctive relief filed by any party claiming to have been injured by the Company's practices. The Company cannot predict either the likelihood of the filing of any such complaints or the results if filed. Under existing regulations, non-dominant carriers are required to file with the FCC tariffs listing the rates, terms and conditions of both interstate and international services provided by the carrier. Pursuant to such regulations, the Company has filed with the FCC a tariff for its interstate and international services. On October 29, 1996, the FCC adopted an order in which it eliminated, as of September 1997, the requirement that non-dominant interstate carriers such as the Company maintain tariffs on file with the FCC for domestic interstate services, although tariffs for international service must still be filed. Such carriers were given the option to cease filing tariffs during a nine-month transition period that concludes on September 22, 1997. The FCC's order was issued pursuant to authority granted to the FCC in the Telecom Act of 1996 to "forbear" from regulating any telecommunications service provider if the FCC determines that the public interest will be served. However, on February 19, 1997, the United States Court of Appeals for the District of Columbia Circuit 47 suspended the FCC's order pending further expedited judicial review. The Company cannot predict the ultimate outcome of this or other proceedings on its service offerings or operations. On December 24, 1996, the FCC initiated a proceeding to reform its system of interstate access charges to make that regime compatible with the pro- competitive deregulatory framework of the Telecom Act of 1996. Access service is the use of local exchange facilities for the origination and termination of interexchange communications. The FCC's current access charge rules were formulated largely in anticipation of the 1984 divestiture of AT&T and the emergence of long distance competition, and were designated to replace piecemeal arrangements for compensating LECs for use of their networks for access, to ensure that all long distance companies would be able to originate and terminate long distance traffic at just, reasonable, and non- discriminatory rates, and to ensure that access charge revenues would be sufficient to provide certain levels of subsidy to local exchange service. While there has been pressure on the FCC historically to revisit its access pricing rules, the Telecom Act of 1996 has made access reform timely. In the current inquiry, the FCC has proposed substantial changes to its rules and policies governing interstate access service pricing, modified certain aspects of its current access pricing rules, and commenced an inquiry into how to treat usage of the public switched network by information and Internet access providers (including, but not limited to, whether information and Internet services should be subject to access charges). Among other things, the FCC has outlined two possible approaches for addressing claims that existing access charge levels are excessive, for establishing a transition to access charges that more closely reflect economic costs, and for deregulating incumbent LEC exchange access services as competition develops in the local exchange and exchange access markets. Under a "market-based" approach the FCC would rely on potential and actual local exchange competition to drive prices for interstate access services toward economic cost and allow for the gradual relaxation and ultimate removal of the federal access rates structures. Under a "prescriptive" approach the FCC would specify the nature and timing of changes to existing access rate levels. Though the Company believes that access reform through lowering and/or eliminating excessive access service charges will have a marked effect on its service offerings and operations, it cannot predict how or when such benefits may present themselves. The Company's Microwave System subsidiary is subject to applicable FCC regulations for the use of radio frequencies. The FCC issues domestic microwave radio licenses for limited periods not to exceed 10 years. The Company must seek renewal of such licenses prior to their expiration. The Company knows of no facts that would result in the denial of any such renewals, although there can be no assurance in that regard. Although the FCC has never denied a microwave license application made by the Company, there can be no assurance that the Company will receive all authorizations or licenses necessary to implement its business plan or that delays in the licensing process will not adversely affect the Company's business. The Communications Act of 1934 limits the ownership by non-U.S. citizens, foreign corporations and foreign governments of an entity holding a common carrier radio license. These ownership restrictions apply to the Company's Microwave System but currently do not apply to non-radio facilities, such as fiber optic cable. The FCC recently adopted new rules relating to the participation of foreign entities or U.S. entities with foreign affiliates (generally an ownership interest greater than 25% or a controlling interest) in an entity holding a common carrier radio license or an entity holding U.S. international authority. Under those rules, the FCC will scrutinize an ownership interest greater than 25%, or a controlling interest at any level in a U.S. carrier by a foreign carrier, to determine whether the destination market of the foreign carrier offers "effective competitive opportunities" ("ECO"). The FCC imposes the same ECO test and affiliation standard on U.S. based carriers holding or applying for international authorization that invest in foreign carriers. The FCC may impose restrictions (including prohibition of the proposed participation or investment) on affiliated carriers not meeting the ECO test. The new rules also require international carriers to notify the FCC 60 days in advance of an acquisition of a 10% or greater interest by a foreign carrier in that U.S. carrier. The FCC has discretion 48 to determine that unique factors require application of the ECO test or a change in regulatory status of the U.S. carrier even though the foreign carrier's interest is less than 25%. These rules also reduce international tariff notice requirements for dominant, foreign-affiliated carriers from 45 days' notice to 14 days' notice. Such reduced tariff notice requirements may make it easier for dominant, foreign-affiliated carriers to compete with the Company. The Telecom Act of 1996 partially amends existing restrictions on foreign ownership of radio licenses by allowing corporations with non-U.S. citizen officers or directors to hold radio licenses. Other non-U.S. ownership restrictions, however, currently remain unchanged, but the U.S. has agreed in recent world trade negotiations to allow for a significant increase in permissible foreign investment, including 100% indirect foreign ownership of U.S. common carriers. The effect on the Company of the Telecom Act of 1996 or other new legislation, negotiations or regulations which may become applicable to the Company cannot be determined. INTERNATIONAL SETTLEMENTS Under the international settlement system, international long distance traffic is exchanged under bilateral correspondent agreements between facilities-based carriers in two countries. Correspondent agreements generally are three to five years in length and provide for the termination of traffic in, and return traffic to, the carriers' respective countries at a negotiated accounting rate, known as the Total Accounting Rate ("TAR"). In addition, correspondent agreements provide for network coordination and accounting and settlement procedures between the carriers. Both carriers are responsible for their own costs and expenses related to operating their respective halves of the end-to-end international connection. Settlement costs, which typically equal one-half of the TAR, are the fees owed to another international carrier for transporting traffic on its facilities. Settlement costs are reciprocal between each party to a correspondent agreement at a negotiated rate (which must be the same for all U.S. based carriers, unless the FCC approves an exception). For example, if a foreign carrier charges a U.S. carrier $0.30 per minute to terminate a call in the foreign country, the U.S. carrier would charge the foreign carrier the same $0.30 per minute to terminate a call in the United States. Additionally, the TAR is the same for all carriers transporting traffic into a particular country, but varies from country to country. The term "settlement costs" arises because carriers essentially pay each other on a net basis determined by the difference between inbound and outbound traffic between them. The difference in cost between providing domestic long distance and international service is minimal, and technical advances in facilities deployed for international calling are making distance largely irrelevant to cost. Increased worldwide competition has already brought about certain reductions in settlement rates and end user prices, thereby reducing overseas termination costs for United States based carriers. However, it is believed that certain foreign countries use settlement rates to subsidize their domestic call rates. As a result, domestic customers currently pay significantly more for an international call than they do for a domestic long distance call. The FCC has proposed measures intended to overhaul the system of international settlements, although such proposals have not yet been enacted and remain subject to modification or appeal to the courts or both. Additionally, recent worldwide trade negotiations may have a significant impact on settlement rates. The Company believes that the average cost of international telephone calls will be reduced, and anticipates further international opportunities will be created as a result of recent worldwide trade negotiations. On February 15, 1997, representatives of 70 countries, including the United States, finalized the World Trade Organization ("WTO") Basic Telecommunications Agreement ("WTO Agreement"), a compact addressing market access, investment and pro- competitive regulatory principles in areas currently generating over 95% of the world's telecommunications revenue. The WTO Agreement takes effect January 1, 1998. Among other things, the agreement provides U.S. companies market access for local, long distance and international service in 53 historically 49 monopolized countries through any means of network technology, either as a facilities-based provider or as a reseller of existing network capacity. The countries providing market access for telecommunications services as a result of the WTO Agreement account for 99% of the world's telecommunications revenue. Although some countries have reserved specific exceptions, the agreement generally ensures that U.S. companies may acquire, establish, or hold a significant stake in telecommunications companies around the world. Additionally, pro-competitive regulatory principles based largely upon the Telecom Act of 1996 were adopted by 65 countries within the WTO Agreement. U.S. companies will be able to enforce these principles, as well as the WTO Agreement's market access and investment commitments, at the WTO and through enabling legislation in the U.S. The Company expects to benefit from the anticipated effects of the WTO Agreement, but cannot predict where or when such opportunities may present themselves. STATE REGULATION The Company's intrastate long distance telecommunications operations are subject to various state laws and regulations including, in many jurisdictions, certification and tariff filing requirements. Generally, the Company must obtain and maintain certificates of authority from regulatory bodies in most states in which it offers intrastate services. In most of these jurisdictions the Company must also file and obtain prior regulatory approval of tariffs for its intrastate services. Certificates of authority can generally be conditioned, modified, canceled, terminated, or revoked by state regulatory authorities for failure to comply with state law and/or the rules, regulations, and policies of the state regulatory authorities. Fines and other penalties also may be imposed for such violations. The Company is currently authorized to provide intrastate services in 47 states, and has a pending application for authority to provide intrastate services in one additional state. The Company intends to have authority in all states where competition is allowed. Those states that permit the offering of intrastate/intra-LATA service by interexchange carriers generally require that end users desiring to use such services dial special access codes. Historically, this has put the Company at a competitive disadvantage compared with LECs whose customers can make intrastate/intra-LATA calls simply by dialing 1 plus the desired number. If a long distance carrier's customer attempts to make an intra-LATA call by simply dialing 1 plus the desired number, the call will be routed to and completed by the LEC. Regulatory agencies in a number of states have issued decisions that would permit the Company and other interexchange carriers to provide intra- LATA calling on a 1 + basis. Further, the Telecom Act of 1996 requires in most cases that the RBOCs provide such dialing parity coincident to their providing in-region inter-LATA services. The Company expects to benefit from the ability to offer 1 + intra-LATA services in states that allow this type of dialing parity. LOCAL REGULATION The Company is occasionally required to obtain street use and construction permits and licenses and/or franchises to install and expand its fiber optic network using municipal rights-of-way. Termination of the existing franchise or license agreements prior to their expiration dates or a failure to renew the franchise or license agreements and a requirement that the Company remove its facilities or abandon its network in place could have a material adverse effect on the Company. In some municipalities where the Company has installed or anticipates constructing networks, it will be required to pay license or franchise fees based on a percentage of gross revenue or on a per linear foot basis. There can be no assurance that, following the expiration of existing franchises, fees will remain at their current levels. In addition, the Company could be at a competitive disadvantage if its competitors do not pay the same level of fees as the Company. However, the Telecom Act of 1996 requires municipalities to manage public rights-of-way in a competitively neutral and non-discriminatory manner. 50 OTHER The Company monitors compliance with federal, state and local regulations governing the discharge and disposal of hazardous and environmentally sensitive materials, including the emission of electromagnetic radiation. The Company believes that it is in compliance with such regulations, although there can be no assurance that any such discharge, disposal or emission might not expose the Company to claims or actions that could have a material adverse effect on the Company. 51 MANAGEMENT DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of Qwest, their ages and positions with Qwest, and brief biographies are set forth below:
NAME AGE POSITION ---- --- -------- Philip F. Anschutz....... 57 Director and Chairman Joseph P. Nacchio........ 47 Director, President and Chief Executive Officer Robert S. Woodruff....... 48 Director, Executive Vice President--Finance and Chief Financial Officer and Treasurer Cannon Y. Harvey......... 56 Director Richard T. Liebhaber..... 62 Director Douglas L. Polson........ 55 Director Craig D. Slater.......... 39 Director Joseph T. Garrity........ 45 Secretary Richard L. Smith......... 36 Vice President and Controller
OTHER MANAGEMENT In addition, management of QCC includes the individuals set forth below:
NAME AGE POSITION ---- --- -------- Anthony J. Brodman...... 54 Senior Vice President--Strategy and Planning Stephen M. Jacobsen..... 38 Senior Vice President--Consumer Markets Daniel I. O'Callaghan... 53 Senior Vice President--Construction A. Dean Wandry.......... 56 Senior Vice President--New Business Development
Philip F. Anschutz has been a Director and the Chairman of the Board of Qwest since February 1997. He has been a Director and Chairman of the Board of QCC since November 1993. He has been a Director and Chairman of the Board of Anschutz Company ("AC"), Qwest's parent, for more than five years, and a Director and Chairman of the Board of The Anschutz Corporation ("TAC"), a wholly owned subsidiary of Anschutz Company, for more than five years. Since the merger of Southern Pacific Rail Corporation ("SPRC") and Union Pacific Corporation ("UP") in September 1996, Mr. Anschutz has served as Vice-Chairman of UP. Prior to the merger, Mr. Anschutz was a Director of SPRC from June 1988 to September 1996, Chairman of SPRC from October 1988 to September 1996, and President and Chief Executive Officer of SPRC from October 1988 to July 1993. Joseph P. Nacchio became Director, President and Chief Executive Officer of Qwest in February 1997, having been appointed to the same positions at QCC in January 1997. Prior to joining the Company he was Executive Vice President of AT&T Corp.'s ("AT&T") Consumer and Small Business Division since January 1996. In that capacity he was responsible for AT&T's core consumer long distance business, and AT&T's DirecTV, AT&T Alascom and Language Line businesses. He was also responsible for marketing and sales targeted at all consumer and small businesses in the United States. In 1994 and 1995 Mr. Nacchio was President of AT&T's Consumer Communications Services long distance, a winner of the Malcolm Baldrige National Quality Award for Excellence. From November 1991 until August 1994, Mr. Nacchio was President of AT&T's Business Communications Services unit focused on the long distance communications needs of business customers. Since joining AT&T in June 1970 he held assignments in network operations, engineering, marketing and sales. Mr. Nacchio earned an M.S. degree in management from the Massachusetts Institute of Technology in the Sloan Fellows Program. He also received an M.B.A. degree and a B.S. degree in electrical engineering, both from New York University. 52 Robert S. Woodruff became a Director and Executive Vice President--Finance and Chief Financial Officer of Qwest in February 1997. He has served as interim Chief Operating Officer of Qwest and QCC since November 1996. He has served as a Director of QCC since December 1996. He became Executive Vice President--Finance, Chief Financial Officer and Treasurer of QCC in August 1994. He serves as a Director of FSI Acquisition Corp., Government Communications Inc., Qwest Transmission Inc., Qwest Properties, Inc., and U.S. TeleSource, Inc., all of which are wholly owned subsidiaries of QCC. He is also Sole Administrator of QCC's Mexican subsidiaries, Opticom, S.A. de C.V., Servicios Derecho de Via, S.A. de C.V., and S.P. Servicios Mexico, S.A. de C.V. Prior to joining the Company he had been a partner in the accounting firm of Coopers & Lybrand since 1984, where his responsibilities included providing services to communications companies. Mr. Woodruff received a B.B.A. degree in accounting, with honors, from the University of Wisconsin. Cannon Y. Harvey has been a Director of Qwest since February 1997 and a Director of QCC since December 1996. He has been President and Chief Operating Officer of both AC and TAC since December 1996. From February 1995 until September 1996 he served as Executive Vice President--Finance and Law of SPRC; from September 1993 to February 1995 he served as Senior Vice President and General Counsel of SPRC; from May 1993 to September 1993 he served as Vice President--Finance and Law and General Counsel of SPRC. Prior to joining SPRC, Mr. Harvey was a Partner in the law firm of Holme Roberts & Owen LLP for more than five years. Richard T. Liebhaber has been a Director of Qwest since February 1997. He has been a Managing Director of Veronis, Suhler & Associates, Inc., the New York media merchant banking firm, since June 1, 1995. Mr. Liebhaber has been a member of the board of directors of Precision Systems, Inc. since June 21, 1995 and Chairman since June 13, 1996. He has also been a member of the board of directors of Objective Communications, Inc. since August 1994, the board of directors of Alcatel Network Systems, Inc. since June 1995, the board of directors of Geotek Communications, Inc. since April 1995, the board of directors of Advanced Network Services, Inc. (America OnLine, Inc.) since July 1996, and the board of directors of Scholz Master Builders since December 1985. From December 1985 to his retirement in May 1995, Mr. Liebhaber served as Executive Vice President of MCI Communications Corporation and as a member of its Management Committee. Mr. Liebhaber was a member of the board of directors of MCI Communications Corporation from July 1992 until his retirement in May 1995. Douglas L. Polson has been a Director of Qwest since February 1997 and a Director of QCC for more than five years. He has been a Director and Vice President--Finance of both AC and TAC for more than five years. He was a Director of SPRC from June 1988 to September 1996; Vice Chairman of SPRC from June 1988 to September 1996; and a Vice President of SPRC from October 1988 to September 1996. Craig D. Slater has been a Director of Qwest since February 1997 and a Director of QCC since November 1996. He has been Vice President--Acquisitions and Investments of both AC and TAC since August 1995 and Corporate Secretary of AC and TAC from September 1991 to October 1996. Mr. Slater held various other positions with AC and TAC from 1988 to 1995. He has been a Director of Forest Oil Corporation since 1995 and Internet Communications Corporation since 1996. Joseph T. Garrity has been Secretary of Qwest since February 1997 and Secretary of QCC since November 1996. He is also Senior Director--Legal, Regulatory and Legislative Affairs of QCC since November 1996 and was Director--Regulatory and Legislative Affairs of QCC from March 1995 to November 1996. Prior to joining the Company, from 1992 to March 1995, Mr. Garrity was Senior Attorney with MCI Telecommunications Corporation; and from 1991 to 1992 he was President of Garrity, Inc. and Joseph T. Garrity, P.C., where he was an attorney and consultant in the areas of domestic and international telecommunications. From 1988 to 1991 he was Counsel and Assistant 53 Secretary to Jones International, Ltd., Jones Intercable, Inc. and Jones Spacelink, Ltd. and from 1989 to 1991 was President, Jones Programming Services, Inc. He has B.S. and M.S. degrees from Northwestern University and a J.D. from DePaul University College of Law. Richard L. Smith became Vice President and Controller of Qwest in February 1997 and of QCC in October 1995. Prior to becoming Controller for QCC, he had been the Director of Financial Operations for QCC since November 1993. From 1989 through October 1993, Mr. Smith served as Vice President of Finance for Centrex Equipment Associates, Inc., an interconnect company. He was Controller of Convenience Video Movies, Inc., a national distribution company, from 1987 to 1989 and was a Senior Accountant with Coopers & Lybrand from 1983 to 1987. Mr. Smith received a B.S. degree in accounting from San Diego State University. Anthony J. Brodman joined QCC in 1989 and has been Senior Vice President-- Strategy and Planning since 1995. From 1994 to June 1995 he served as Vice President--Strategy, Planning and Public Relations and from 1989 to 1994 was Vice President--Sales and Marketing. Prior to joining QCC, he held senior level marketing and sales positions from 1973 to 1989 with Sprint. He has 11 years of experience in field and headquarters marketing positions with Pacific Telephone. Mr. Brodman holds a degree from DeAnza College and attended Northrop Institute of Technology and San Francisco State University. Stephen M. Jacobsen became Senior Vice President--Consumer Markets of QCC in March 1997. In this capacity, he is responsible for all of QCC's consumer marketing and sales programs. Prior to joining QCC, Mr. Jacobsen was Regional Vice President--Consumer and Small Business for AT&T in Southern California and Nevada since 1996, with responsibility for all marketing functions for consumer and small business customers in those geographic areas. During his nearly sixteen-year career at AT&T, Mr. Jacobsen held key managerial positions in the network services division, including responsibility for AT&T's network operations center in the western region as well as positions in sales, marketing and product management, Mr. Jacobsen holds an M.S. degree in management from the Massachusetts Institute of Technology in the Sloan Fellows Program and a B.S.B.A. degree from the University of Arizona. Daniel I. O'Callaghan became Senior Vice President--Construction for QCC in November 1994. From 1989 to September 1994 he was Vice President--Construction for QCC and from 1988 to 1989 he was Vice President--Operations for QCC. He has been with QCC since its inception. From 1964 to 1988 he was with Southern Pacific Lines and last served as Assistant Chief Engineer. He has extensive experience in construction, engineering, operations, facilities, planning and project management. He has the direct responsibility for managing all of QCC's fiber optic construction projects. Mr. O'Callaghan holds a B.S. degree in mathematics and physics from the University of San Francisco, a B.S. degree in engineering from Santa Clara University, and an M.B.A., with honors, from St. Mary's College. He is a professional civil engineer in Louisiana, Colorado and California, and is the qualified individual for the contractor's licenses of SP Construction Services in California, Arizona and Utah. A. Dean Wandry became Senior Vice President--Cable & Access Services for QCC in November 1994 and Senior Vice President--New Business Development for QCC in December 1995. In 1981 Mr. Wandry formed Citation Cable Systems Limited, which merged into Fanch Communications, Inc. in 1986. Following the merger, he served as Vice President--Operations until he joined QCC. He joined Bayly Corp., a multinational apparel manufacturer, in 1967 and served as President of the Sales and Marketing Division from 1977 to 1981. He holds a B.S. degree in economics from the University of Colorado. EXECUTIVE COMPENSATION The following table summarizes the compensation paid or accrued to Qwest's chief executive officer and four other most highly compensated executive officers of Qwest and its operating 54 subsidiaries (the "Named Executives") during the fiscal years ended December 31, 1996, 1995, and 1994. The position identified in the table for each person is that person's current position at Qwest unless otherwise indicated. Mr. Joseph P. Nacchio became President and Chief Executive Officer of Qwest effective January 4, 1997. His employment agreement is described below the table. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION -------------------------------- OTHER ANNUAL ALL OTHER NAME/PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION COMPENSATION - ----------------------- ---- -------- ------- ------------ ------------ Robert S. Woodruff, Interim Chief 1996 $182,200 $25,000 $ -- $ 5,466(1) Operating Officer, Ex- ecutive Vice 1995 167,766 16,500 -- 1,671 President--Finance and Chief Financial Officer and Treasurer 1994 65,683(2) -- -- -- Anthony Brodman, Senior Vice 1996 152,333 30,000 -- 7,945(1) President--Strategy and 1995 130,270 11,634 15,752(3) 7,163 Planning (QCC) 1994 112,140 -- 2,083(3) 62,602 A. Dean Wandry, Senior Vice 1996 148,300 30,000 -- 7,725(1) President--New Business 1995 141,866 14,000 -- 2,310 Development (QCC) 1994 45,141(4) -- -- -- Joseph DePetro, Vice President-- 1996 130,083 -- 48,337(5) 7,203(1) Sales and Marketing (QCC) 1995 120,000 -- 45,634(3) 6,712 1994 99,897 -- 50,403(6) 62,313 Douglas H. Hanson, 1996 193,557 -- -- 128,420(8) former President and Chief Executive 1995 200,040 20,004 -- 8,240 Officer (QCC)(7) 1994 195,865 -- -- 79,001 Peter R. Geddis, former Executive 1996 157,150 -- -- 24,147(10) Vice President (QCC) (9) 1995 188,127 18,504 239,680(11) 9,738 1994 180,865 -- 239,680(11) 75,000
- -------- (1) The amount shown represents QCC's contribution to QCC's 401(k) plan. (2) Mr. Woodruff began his employment with QCC in August 1994 and amounts disclosed for Mr. Woodruff for 1994 represent compensation paid after that date. (3) The amount shown represents commissions. (4) Mr. Wandry began his employment with QCC in August 1994 and amounts disclosed for Mr. Wandry for 1994 represent compensation paid after that date. (5) The amount shown represents commissions. In August 1996, QCC extended a loan to Mr. DePetro in the principal amount of $31,850 with interest at 5% per year and secured by a deed of trust on his principal residence. The principal amount is forgiven in annual increments of $7,963 on December 31, 1996 through 1999. Mr. DePetro pays interest on the outstanding principal balance on the first day of each month. If Mr. DePetro terminates his employment voluntarily or if QCC terminates his employment on account of wilful misconduct, QCC may declare the then outstanding principal amount and accrued interest due and payable within 45 days after he terminates employment. If his employment terminates for any other reason, the outstanding principal balance will be forgiven. (6) The amount shown represents commissions ($38,577) and QCC's forgiveness of a portion of a loan ($11,826). (7) Mr. Hanson resigned his position effective November 11, 1996. In connection with his termination, Qwest and Mr. Hanson entered into a severance agreement that is described under "--Employment Contracts and Termination of Employment and Change-in-Control Arrangements," below. (8) The amount shown represents QCC's contribution to QCC's 401(k) Plan ($9,000) and a payment for accrued but unused vacation ($119,420). For a description of the severance payments paid or payable to Mr. Hanson, see "--Employment Contracts and Termination of Employment and Change-In- Control Arrangements," below. (9) Mr. Geddis terminated employment as an executive officer effective July 1, 1996. He continued to perform services for QCC on a reduced-time basis through December 31, 1996. (10) The amount shown represents QCC's contribution to QCC's 401(k) Plan ($9,215) and QCC's payment for accrued but unused vacation time ($14,932) upon his termination of employment. In January 1997, QCC paid Mr. Geddis the sum of $450,000 in full satisfaction of Mr. Geddis' interest in the Growth Share Plan, which is described below. (11) The amount shown represents QCC's forgiveness of a loan. 55 CEO EMPLOYMENT AGREEMENT Qwest and Joseph P. Nacchio entered into an employment agreement dated as of December 21, 1996 and amended as of January 3, 1997, pursuant to which Mr. Nacchio joined Qwest as its President and Chief Executive Officer effective January 4, 1997 for a term through the close of business on December 31, 2001, unless terminated earlier by either party. The agreement provides for an annual base salary of $600,000, a $300,000 bonus for 1997, and, unless Qwest makes an initial public offering of its stock in 1998, a $300,000 bonus for 1998. Mr. Nacchio may participate in the employee benefit plans available to Qwest's senior executives according to the plans' terms and conditions. Under the agreement, Mr. Nacchio will be granted 300,000 growth shares under Qwest's Growth Share Plan, with a five year performance cycle commencing January 1, 1997 and a "beginning company value" of $1 billion. See "--Growth Share Plan." The agreement provides generally that the growth shares will vest in 20% increments on each January 1 beginning January 1, 1998. The agreement also provides that in order to compensate Mr. Nacchio for certain benefits from his former employer, AT&T, that Mr. Nacchio may lose or forfeit as a result of his termination of employment and commencement of employment with Qwest, Qwest will pay him $11,300,000 ("equalization payment"), subject to reduction if Mr. Nacchio retains, or receives a substitute payment for, any of the benefits he had expected to forfeit, and subject to adjustment based on AT&T's stock price. The equalization payment is to be made in three installments. The first installment of $7,232,000 (64% of the total payment) has been paid. The remaining two installments of 18% each are scheduled to be paid on each of January 1, 1998 and 1999, with annual interest at the rate of 5% from January 7, 1997 to the date of payment. If Mr. Nacchio's employment is terminated for cause (including any willful misconduct materially detrimental to the Company, felony conviction, or nonfeasance with respect to duties set forth in the employment agreement) on or before December 31, 1999, the agreement provides that he will repay to Qwest a portion of the equalization payment previously paid. If a termination for cause occurs after December 31, 1999, the equalization payment will not be repaid. If Qwest terminates Mr. Nacchio's employment other than for cause or if Mr. Nacchio resigns following a reduction in his title or responsibility, or if there is a change in control of Qwest or certain other events, Qwest will be obligated to make certain payments to him, including an amount equal to two times his base salary at the rate in effect on the date of employment termination. For this purpose, "change in control" means the acquisition of 20 percent or more of Qwest by an individual, entity (not controlled by Philip F. Anschutz) or group if the new acquirors own a larger percentage of Qwest than entities controlled by Philip F. Anschutz. The agreement provides that if Mr. Nacchio receives any payments upon a change in control that are subject to the excise tax of section 4999 of the Internal Revenue Code, Qwest will pay Mr. Nacchio an amount that reimburses him in full for the excise tax. GROWTH SHARE PLAN The Plan was originally adopted by QCC effective November 1, 1993. Qwest adopted, assumed, and continued the Plan, effective May 1, 1996. The Plan was amended and restated in its entirety, effective October 1, 1996. The Plan provides for the grant of "growth shares" to selected employees and directors of Qwest and certain affiliates who can significantly affect the long-term financial success of Qwest. Growth share grants may include additional or different terms and conditions from those described herein. A "growth share" is a unit of value based on the increase in value of Qwest over a specified performance cycle or other specified measuring period. The value of a growth share is generally equal to (1) the value of Qwest at or near the date of a "triggering event," as defined below, minus (2) the value of Qwest as of a date determined by Qwest's board of directors in its sole discretion at the time of grant of a growth share ("beginning company value"), minus (3) the value of contributions to capital during the period beginning with the date as of which Qwest's value for purposes of the growth share's grant is determined and ending with the date as of which the value of the growth share is determined (the "measuring period") together with an amount equal to 9% of each such contribution made by entities controlled by Philip F. Anschutz, compounded annually, plus (4) dividends paid during the measuring period, divided by (5) 10 million (the total number of growth 56 shares). The value of Qwest as of the last day of the measuring period is determined by independent appraisal; provided that if all classes of Qwest's equity securities are publicly traded and Qwest is subject to the reporting and disclosure rules of the Securities Exchange Act, the value of Qwest will be based on the trading price of the equity securities over the 20 consecutive trading days ending on the last day of the measuring period. Payment for growth shares is generally made at the end of the performance cycle; however, the Plan provides that the outstanding growth shares will be valued and payment will be made upon the termination of the Plan or a "change in control" (defined below), which are referred to as "triggering events". In the case of payments made other than at the end of a performance cycle, Qwest is valued as of the last day of the month following the triggering event, in the case of Plan termination, and immediately after the date of the change in control, in the case of a change in control. Generally, payment is made in a single cash payment or in shares of Qwest's common stock, as determined by the board, although Qwest may elect to pay in two equal annual installments, the first installment to be made within 30 days after the growth shares are valued and the second installment to be made one year later with interest at the consolidated prime rate published in The Wall Street Journal. Payment will be made in shares of Qwest's common stock if Qwest's common stock is actively traded on an established securities market, and Qwest is subject to the reporting and disclosure requirements of the Exchange Act. The Plan provides that no more than 850,000 of the 10 million growth shares will be outstanding at one time. Growth shares generally vest at 20% for each full year of service after the date of grant. Participants become fully vested in their outstanding growth shares at death, disability or retirement after age 65. If a participant is terminated for cause, he or she will forfeit all vested growth shares. A participant who voluntarily terminates employment will forfeit 25% of his or her vested growth shares. Different vesting arrangements may apply to different participants. A participant who is not 100% vested at the date of a triggering event will be paid for the vested growth shares; however, 25% of the payment will be withheld and will be forfeited if the participant voluntarily terminates employment. Payment will be made for the unvested growth shares if and when they vest. Upon a "change of control" of Qwest, the outstanding growth shares will become fully vested. For this purpose, "change of control" is defined as either (A) the acquisition by any individual, entity or group (as defined in the Exchange Act), other than Anschutz Company, The Anschutz Corporation, or any entity controlled by Philip F. Anschutz ("Anschutz Entities"), of beneficial ownership of 20% or more of either (1) the then-outstanding shares of Common Stock or (2) the combined voting power of the then-outstanding voting securities of Qwest entitled to vote generally in the election of directors and the beneficial ownership of the individual, entity or group exceeds the beneficial ownership of the Anschutz Entities or (B) the Anschutz Entities no longer have beneficial ownership of at least 20% of Qwest's common stock or 20% of the combined voting power. The amended and restated Plan provides that growth shares granted prior to October 1, 1996, remain subject to the terms and conditions of the Plan that were in effect when the growth shares were granted, unless otherwise agreed in writing by the Participant and Qwest. A total of 253,900 outstanding growth shares were granted under prior versions of the Plan (the "Prior Plan"). Those growth shares will become 100% vested (if not previously vested) upon completion of the Offerings and completion of the Offerings will constitute a triggering event with respect to those growth shares, resulting in payment by Qwest to the holders of the value of those growth shares. Under the Prior Plan, in the event of an initial public offering of Qwest's stock, payment may be made either in cash or in shares of Common Stock, as determined in the sole discretion of Qwest. Under the Prior Plan, a change in control will occur if more than 50% of the Common Stock is transferred, there is a merger and the Anschutz Entities have less than 50% control, or management control of Qwest is lost by Phillip F. Anschutz or the Anschutz Entities. If a Participant is not 100% vested in growth shares granted under the Prior Plan at the end of a performance cycle, the Participant will be paid for the vested growth shares at the earlier of the 57 time the growth shares become 100% vested or at termination of employment. With respect to growth shares granted prior to May 1, 1996, payment is made as the growth shares vest. Unvested growth shares are forfeited. The Prior Plan provided that if a Participant's employment is terminated within 12 months after the sale of a division or the assets with which the Participant was employed, the Participant's growth shares will be vested at least 20%. In addition, the Prior Plan provides that if, within 18 months after the end of a performance cycle or the termination of the Plan with respect to which the Participant received payment for growth shares, there is a change in control or public offering that results in a material increase in the value of Qwest, the Participant is entitled to receive an additional payment to reflect the increase in value. The first growth shares were granted as of November 1, 1993. As of April 15, 1997, a total of 631,900 growth shares had been granted and were outstanding. The following table shows the growth shares that were granted to the named executive officers prior to 1996. All of the growth shares have a measuring period commencing November 1, 1993, a performance cycle commencing November 1, 1993 and ending November 1, 1998, and a beginning company value of $50 million. All of the growth shares vest in annual 20% increments; the first annual increment vested on the date shown in the table.
INITIAL GRANT NUMBER OF VESTING NAME DATE GROWTH SHARES DATE ---- ------- ------------- ------- Robert Woodruff................................ 8/8/94 40,000 8/8/95 Anthony Brodman................................ 11/1/93 25,000 11/1/94 A. Dean Wandry................................. 9/6/94 35,000 11/1/95 Joseph DePetro................................. 11/1/93 25,000 11/1/94
Messrs, Slater, Polson, and Liebhaber, directors of Qwest, have each been granted a total of 20,000, 7,500, and 10,000 growth shares, respectively. The following table shows the growth shares granted in 1996 to the named individuals in the Summary Compensation Table: LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
NUMBER OF NAME GROWTH SHARES PERFORMANCE PERIOD ---- ------------- ------------------ Anthony Brodman............................. 2,500 January 1, 1997 to December 31, 2001
The growth shares were granted as of October 1, 1996 and will vest in annual increments of 20% on each October 1, beginning October 1, 1997. The growth shares have a measuring period commencing November 1, 1993 and a beginning company value of $50 million. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS. The employment agreement, which includes provision for a payment upon a change in control, between Qwest and Joseph P. Nacchio is described under "-- CEO Employment Agreement," above. QCC and Robert S. Woodruff entered into a letter agreement in July 1994 that provides for Mr. Woodruff's employment as Executive Vice President--Finance and Chief Financial Officer and Treasurer for an indefinite term. The agreement provides for an annual base salary of $165,000 and provides that Mr. Woodruff will participate in QCC's annual bonus plan with a bonus payout potential of up to 30% of base salary, in the Growth Share Plan, and in QCC's other employee benefit plans according to their terms and conditions. Future increases in compensation are at QCC's discretion. In 58 November 1996 QCC extended Mr. Woodruff an unsecured, noninterest-bearing loan in the principal amount of $100,000. The principal amount is forgiven in monthly increments of $2,083 beginning December 1, 1996. If Mr. Woodruff terminates employment voluntarily or if QCC terminates his employment on account of willful misconduct, QCC may declare the unforgiven outstanding principal amount due and payable within 45 days after the date he terminates employment. If Mr. Woodruff's employment terminates for any other reason, the outstanding principal balance will be forgiven. In December 1996, Mr. Woodruff's letter agreement was amended to provide that if his employment is terminated for reasons other than willful misconduct, he will receive either a lump sum payment equal to one year's compensation at his then current rate or payment in accordance with QCC's severance policy then in effect, as he elects. Douglas H. Hanson resigned his position as President and Chief Executive Officer of QCC effective as of November 11, 1996. QCC, The Anschutz Corporation, Anschutz Company, and Mr. Hanson entered into an agreement (the "Agreement") to provide for Mr. Hanson's termination. Pursuant to the Agreement, QCC will pay Mr. Hanson $9,000,000, payable in three equal installments. The first installment was paid January 2, 1997; the two remaining installments are scheduled to be paid on January 2, 1998 and 1999 with accrued interest at the annual rate of 6%. Anschutz Company, Qwest's parent, unconditionally guaranteed these payments. The Agreement provides that QCC will continue Mr. Hanson's health, disability or life insurance coverage, or provide comparable coverage through November 10, 1997 unless Mr. Hanson obtains such coverage from any other source before November 10, 1997, and that QCC will transfer to Mr. Hanson his home office computer, facsimile machine and copying machine. As described above in the Summary Compensation Table, QCC paid Mr. Hanson for his accrued but unused vacation time. The Anschutz Corporation agreed to forgive the $1,000,000 outstanding amount that Mr. Hanson owed pursuant to a promissory note in favor of The Anschutz Corporation and to release the mortgage and deed of trust securing the promissory note. Mr. Hanson agreed that for a period of 36 months he will not compete with QCC by owning, operating, consulting for, or being connected in any way with any business that competes with QCC in the construction or sale of fiber optic systems or by soliciting or contacting QCC's customers or any person identified as a QCC customer within twelve months before the Agreement was signed. However, Mr. Hanson, together with his wife, children, and parents may own up to 5% of the stock of a corporation that is a direct competitor of QCC in the construction and sale of fiber optic cable systems. Mr. Hanson agreed not to disclose any confidential information in connection with the construction and sale of fiber optic cable systems for a period of 36 months and not to disclose any other confidential information that would adversely affect QCC or its business for six months, in both cases without QCC's prior written permission, which QCC may withhold in its reasonable discretion. The Agreement provides for Mr. Hanson's release of all rights under the Growth Share Plan, see "--Growth Share Plan," above, and for the parties' mutual releases of all claims for acts or omissions prior to the date of the Agreement. The Growth Share Plan provides that, upon a change in control, the outstanding growth shares will become fully vested. See "--Growth Share Plan," above. DIRECTOR COMPENSATION Directors who are officers or employees of Qwest or any of its affiliates do not receive compensation, except as officers or employees of Qwest or its affiliates. Mr. Liebhaber has a consulting agreement with QCC that is described under "Certain Transactions." The consulting agreement provides that he will be paid an annual retainer fee of $250,000 plus reimbursement for out-of-pocket expenses not to exceed $10,000 without QCC's prior approval. Mr. Liebhaber agreed to waive director's fees in consideration for these payments. 59 COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Company did not have a Compensation Committee during 1996. The Chairman performed the functions of a Compensation Committee with respect to determining compensation of senior executive officers of Qwest and QCC. In December 1996, the board of directors of the Company's predecessor company created a Compensation Committee and appointed Philip F. Anschutz and Cannon Y. Harvey to serve on the committee. The Compensation Committee determines the salaries, cash bonuses, and fringe benefits of the executive officers, reviews the salary administration and benefit policies of the Company and administers the Growth Share Plan. Mr. Anschutz is a Director and Chairman of Qwest, a Director of QCC, a Director and Chairman of Anschutz Company, Qwest's parent, and a Director and Chairman of The Anschutz Corporation, a subsidiary of Anschutz Company. Mr. Harvey is a Director of Qwest and QCC and President and Chief Operating Officer of Anschutz Company and The Anschutz Corporation. PRINCIPAL STOCKHOLDER The Company is wholly owned directly by Anschutz Company, a Delaware corporation, of which Mr. Philip F. Anschutz is the direct, sole owner. Upon consummation of the Offerings, assuming no exercise of the over-allotment option by the Underwriters, Mr. Anschutz will be the beneficial owner of % of the outstanding shares of Common Stock. Mr. Anschutz is a Director and Chairman of the Board of Qwest. Anschutz Company has granted an option to Anschutz Family Investment Company LLC, an affiliate of Anschutz Company, to purchase approximately 5.0% of the shares of Common Stock of Qwest currently owned by Anschutz Company. Anschutz Company has granted or expects to grant from time to time security interests in all or part of its shares of the Common Stock in connection with transactions entered into by it or its affiliates. Although not anticipated, under certain circumstances, shares of Common Stock could be sold pursuant to such security interests, which could result in a change of control of the Company for purposes of Delaware law. CERTAIN TRANSACTIONS The Company has easement agreements with certain railroads owned by Union Pacific Corporation ("Union Pacific") arising from the 1996 merger between a subsidiary of Union Pacific and Southern Pacific Rail Corporation ("Southern Pacific"). The Company's sole beneficial owner, Mr. Philip F. Anschutz, was the principal stockholder of Southern Pacific prior to the merger and is the largest shareholder (holding approximately 5.2%) of Union Pacific. The easement agreements provide for payment by the Company to Southern Pacific of specified amounts based on miles of conduit used by the Company or sold to third parties. The amounts paid by the Company to Southern Pacific under these easement agreements for the years 1996, 1995 and 1994 and to reimburse Southern Pacific for expenses related to the construction, operation and maintenance of the Company's fiber optic system were approximately $3.5 million, $2.2 million and $0.9 million, respectively. In October and November 1996, Union Pacific entered into agreements with the Company to survey, construct and operate a fiber optic telecommunications system on Union Pacific rights-of-way between Alazon, Nevada and Salt Lake City, Utah. Fees paid or accrued by the Company during 1996 pursuant to these agreements totaled $0.9 million. Southern Pacific performed certain administrative functions for the Company for which it charged the Company approximately $0.1 million for 1994. Charges to the Company were not material in amount for each of the years 1996 and 1995. The Company provides telecommunications services to Southern Pacific. For these services, Southern Pacific paid the Company $1.6 million, $3.6 million and $3.4 million in the years 1996, 1995 and 1994, respectively. 60 Certain affiliates of Anschutz Company indirectly provide facilities to the Company at prevailing market rates. The Company rents its corporate office in Denver, Colorado from a limited partnership in which Mr. Anschutz serves as a general partner and indirectly holds limited partner interests and rents certain telecommunications equipment used by the Company at its corporate office from an affiliate of Anschutz Company. Such expenses totaled $1.2 million and $1.0 million in the years ended December 31, 1996 and 1995, respectively, and were not material in amount in 1994. Affiliates of Anschutz Company incur certain costs on the Company's behalf, including primarily insurance and corporate transportation services, and allocate such costs to the Company based on actual usage. The cost to the Company for such services was approximately $2.1 million and $2.5 million for the years ended December 31, 1996 and 1995, respectively, and was not material in 1994. The Company historically has received capital contributions and noninterest- bearing advances from Anschutz Company and an affiliate of Anschutz Company to fund operations. The Company received capital contributions from Anschutz Company of $28.0 million and $20.9 million in 1995 and 1994, respectively. Neither Anschutz Company nor any of its affiliates made cash capital contributions to the Company during 1996. Outstanding advances totaled $19.1 million at December 31, 1996 and currently total approximately $28.0 million, all of which will be paid with a portion of the proceeds of the Offerings. The Company has a tax sharing agreement with Anschutz Company that provides for the allocation of tax liabilities and benefits. In general, the agreement requires the Company to pay to Anschutz Company the applicable income taxes for which the Company would be liable if it filed a separate return and requires Anschutz Company to pay the Company for losses or credits which would have resulted in a refund of taxes as if the Company had filed a separate return. The payments under the agreement may be made in the form of cash, setoffs, contributions to capital, dividends, notes or any combination of the foregoing. The tax benefits payable to the Company under the existing agreement through December 31, 1996 ($11.1 million) were forgiven. The ABN AMRO $100.0 million revolving credit facility and $50.0 million line of credit are collateralized by shares owned and pledged by an affiliate of Anschutz Company. For a description of these facilities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources" and "Description of Certain Indebtedness." Anschutz Company has guaranteed equipment loans of QCC with an aggregate outstanding balance at December 31, 1996 of approximately $5.4 million and a QCC construction loan with an outstanding balance of approximately $26.0 million. The construction loan pertains to a network construction project undertaken by QCC for an interexchange carrier. The guarantee is limited to indemnification against defective construction, warranty or other claims of the interchange carrier that would reduce or eliminate the interexchange carrier's obligation to pay QCC. In addition, Anschutz Company has guaranteed bonds furnished by the Company to support its construction obligations under the Frontier contract for sale of dark fiber. See "Business--The Qwest Network-- Dark Fiber and High Volume Capacity Sales." The Company has agreed to indemnify Anschutz Company and its subsidiaries against any cost or losses incurred by any of them as a result of their providing credit support to the Company (in the form of collateral pledges, guarantees, bonds or otherwise). Richard T. Liebhaber, a Director of the Company, entered into a consulting agreement with an affiliate of Anschutz Company in December 1996 to provide consulting services in 1997 and serve on the board of directors of Qwest and its subsidiaries upon request. The agreement was assigned to the Company in February 1997. Mr. Liebhaber is required under the contract to provide a minimum of 30 days of consulting services to QCC during 1997 and will be paid $250,000 plus out-of-pocket expenses not to exceed $10,000. Mr. Liebhaber, was granted 10,000 growth shares, effective December 1, 1996, with a performance cycle ending December 31, 2001. See "Management--Growth Share Plan." 61 DESCRIPTION OF CAPITAL STOCK The following summary description of the capital stock of the Company does not purport to be complete and is subject to the provisions of the Certificate of Incorporation and By-laws, which are included as exhibits to the Registration Statement of which this Prospectus forms a part and by the provisions of applicable law. AUTHORIZED AND OUTSTANDING CAPITAL STOCK Pursuant to the Certificate of Incorporation, the Company has authority to issue shares of capital stock, consisting of shares of Common Stock, par value $.01 per share, and shares of Preferred Stock, par value $ per share ("Preferred Stock"). As of December 31, 1996, the Common Stock was held solely by Anschutz Company. As of December 31, 1996, shares of Common Stock and no shares of Preferred Stock were issued and outstanding. The rights of the holders of Common Stock discussed below are subject to such rights as the Board may hereafter confer on the holders of Preferred Stock; accordingly, rights conferred on holders of Preferred Stock that may be issued in the future under the Certificate of Incorporation may adversely affect the rights of the holders of Common Stock. COMMON STOCK Voting Rights. Each holder of the Common Stock shall be entitled to attend all special and annual meetings of the stockholders of the Company and, together with the holders of all other classes of stock entitled to attend and vote at such meetings, to vote upon any matter or thing (including, without limitation, the election of one or more directors) properly considered and acted upon by the stockholders. Holders of the Common Stock are entitled to one vote per share. Liquidation Rights. In the event of any dissolution, liquidation or winding up of the Company, whether voluntary or involuntary, the holders of the Common Stock and holders of any class or series of stock entitled to participate therewith, shall become entitled to participate in the distribution of any assets of the Company remaining after the Company shall have paid, or provided for payment of, all debts and liabilities of the Company and after the Company shall have paid, or set aside for payment, to the holders of any class of stock having preference over the Common Stock in the event of dissolution, liquidation or winding up the full preferential amounts (if any) to which they are entitled. Dividends. Dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith when and as declared by the Board. See "Dividend Policy." AUTHORIZED PREFERRED STOCK The Certificate of Incorporation authorizes the Board, from time to time and without further stockholder action, to provide for the issuance of up to shares of Preferred Stock, par value $ per share, in one or more series, and to fix the relative rights and preferences of the shares, including voting powers, dividend rights, liquidation preferences, redemption rights and conversion privileges. As of the date hereof, the Board has not provided for the issuance of any series of such Preferred Stock and there are no agreements or understandings for the issuance of any such Preferred Stock. Through its broad discretion with respect to the creation and issuance of Preferred Stock without stockholder approval, the Board could adversely affect the voting power of the holders of Common Stock and, by issuing shares of Preferred Stock with certain voting, conversion or redemption rights or all of them, could discourage any attempt to obtain control of the Company. 62 CERTAIN CHARTER AND STATUTORY PROVISIONS The Company's Certificate of Incorporation and By-laws include certain provisions that may have the effect of delaying, deterring or preventing a future takeover or change in control of the Company unless such takeover or change in control is approved by the Company's Board of Directors. See "Risk Factors--Anti-Takeover Provisions." The Company's Certificate of Incorporation places certain restrictions on who may call a special meeting of stockholders. In addition, the Company's Board of Directors has the authority to issue up to shares of Preferred Stock and to determine the price, rights, preferences, and privileges of those shares without any further vote or actions by the stockholders. The rights of the holders of Common Stock will be subject to, and may be adversely affected by, the rights of the holders of any Preferred Stock that may be issued in the future. The issuance of such shares of Preferred Stock, while potentially providing desirable flexibility in connection with possible acquisitions and serving other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or may discourage a third party from attempting to acquire, a majority of the outstanding voting stock of the Company. The Company has no present intention to issue such shares of Preferred Stock. The Company is subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, the statute prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless (i) prior to such date, the board approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder, (ii) upon consummation of the transaction that resulted in such person becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced (excluding, for purposes of determining the number of shares outstanding, shares owned by certain directors or certain employee stock plans), or (iii) on or after the date the stockholder became an interested stockholder, the business combination is approved by the board of directors and authorized by the affirmative vote (and not by written consent) of at least two-thirds of the outstanding voting stock excluding that stock owned by the interested stockholder. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to the interested stockholder. An "interested stockholder" is a person who (other than the corporation and any direct or indirect majority-owned subsidiary of the corporation), together with affiliates and associates, owns (or, as an affiliate or associate, within three years prior, did own) 15% or more of the corporation's outstanding voting stock. The application of Section 203 could have the effect of delaying or preventing a change of control of the Company. The Certificate of Incorporation limits the ability of stockholders that are aliens to vote for Directors to a vote for not more than the maximum percentage of Directors permitted under the Communications Act of 1934. For purposes of this restriction, the term "alien" means aliens and their representatives, foreign governments and their representatives and corporations organized under the laws of a foreign country. Under the Communications Act of 1934, non-U.S. citizens or their representatives, foreign governments or their representatives, or corporations organized under the laws of a foreign country may not own, in the aggregate, more than 20% of a common carrier radio licensee or more than 25% of the parent of a common carrier radio licensee if the FCC determines that the public interest would be served by prohibiting such ownership. Additionally, the FCC's rules may under certain conditions limit the size of investments by foreign telecommunications carriers in U.S. international carriers. See "Business--Regulation." Certain provisions of the Company's By-laws may have the effect of delaying or preventing changes in control or management of the Company. See "Risk Factors--Anti-Takeover Provisions." 63 TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for the Common Stock is . SHARES ELIGIBLE FOR FUTURE SALE Prior to the Offerings, there has been no public market for the Common Stock. Sales of a substantial amount of Common Stock in the public market, or the perception that such sales may occur, could adversely affect the market price of the Common Stock prevailing from time to time in the public market and could impair the Company's ability to raise additional capital through the sale of its equity securities in the future. Upon completion of the Offerings, the Company will have approximately shares of Common Stock outstanding, including Shares offered hereby and "restricted" shares of Common Stock. Of these restricted shares, shares of Common Stock generally are currently eligible for sale under Rule 144 as currently in effect, and shares of Common Stock generally will be eligible for sale under Rule 144 as currently in effect beginning in through . The Shares offered hereby will be freely tradable without restriction or further registration under the Securities Act by persons other than "affiliates" of the Company within the meaning of Rule 144 promulgated under the Securities Act. The holders of restricted shares generally will be entitled to sell these shares in the public securities market without registration under the Securities Act to the extent permitted by Rule 144 (or Rule 145, as applicable) promulgated under the Securities Act or any exemption under the Securities Act. In general, under Rule 144 as currently in effect, if one year has elapsed since the later of the date of acquisition of restricted shares from the Company or any "affiliate" of the Company, as that term is defined under the Securities Act, the holder is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then-outstanding shares of Common Stock or the average weekly trading volume of shares of Common Stock on all exchanges and reported through the automated quotation system of a registered securities association during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain restrictions on the manner of sales, notice requirements and the availability for current public information about the Company. If two years have elapsed since the date of acquisition of restricted shares from the Company or from any "affiliate" of the Company, and the holder thereof is deemed not to have been an affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such Common Stock in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements. The Company and its parent will, and it is expected that the directors and principal officers of the Company will, enter into "lock-up" agreements with the Underwriters, providing that, subject to certain exceptions, they will not, for a period of days after the date of this Prospectus, without the prior written consent of the Representatives, offer, sell or contract to sell, or otherwise dispose of, directly or indirectly, or announce an offering of, any shares of Common Stock or any securities convertible into, or exchangeable for, shares of Common Stock. See "Underwriting." 64 DESCRIPTION OF CERTAIN INDEBTEDNESS THE NOTES On March 31, 1997, Qwest issued and sold the Notes in the aggregate principal amount of $250.0 million to a group of institutional and accredited investors. The Indenture for the Notes contains certain covenants that, among other things, limit the ability of Qwest and certain of its subsidiaries (the "Restricted Subsidiaries") to incur additional indebtedness and issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create certain liens, enter into certain transactions with affiliates, sell assets of Qwest or its Restricted Subsidiaries, issue or sell capital stock of Qwest's Restricted Subsidiaries or enter into certain mergers and consolidations. In addition, under certain limited circumstances, Qwest will be required to offer to purchase the Notes at a price equal to 100% of the principal amount thereof plus accrued and unpaid interest to the date of purchase, with the excess proceeds of certain asset sales. In the event of a Change of Control (as defined in the Indenture), holders of the Notes will have the right to require Qwest to purchase all of their Notes at a price equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest. The Indenture relating to the Notes is an exhibit to the Registration Statement of which this Prospectus is a part. The Company entered into a Registration Agreement dated March 31, 1997 (the "Registration Agreement") with the initial purchasers of the Notes (the "Initial Purchasers") for the benefit of the holders of the Notes. Pursuant to the Registration Agreement the Company agreed, for the benefit of the holders, that it will, at its cost, (a) file a registration statement (the "Exchange Offer Registration Statement") with the Commission with respect to a registered offer (the "Exchange Offer") to exchange the Notes for a series of notes (the "New Notes") with terms identical in all material respects to the Notes (except that the New Notes will not contain terms with respect to registration rights or transfer restrictions) or (b) in lieu of the Exchange Offer Registration Statement, file a shelf registration statement (the "Shelf Registration Statement") with respect to registration of resales of the Notes. If (i) the Exchange Offer Registration Statement has not been filed with the Commission within 90 days after March 31, 1997 (the "Closing Date") or declared effective within 150 days after the Closing Date, or the Exchange Offer has not been consummated within 180 days after the Closing Date or (ii) in lieu thereof, the Shelf Registration Statement has not been filed with the Commission and declared effective within 210 days after the Closing Date or (iii) after either the Exchange Offer Registration Statement or the Shelf Registration Statement has been declared effective, as the case may be, it thereafter ceases to be effective or usable (subject to certain exceptions) in connection with resales of Notes or New Notes in accordance with and during the periods specified in the Registration Agreement (each such event referred to in clauses (i) through (iii), a "Registration Default"), additional interest ("Liquidated Interest") will acrrue on the Notes and the New Notes (in addition to the stated interest on the Notes and the New Notes) from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Liquidated Interest will be payable in cash semiannually in arrears each April 1 and October 1, at a rate per annum equal to 0.50% of the principal amount of the Notes during the 90-day period immediately following the occurrence of any Registration Default and shall increase by 0.25% per annum of the principal amount of the Notes at the end of each subsequent 90-day period, but in no event shall such rates exceed 2.00% per annum in the aggregate regardless of the number of Registration Defaults. CREDIT FACILITIES QC is the borrower under a $100.0 million revolving credit facility with certain commercial lending institutions and ABN AMRO North America, Inc. as agent for the lenders. The credit facility is secured by pledges of publicly traded stock owned by an affiliate of Anschutz Company and is being used to provide working capital and capital expansion funds to QCC. The credit facility is structured as a three-year revolving bank credit facility which converts to a two-year term loan that matures on April 2, 2001. 65 Borrowings bear interest at an adjustable rate, currently 6.54% per annum, which is based on the agent's prime rate or LIBOR plus an applicable margin. At February 28, 1997, the Company had drawn $66.0 million principal amount under the facility, which increased by $14.0 million to $80.0 million on March 25, 1997, all of which was repaid with a portion of the net proceeds of the sale of the Notes. The Company has not redrawn any amounts under the credit facility. The facility contains covenants that, among other things, restrict QC's use of the loan proceeds to working capital, capital expenditures and general corporate purposes of QC and its subsidiaries and limit QC's ability to make certain dividends, distributions or investments, and mergers. The facility generally permits dividends or distributions on capital stock in amounts necessary to service scheduled principal and interest payments on debt of the Company of up to a maximum of $450.0 million principal amount plus amounts not to exceed 50% of consolidated net income, and other amounts for certain taxes and an annual $2.0 million basket. The facility contains certain events of default including, among other things, failure to pay, breach of the agreement and insolvency. An event of default also occurs if obligations under the facility cease to rank pari passu with other unsecured obligations. Upon the occurrence of an event of default, the facility permits the lenders to declare all outstanding borrowings to be immediately due and payable and to proceed against the collateral. QC also has a one year $50.0 million line of credit from ABN AMRO. The facility is secured by pledges of publicly traded stock owned by an affiliate of Anschutz Company and is being used to provide working capital to QCC. The facility contains, except for terms of repayment, substantially identical terms as the $100.0 million revolving credit facility described above. No amounts are, or ever have been, outstanding under the facility. The Company anticipates that it will terminate the existing credit facilities as described above as soon as practicable. The Company intends to obtain new credit facilities, secured or unsecured, as permitted under the Indenture, but anticipates that it will receive no guarantees, pledges of collateral or other credit support from its parent, which can be expected to result in higher interest rates than are applicable under the existing credit facilities. The Company is in discussion with various potential lenders in this regard. 66 UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement among the Company and the U.S. Underwriters (the "U.S. Underwriting Agreement"), the Company has agreed to sell to each of the U.S. Underwriters named below (the "U.S. Underwriters"), and each of the U.S. Underwriters, for whom Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as the representatives (the "U.S. Representatives"), has severally agreed to purchase the number of Shares set forth opposite its name below:
UNDERWRITING U.S. UNDERWRITERS COMMITMENT ----------------- ------------ Salomon Brothers Inc ........................................... Donaldson, Lufkin & Jenrette Securities Corporation............. Goldman, Sachs & Co. ........................................... Merrill Lynch, Pierce, Fenner & Smith Incorporated.............................................. ---------- Total......................................................... ==========
The Company has been advised by the U.S. Representatives that the several U.S. Underwriters initially propose to offer such Shares to the public at the Price to Public set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Share. The U.S. Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per Share to other dealers. After the Offerings, the Price to Public and such concessions may be changed. The Company has granted to the U.S. Underwriters and the international underwriters (the "International Underwriters" and, collectively with the U.S. Underwriters, the "Underwriters") options, exercisable during the 30-day period after the date of this Prospectus, to purchase up to additional shares of Common Stock from the Company at the Price to Public less the Underwriting Discount, solely to cover over-allotments. To the extent that the U.S. Underwriters and the International Underwriters exercise such options, each of the U.S. Underwriters and the International Underwriters, as the case may be, will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such U.S. Underwriter's or International Underwriter's initial commitment. The Company has entered into an International Underwriting Agreement with the International Underwriters named therein, for whom Salomon Brothers International Limited, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman Sachs International and Merrill Lynch International are acting as the representatives (the "International Representatives"), providing for the concurrent offer and sale of Shares (in addition to the shares covered by the over-allotment options described above) outside the United States and Canada. Both the U.S. Underwriting Agreement and the International Underwriting Agreement provide that the obligations of the U.S. Underwriters and the International Underwriters are such that if any of the Shares are purchased by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement, or by the International Underwriters pursuant to the International Underwriting Agreement, all the Shares agreed to be purchased by either the U.S. Underwriters or the International Underwriters, as the case may be, pursuant to their respective agreements must be so purchased. The Price to Public and Underwriting Discount per Share for the U.S. Offering and the International Offering will be identical. The closing of the International Offering is a condition to the closing of the U.S. Offering and the closing of the U.S. Offering is a condition to the closing of the International Offering. 67 Each U.S. Underwriter has severally agreed, that, as part of the distribution of the Shares offered by the U.S. Underwriters, (i) it is not purchasing any Shares for the account of anyone other than a United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute this Prospectus to any person outside the United States or Canada or to anyone other than a United States or Canadian Person. Each International Underwriter has severally agreed that, as part of the distribution of the Shares by the International Underwriters, (i) it is not purchasing any Shares for the account of any United States or Canadian Person, and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any Prospectus relating to the International Offering to any person within the United States or Canada or to any United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. Underwriters and International Underwriters. "United States" or "Canadian Person" means any person who is a national or resident of the United States or Canada, any corporation, partnership or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, and any estate or trust which is subject to United States or Canadian federal income taxation, regardless of the source of its income (other than the foreign branch of any United States or Canadian Person), and includes any United States or Canadian branch of a person other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, sales may be made between the U.S. Underwriters and the International Underwriters of such number of Shares as may be mutually agreed. The price of any Shares so sold shall be the Price to Public, less an amount not greater than the concession to securities dealers. To the extent that there are sales between the U.S. Underwriters and the International Underwriters pursuant to the Agreement Between U.S. Underwriters and International Underwriters, the number of Shares initially available for sale by the U.S. Underwriters or by the International Underwriters may be more or less than the amount specified on the cover page of this Prospectus. Any offer of the Shares in Canada will be made only pursuant to an exemption from the registration and qualification requirements in any jurisdiction in Canada in which such offer is made. The U.S. Underwriting Agreement provides that the Company will indemnify the U.S. Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, or contribute to payments the U.S. Underwriters may be required to make in respect thereof. The Company and its parent will agree, and it is expected that the directors and principal officers of the Company will agree, not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or announce the offering of any shares of Common Stock, including any such shares beneficially or indirectly owned or controlled by the Company, or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock, for days from the date of this Prospectus, without the prior written consent of the U.S. Representatives, except for (i) shares issued in connection with the Company's Growth Share Plan and (ii) shares issued in connection with the Offerings made hereby. During and after the Offerings, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Shares of Common Stock sold in the Offerings for their account may be reclaimed by the syndicate if such Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. 68 Prior to the Offerings, there has been no public market for the Common Stock. The Price to Public will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in determining the Price to Public are prevailing market conditions, the market values of publicly traded companies that the Underwriters believe to be somewhat comparable to the Company, the demand for the Shares and for similar securities of publicly traded companies that the Underwriters believe to be somewhat comparable to the Company, the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and other factors deemed relevant. There can be no assurance that the prices at which the Shares will sell in the public market after the Offerings will not be lower than the Price to Public. LEGAL MATTERS The validity of the Common Stock and certain other legal matters in connection with the Common Stock offered hereby are being passed upon for the Company by Holme Roberts & Owen LLP, 1700 Lincoln Street, Suite 4100, Denver, Colorado 80203. The validity of the Common Stock is being passed upon for the Underwriters by their counsel, Shearman & Sterling, 599 Lexington Avenue, New York, NY 10022-6069. EXPERTS The financial statements and schedules of Qwest Communications International Inc. as of December 31, 1996 and 1995, and for each of the years in the three- year period ended December 31, 1996, have been included herein and in the Registration Statement in reliance upon the report, dated February 19, 1997, of KPMG Peat Marwick LLP, independent certified public accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. ADDITIONAL INFORMATION The Company is not currently subject to the information requirements of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"). As a result of the Offerings, the Company will be required to file reports and other information with the Securities and Exchange Commission (the "Commission") pursuant to the informational requirements of the Exchange Act. The Company intends to furnish its stockholders with Annual Reports containing Consolidated Financial Statements audited by independent certified public accountants and with quarterly reports containing unaudited financial information for each of the first three quarters of each year. The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act of 1933, as amended (the "Securities Act"), with respect to the securities offered hereby. As permitted by the rules and regulations of the Commission, this Prospectus, which is a part of the Registration Statement, omits certain information, exhibits, schedules and undertakings set forth in the Registration Statement. For further information pertaining to the Company and the securities offered hereby, reference is made to such Registration Statement and the exhibits and schedules thereto. Statements contained in this Prospectus as to the contents or provisions of any documents referred to herein are not necessarily complete, and in each instance, reference is made to the copy of the document filed as an exhibit to the Registration Statement. The Company will issue annual and quarterly reports. Annual reports will include audited financial statements prepared in accordance with accounting principles generally accepted in the United States and a report of its independent auditors with respect to the examination of such financial statements. In addition, the Company will issue to its securityholders such other unaudited quarterly or other interim reports as it deems appropriate. 69 The Registration Statement may be inspected without charge at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. Copies of the Registration Statement may be obtained from the Commission at prescribed rates from the Public Reference Section of the Commission at such address, and at the Commission's regional offices located at 7 World Trade Center, 13th Floor, New York, New York 10048, and at Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. In addition, registration statements and certain other filings made with the Commission through its Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system are publicly available through the Commission's site on the Internet's World Wide Web, located at http://www.sec.gov. 70 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES Independent Auditors' Report.............................................. F-2 Consolidated Balance Sheets of Qwest Communications International Inc. and Subsidiaries as of December 31, 1996 and 1995............................ F-3 Consolidated Statements of Operations of Qwest Communications Interna- tional Inc. and Subsidiaries for the years ended December 31, 1996, 1995 and 1994........ F-4 Consolidated Statements of Stockholder's Equity of Qwest Communications International Inc. and Subsidiaries for the years ended December 31, 1996, 1995 and 1994...................................................... F-5 Consolidated Statements of Cash Flows of Qwest Communications Interna- tional Inc. and Subsidiaries for the years ended December 31, 1996, 1995 and 1994........ F-6 Notes to Consolidated Financial Statements of Qwest Communications Inter- national Inc. and Subsidiaries........................................... F-8
F-1 INDEPENDENT AUDITORS' REPORT The Board of Directors Qwest Communications International Inc.: We have audited the accompanying consolidated balance sheets of Qwest Communications International Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Qwest Communications International Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Denver, Colorado February 19, 1997 F-2 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1996 AND 1995 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
1996 1995 -------- -------- ASSETS Current assets: Cash and cash equivalents................................ $ 6,905 $ 1,484 Accounts receivable, net (note 6)........................ 29,248 14,871 Costs and estimated earnings in excess of billings (note 5)...................................................... 4,989 24,127 Deferred income tax asset (note 11)...................... 6,301 4,392 Notes and other receivables (note 7)..................... 14,934 6,253 Other current assets..................................... 328 1,260 -------- -------- Total current assets................................... 62,705 52,387 Property and equipment, net (notes 4, 8, 10 and 11)........ 186,535 114,748 Notes and other receivables (note 7)....................... 11,052 8,430 Intangible and other long-term assets, net of amortization.............................................. 3,967 8,613 -------- -------- Total assets........................................... $264,259 $184,178 ======== ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses (note 9)........... $ 80,129 $ 26,748 Payable to related parties, net (note 12)................ -- 2,983 Deferred revenue......................................... 2,649 3,969 Billings in excess of costs and estimated earnings (note 5)...................................................... 5,034 -- Current portion of long-term debt (note 10).............. 25,193 21,270 Advances from Parent (note 12)........................... 19,138 -- -------- -------- Total current liabilities.............................. 132,143 54,970 Long-term debt (note 10)................................... 109,268 68,793 Advances from Parent (note 12)............................. -- 27,119 Deferred income tax liability (note 11).................... 1,708 922 Other liabilities (note 14)................................ 11,698 5,899 -------- -------- Total liabilities...................................... 254,817 157,703 -------- -------- Stockholder's equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares. No shares issued and outstanding................ -- -- Common stock, $.01 par value. Authorized 10,000,000 shares. Issued and outstanding 10,000 shares............ -- -- Additional paid-in capital............................... 55,892 65,958 Accumulated deficit...................................... (46,450) (39,483) -------- -------- Total stockholder's equity............................. 9,442 26,475 -------- -------- Commitments and contingencies (note 13) Total liabilities and stockholder's equity............. $264,259 $184,178 ======== ========
See accompanying notes to consolidated financial statements. F-3 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 -------- ---------- -------- Revenue: Carrier services............................. $ 57,573 $ 67,789 $ 50,240 Commercial services (note 12)................ 34,265 20,412 8,712 -------- ---------- -------- 91,838 88,201 58,952 Network construction services (note 5)....... 139,158 36,901 11,921 -------- ---------- -------- 230,996 125,102 70,873 -------- ---------- -------- Operating expenses: Telecommunications services.................. 80,368 81,215 48,239 Network construction services (note 12)...... 87,542 32,754 9,369 Selling, general and administrative (notes 2 and 14)..................................... 58,855 37,195 21,516 Depreciation and amortization................ 16,245 9,994 2,364 -------- ---------- -------- 243,010 161,158 81,488 -------- ---------- -------- Loss from operations....................... (12,014) (36,056) (10,615) Other income (expense): Gain on sale of telecommunications service agreements (note 3)......................... 6,126 -- -- Interest expense, net........................ (6,827) (4,248) (219) Interest income.............................. 2,454 1,782 191 Other income (expense), net.................. 60 55 (42) -------- ---------- -------- Loss before income tax benefit............. (10,201) (38,467) (10,685) Income tax benefit (note 11)................... 3,234 13,336 3,787 -------- ---------- -------- Net loss................................... $ (6,967) $ (25,131) $ (6,898) ======== ========== ======== Loss per share................................. $(696.70) $(2,513.10) $(689.80) ======== ========== ========
See accompanying notes to consolidated financial statements. F-4 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK ---------------- ADDITIONAL TOTAL NUMBER PAID-IN ACCUMULATED STOCKHOLDER'S OF SHARES AMOUNT CAPITAL DEFICIT EQUITY --------- ------ ---------- ----------- ------------- BALANCES, JANUARY 1, 1994.................... 10,000 $ -- $ 19,533 $ (7,454) $ 12,079 Contribution from Parent.................. -- -- 20,900 -- 20,900 Repurchase of warrants... -- -- (1,500) -- (1,500) Net loss................. -- -- -- (6,898) (6,898) ------ ----- -------- -------- -------- BALANCES, DECEMBER 31, 1994.................... 10,000 -- 38,933 (14,352) 24,581 Contribution from Parent.................. -- -- 28,000 -- 28,000 Reduction in additional paid-in capital attributable to effect of the tax allocation agreement with Parent (note 11)............... -- -- (975) -- (975) Net loss................. -- -- -- (25,131) (25,131) ------ ----- -------- -------- -------- BALANCES, DECEMBER 31, 1995.................... 10,000 -- 65,958 (39,483) 26,475 Cancellation of income tax benefit receivable from Parent (note 11)... -- -- (11,088) -- (11,088) Expenses incurred by Parent on Company's behalf (note 12)........ -- -- 1,022 -- 1,022 Net loss................. -- -- -- (6,967) (6,967) ------ ----- -------- -------- -------- BALANCES, DECEMBER 31, 1996.................... 10,000 $ -- $ 55,892 $(46,450) $ 9,442 ====== ===== ======== ======== ========
See accompanying notes to consolidated financial statements. F-5 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
1996 1995 1994 -------- -------- -------- Cash flows from operating activities: Net loss....................................... $ (6,967) $(25,131) $ (6,898) Adjustments to reconcile net loss to net cash used in operating activities: Gain on sale of telecommunications service agreements (note 3)......................... (6,126) -- -- Depreciation and amortization................ 16,245 9,994 2,364 Deferred income tax (benefit) expense (note 11)......................................... (1,123) (2,839) 6,920 Changes in operating assets and liabilities: Receivables--accounts and notes, net....... (25,680) (21,379) 910 Costs and estimated earnings in excess of billings.................................. 19,138 (21,650) (2,210) Accounts payable and accrued expenses...... 25,381 4,339 5,795 Payable to related parties................. (2,983) 1,263 1,560 Billings in excess of costs and estimated earnings.................................. 5,034 -- (831) Other changes.............................. 9,605 (1,232) (4,304) -------- -------- -------- Net cash provided by (used in) operating activities.............................. 32,524 (56,635) 3,306 -------- -------- -------- Cash flows from investing activities: Proceeds from sale of telecommunications service agreements............................ 4,500 -- -- Expenditures for property and equipment........ (57,122) (46,313) (40,926) Cash paid for acquisitions, net of cash acquired...................................... -- (12,545) -- Investments in and advances to telecommunications companies, net............. -- -- (786) -------- -------- -------- Net cash used in investing activities.... (52,622) (58,858) (41,712) -------- -------- -------- Cash flows from financing activities: Borrowing of long-term debt.................... 65,000 62,606 25,401 Repayment of long-term debt.................... (21,322) (2,331) (173) Debt issuance costs............................ (112) (591) (190) Advances from Parent, net of repayments........ (19,069) 26,256 (10,174) Contribution from Parent....................... -- 28,000 20,900 Expenses incurred by Parent on Company's behalf (note 12)..................................... 1,022 -- -- Repurchase of common stock warrants............ -- -- (1,500) -------- -------- -------- Net cash provided by financing activities.............................. 25,519 113,940 34,264 -------- -------- -------- Net increase (decrease) in cash and cash equivalents............................. 5,421 (1,553) (4,142) Cash and cash equivalents, beginning of year..... 1,484 3,037 7,179 -------- -------- -------- Cash and cash equivalents, end of year........... $ 6,905 $ 1,484 $ 3,037 ======== ======== ========
See accompanying notes to consolidated financial statements. F-6 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, (CONTINUED) YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (AMOUNTS IN THOUSANDS)
1996 1995 1994 -------- -------- -------- Supplemental disclosure of cash flow information: Cash paid for interest, net....................... $ 8,825 $ 3,972 $ 128 ======== ======== ======== Cash paid for taxes, other than Parent............ $ 160 $ 725 $ 2,232 ======== ======== ======== Supplemental disclosure of significant non-cash investing and financing activities: Capital lease obligation.......................... $ 720 $ 2,419 $ -- ======== ======== ======== Accrued capital expenditures...................... $ 28,000 $ -- $ -- ======== ======== ======== Reduction in additional paid-in capital attributable to effect of cancellation of income tax benefit receivable from Parent............... $ 11,088 $ -- $ -- ======== ======== ======== Reduction in additional paid-in capital attributable to effect of the tax allocation agreement with Parent............................ $ -- $ 975 $ -- ======== ======== ========
See accompanying notes to consolidated financial statements. F-7 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996, 1995 AND 1994 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) General and Business Qwest Communications International Inc. (the Company) is wholly-owned by Anschutz Company (the Parent). The Company is the ultimate holding company for the operations of Qwest Communications Corporation and subsidiaries (Qwest) through a merger with Qwest which was wholly-owned by Anschutz Company. The merger was accounted for as a business combination of entities under common control using carryover basis. The Company is a developer and operator of telecommunications networks and facilities and operates in a single business segment, the telecommunications industry. It provides the following services within that industry: . Telecommunications Services--the Company provides dedicated line and switched services to interexchange carriers and competitive access providers (Carrier Services) and long distance voice, data and video services to businesses and consumers (Commercial Services). . Network Construction Services--the Company installs fiber optic communications systems for interexchange carriers, local telephone companies, cable television companies, competitive access providers and other communication entities, as well as for its own use. Qwest's principal direct and indirect subsidiaries include Qwest Transmission Inc. (QTI), Qwest Properties Inc. (QPI) and SP Services de Mexico S.A. de C.V. (SP Mexico). QTI owns and operates a digital microwave transmission network throughout the eastern and midwestern United States. QPI is a lessor of a telecommunications switching facility in Dallas, Texas. SP Mexico holds the rights assigned to it under construction easement agreements in Mexico (as described in note 13--Mexico Easement Agreement). The accompanying consolidated financial statements include the accounts of the Company and all majority-owned subsidiaries. Intercompany balances and transactions have been eliminated in consolidation. (b) Telecommunications Services Revenue Revenue from telecommunications services is recognized monthly as the services are provided. Amounts billed in advance of the service month are recorded as deferred revenue. (c) Long-Term Construction Contracts The Company accounts for long-term construction contracts relating to the development of telecommunications networks using the percentage of completion method. Under the percentage of completion method, progress is generally measured on performance milestones relating to the contract where such milestones fairly reflect progress toward contract completion. Network construction costs include all direct material and labor costs and those indirect costs related to contract performance. General and administrative costs are charged to expense as incurred. When necessary, the estimated loss on an uncompleted contract is expensed in the period in which it is identified. Revisions to estimated profits on contracts are recognized in the period they become known. F-8 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) Cash and Cash Equivalents The Company classifies cash on hand and deposits in banks, including money market accounts, and any other investments with an original maturity of three months or less that the Company may hold from time to time, as cash and cash equivalents. (e) Property and Equipment Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the useful lives of the assets, commencing when they are available for service. Leasehold improvements are amortized over the lesser of the useful lives of the assets or the lease term. Expenditures for maintenance and repairs are expensed as incurred. Network construction costs, including interest during construction, are capitalized. Interest capitalized in the years ended December 31, 1996, 1995 and 1994 was approximately $2,365,000, $1,856,000 and $285,000, respectively. The useful lives of property and equipment is as follows: Facility and leasehold improvements.............. 20-25 years or lease term Communications and construction equipment........ 3-10 years Fiber and conduit systems........................ 15-25 years Office equipment and furniture................... 3-7 years Capital leases................................... lease term
While constructing network systems for customers, the Company may install additional conduit for its own use. This additional conduit is capitalized at the incremental cost of construction. Costs of the initial conduit, fiber and facilities are allocated to the customer and the Company based upon the number of fibers retained by the Company relative to the total fibers installed or square footage in the case of facilities. (f) Impairment of Long-Lived Assets Statement of Financial Accounting Standards No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of (SFAS 121) requires that long-lived assets be reviewed for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. This review consists of a comparison of the carrying value of the asset with the asset's expected future undiscounted cash flows without interest costs. Estimates of expected future cash flows are to represent management's best estimate based on reasonable and supportable assumptions and projections. If the expected future cash flow exceeds the carrying value of the asset, no impairment is recognized. If the carrying value of the asset exceeds the expected future cash flows, an impairment exists and is measured by the excess of the carrying value over the fair value of the asset. Any impairment provisions recognized in accordance with SFAS 121 are permanent and may not be restored in the future. No impairment expense was recognized in 1996 and 1995. (g) Income Taxes The Company is included in the consolidated income tax return of the Parent. The Company uses the asset and liability method of accounting for income taxes whereby deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred F-9 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Income taxes have been computed by applying the asset and liability method as if the Company was a separate taxpayer. (h) Intangible Asset Amortization Intangible assets include goodwill and acquired intangibles such as customer contracts and non-compete covenants. Such costs are amortized on a straight- line basis over a period ranging from five to fifteen years. (i) Loss Per Share The loss per share for the years ended December 31, 1996, 1995 and 1994, was computed by dividing net loss by the weighted average number of common shares outstanding during such periods. (j) Management Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (k) Fair Value of Financial Instruments The carrying amounts of cash, cash equivalents, accounts receivable, accounts payable and accrued expenses approximate fair value due to the short- term maturities of these assets and liabilities. The carrying amounts of notes and other receivables approximate fair value due to the relatively short period of time between the origination of these instruments and their expected realization. The carrying amounts of long-term debt approximate its fair value since the interest rates on substantially all of the debt are variable and reset periodically. (l) Reclassification Certain prior year amounts have been reclassified to conform with 1996 presentation. (2) RELOCATION AND RESTRUCTURING Relocation and restructuring costs of approximately $1,599,000 were recognized in 1996 and relate primarily to costs incurred in connection with the restructuring of the direct sales group. Such costs were substantially paid in 1996 and are included in selling, general and administrative expenses in the consolidated financial statements. Relocation and restructuring costs of approximately $1,955,000 in 1994 relate primarily to costs incurred to consolidate the Company's operations in Denver, Colorado and are included in selling, general and administrative expenses. (3) GAIN ON SALE OF TELECOMMUNICATIONS SERVICE AGREEMENTS On July 1, 1996, the Company sold its right, title and interest in certain telecommunications service agreements to an unrelated third party (the "Buyer") for $5,500,000. As of December 31, 1996, the Company has received $4,500,000 of the purchase price in cash. As a result of the sale, the Company is no longer required to incur certain costs related to providing service under the F-10 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) agreements. Accordingly, in 1996 the Company has reduced its liability for such costs by approximately $3,899,000 and has included the adjustment in gain on sale of telecommunications service agreements. Also included in the gain on sale of telecommunications service agreements is the carrying value of the related customer contracts sold of approximately $1,714,000 and approximately $559,000 of other costs incurred as a result of the sale. During the transition of the service agreements to the Buyer, the Company has incurred certain facilities costs on behalf of the Buyer, which are reimbursable to the Company. As of December 31, 1996, approximately $1,988,000 is due to the Company for such costs and is included in accounts receivable in the consolidated financial statements (as described in note (6)--Accounts Receivable). (4) ACQUISITIONS On January 31, 1995, the Company purchased all of the outstanding stock of QTI and Subsidiaries (formerly Qwest Communications, Inc.), for $18,770,000. The purchase was initially financed with an advance from the Parent. The Company repaid a substantial portion of this advance with the proceeds from two term notes issued in July 1995 (as described in note (10)--Long-Term Debt). The purchase price was allocated as follows (in thousands): Working capital................................................... $ 7,744 Property and equipment............................................ 11,012 Other............................................................. 14 ------- $18,770 =======
The accompanying consolidated statements of operations include the operating results of QTI since the effective date of the acquisition. The pro forma effect of the acquisition was immaterial in 1995. The following pro forma operating results of the Company and QTI for the year ended December 31, 1994 has been prepared assuming the acquisition had been made as of January 1, 1994.
YEAR ENDED DECEMBER 31, 1994 --------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNT) Revenue.............................................. $84,865 Net loss............................................. $ 6,643 Loss per share....................................... $664.30
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the acquisition been consummated as of January 1, 1994, nor is it necessarily indicative of future operating results. In January 1995, the Company also purchased certain assets from Fiber Systems Inc. for $1,750,000. F-11 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) NETWORK CONSTRUCTION SERVICES REVENUE AND EXPENSES Costs and billings on uncompleted contracts included in the accompanying consolidated financial statements are as follows (in thousands):
DECEMBER 31 ----------------- 1996 1995 -------- ------- Costs incurred on uncompleted contracts................... $ 82,840 $23,339 Estimated earnings........................................ 48,853 10,610 -------- ------- 131,693 33,949 Less: billings to date.................................... 131,738 9,822 -------- ------- $ (45) $24,127 ======== ======= Included in the accompanying balance sheets under the following captions: Costs and estimated earnings in excess of billings...... $ 4,989 $24,127 Billings in excess of costs and estimated earnings...... (5,034) -- -------- ------- $ (45) $24,127 ======== ======= Revenue the Company expects to realize for work to be performed on the above uncompleted contracts............. $328,688 $ 6,692 ======== =======
In 1996, the Company entered into agreements with unrelated third-parties whereby the Company will provide indefeasible rights of use (IRUs) in multiple fibers along base routes for a minimum purchase price of approximately $457,000,000. Under the agreements, the third-parties are entitled to require the Company to provide IRUs along optional routes, as defined, for an additional $65,000,000. One of the parties has the option to require the Company to double the number of fibers along the base route for additional consideration. These options, when combined with certain options of the Company, result in a maximum purchase price of approximately $888,000,000. One contract provides that in the event of delay or non-delivery of segments, the payments may be reduced or penalties of varying amounts may be due. The Company obtained construction performance bonds totaling $175 million which have been guaranteed by the Parent. As a result of activity on these contracts, the Company has recorded approximately $121 million of network construction service revenue in 1996. Earnings relating to these contracts are estimated using allocations of the total cost of the Company's network construction project (as described in note (13)--Commitments and Contingencies). F-12 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) ACCOUNTS RECEIVABLE Accounts receivable consists of the following (in thousands):
DECEMBER 31 ---------------- 1996 1995 ------- ------- Carrier services........................................... $ 9,978 $12,634 Commercial services........................................ 5,736 3,595 Network construction services.............................. 13,751 111 Transition costs (note 3).................................. 1,988 -- Interest on notes receivable (note 7)...................... 1,289 1,088 Other...................................................... 175 64 ------- ------- 32,917 17,492 Less allowance for doubtful accounts....................... (3,669) (2,621) ------- ------- Accounts receivable, net................................... $29,248 $14,871 ======= =======
(7) NOTES AND OTHER RECEIVABLES On November 16, 1994, the Company entered into an agreement to construct multiple conduit systems for a third party along two routes. One conduit was constructed for the third party's use, and resulted in net contract revenues of approximately $3,059,000, $29,664,000 and $1,959,000 in the years ended December 31, 1996, 1995 and 1994, respectively. Three additional conduits on these routes were constructed for the Company's use or sale. The Company recognized cost recoveries in 1996 and 1995 related to the agreement, by reducing its cost basis in the three additional conduits. The Company may be required to pay up to $13,000,000 to the third party in the event of the sale of the remaining conduits. Payment for installation of each route became due upon completion of the route and was payable in three equal installments. Prior to completion, interest was payable on costs incurred for route construction at 7.65%. In November 1995, the Company completed construction of the first route. The Company received cash payments of approximately $4,082,000 representing one- third of the route's contract price, including cost recoveries, and $546,000 representing interest earned during construction. In addition, the Company received a promissory note for approximately $8,163,000, representing the remaining two-thirds of the contract price, including cost recoveries. The second installment of approximately $4,082,000 was received in November 1996. The remaining note balance is due on the second anniversary of the note's issuance and accrues interest at 6.59%. In February 1996, the Company completed construction of the second route. The Company received cash payments of approximately $10,918,000 representing one-third of the route's contract price, including cost recoveries, and $1,328,000 representing interest earned during construction. In addition, the Company received two promissory notes for approximately $19,650,000 and $2,187,000, representing the remaining two-thirds of the contract price for that route, including cost recoveries. The notes are due in two equal annual installments on the first and second anniversaries of the notes' issuance, and accrue interest at 7.31% and 6.59% during the first and second years, respectively, of the notes' term. F-13 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) PROPERTY AND EQUIPMENT Property and equipment consists of the following (in thousands):
DECEMBER 31 ------------------ 1996 1995 -------- -------- Land................................................... $ 506 $ 420 Facility and leasehold improvements.................... 7,951 5,040 Communications and construction equipment.............. 52,076 41,104 Fiber and conduit systems.............................. 42,446 42,414 Office equipment and furniture......................... 6,360 5,925 Network construction and other assets held under capital leases (note 10).............................. 3,197 2,419 Work in progress....................................... 99,915 29,618 -------- -------- 212,451 126,940 Less accumulated depreciation and amortization......... (25,916) (12,192) -------- -------- Property and equipment, net............................ $186,535 $114,748 ======== ========
(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses consists of the following (in thousands):
DECEMBER 31 --------------- 1996 1995 ------- ------- Accounts payable............................................ $44,766 $13,587 Construction accounting accrual............................. 18,071 -- Growth-share expenses (note 14)............................. 3,810 -- Capacity service expenses................................... 3,658 3,719 Property, sales and other taxes............................. 3,793 2,395 Contract obligations........................................ 855 2,381 Other....................................................... 5,176 4,666 ------- ------- Accounts payable and accrued expenses....................... $80,129 $26,748 ======= =======
Accounts payable as of December 31, 1996 includes approximately $37,000,000 payable for fiber purchases under the materials purchase agreement (as described in note (13)--Materials Purchase Agreement). F-14 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (10) LONG-TERM DEBT Long-term debt consists of the following (in thousands):
DECEMBER 31 ------------------ 1996 1995 -------- -------- Revolving credit facility................................ $ 60,000 $ -- Customer contract credit facility........................ 25,918 40,418 Network credit facility.................................. 27,077 29,273 Equipment loans.......................................... 9,820 6,765 Term notes............................................... 9,416 11,100 Capital lease obligation................................. 2,010 2,187 Other.................................................... 220 320 -------- -------- Total debt............................................. 134,461 90,063 Less current portion..................................... (25,193) (21,270) -------- -------- Long-term debt........................................... $109,268 $ 68,793 ======== ========
In April 1996, the Company entered into a $100 million revolving credit facility agreement (as amended in September 1996) (the "Facility"), the proceeds of which will be used for working capital purposes, capital expenditures and the issuance of letters of credit. The Facility provides for an initial $100 million three-year revolving loan commitment (the "Revolver") which expires on April 2, 1999. At that time, the outstanding loan amount converts to a two-year term credit loan which matures on April 2, 2001. Quarterly mandatory payments commence on June 30, 1999, and include equal quarterly principal reductions, based on the amount of the outstanding loan at the date of conversion. Letters of credit issued under the Facility are limited to a total outstanding of $10 million. There were no letters of credit outstanding at December 31, 1996. Interest on amounts borrowed under the Revolver is payable approximately monthly at the bank's prime rate or other interest rate option plus an applicable margin. The weighted average interest rate on amounts borrowed under the Revolver was approximately 6.5% at December 31, 1996. In addition, a commitment fee is payable on the unused portion of the Revolver. The Facility is secured by pledges of certain stock owned by the Parent. The Facility agreement contains certain affirmative and negative covenants. The Company can make prepayments of outstanding principal without penalty. In April 1995, the Company entered into a $45 million customer contract credit facility agreement to finance certain construction projects undertaken at that time. The facility converted to a term loan upon completion of the construction projects in 1996 and 1995 and is now secured by notes receivable issued in connection with these construction projects (as described in note (7)--Notes and Other Receivables). The facility bears interest at the Company's option at either (a) the higher of (i) the bank's base rate of interest, or (ii) the Federal Funds Rate plus 1/2%; or (b) LIBOR plus 9/16%. The outstanding balance at December 31, 1996 is due in installments on the anniversary dates of the completion of the projects, through February 1998. In June 1994, the Company entered into a $27.6 million network credit facility agreement, secured by certain of the Company's fiber systems, which bears interest at 4.65% above the 90-day High Grade Commercial Paper rate. All interest accrued on borrowings under this facility from June 1994 through June 1995 was added to the principal balance of the facility. Interest added as additional principal was approximately $1,388,000 and $285,000 for 1995 and 1994, respectively. From July 1995 to June 1996, interest only payments were paid on the loan balance. Monthly mandatory principal F-15 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) and interest payments commenced on July 31, 1996 and increase from 1.25% to 2.08% of the initial loan balance over the term of the loan, which is payable in full on July 31, 2001. Prepayments are permitted without penalty. The credit facility agreement contains financial covenants for Qwest regarding the maintenance of certain key ratios. In August 1995, the Company executed two equipment loans for approximately $5,000,000 in aggregate, which bear interest at LIBOR plus 2.65%, and LIBOR plus 2.55%, respectively, and are secured by certain equipment. Quarterly mandatory payments commenced on December 1, 1995, which include $250,000 principal reductions and accrued interest, with the final installment due on September 1, 2000. In 1996, the Company executed three equipment loans aggregating approximately $5,000,000. The notes bear interest ranging from 8.86% to 10.15% per annum, and are secured by certain equipment. Monthly mandatory payments include monthly principal reductions ranging from approximately $20,000 to $54,000 plus accrued interest, with the final installment due August 1, 2001. In December 1992, the Company executed an equipment loan for approximately $2,600,000. The loan bears interest at 4.65% above the 90-day High Grade Commercial Paper rate and is secured by certain communications equipment. Monthly mandatory payments include approximately $29,000 of principal reduction and accrued interest, with the final installment due October 2001. The loan agreement contains financial covenants for Qwest regarding the maintenance of certain key ratios. In July 1995, the Company issued two term notes totaling $12,000,000, which are secured by all current and future assets of QTI and used the proceeds to repay a portion of the advance from the Parent used to purchase QTI (as described in note (4)--Acquisitions). The notes bear interest at Libor plus 3%, which is to be reduced as the Company meets certain covenants. Quarterly mandatory principal and interest payments commenced on September 30, 1995 and increase from 3.75% to 5.4% of the initial loan balance over the term of the loan, which is payable in full on September 30, 2000. The Company may prepay the notes without penalty. Mandatory prepayments are required within 120 days of each fiscal year end in the amount of 50% of the excess cash flow, as defined, in excess of $500,000, if QTI's leverage ratio is in excess of 1.75 to 1. The note agreements contain financial covenants for QTI regarding the maintenance of certain leverage and fixed charge coverage ratios. Under the terms of certain loan agreements described above, at December 31, 1996 all net assets of the Company's subsidiaries are restricted. The Company leases certain network construction equipment under capital lease agreements. The amortization charge applicable to capital leases is included in depreciation expense. Future minimum payments under capital lease obligations is included in contractual maturities of long-term debt summarized below. F-16 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) Contractual maturities of long-term debt at December 31, 1996 are as follows (in thousands): Year ended December 31: 1997............................................................ $ 25,193 1998............................................................ 21,533 1999............................................................ 34,458 2000............................................................ 41,430 2001............................................................ 11,847 -------- $134,461 ========
(11) INCOME TAXES Income tax benefit for the years ended December 31, 1996, 1995 and 1994 is as follows (in thousands):
1996 1995 1994 ------- -------- -------- Current: Federal..................................... $(1,673) $(10,497) $ (9,575) State....................................... (438) -- (1,132) ------- -------- -------- Total current income tax benefit.......... (2,111) (10,497) (10,707) ------- -------- -------- Deferred: Federal..................................... (1,123) (2,839) 6,720 State....................................... -- -- 200 ------- -------- -------- Total deferred income tax (benefit) expense.................................. (1,123) (2,839) 6,920 ------- -------- -------- Total income tax benefit.................. $(3,234) $(13,336) $ (3,787) ======= ======== ========
Total income tax benefit differed from the amounts computed by applying the federal statutory income tax rate (35%) to loss before income tax benefit as a result of the following items for the years ended December 31, 1996, 1995 and 1994 (amounts in thousands):
1996 1995 1994 ------- -------- ------- Expected tax benefit........................... $(3,570) $(13,463) $(3,740) State income taxes, net of federal income tax benefit....................................... (279) -- (281) Goodwill and other intangible asset amortization.................................. 568 56 67 Other, net..................................... 47 71 167 ------- -------- ------- Total income tax benefit..................... $(3,234) $(13,336) $(3,787) ======= ======== =======
F-17 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are as follows (in thousands):
DECEMBER 31 ---------------- 1996 1995 ------- ------- Current deferred tax assets (liabilities): Allowance for doubtful accounts........................ $ 1,283 $ 917 Accrued liabilities.................................... 7,578 3,475 ------- ------- 8,861 4,392 Network construction contracts......................... (2,560) -- ------- ------- $ 6,301 $ 4,392 ======= ======= Long-term deferred tax assets (liabilities): Deferred compensation.................................. $ 3,252 $ -- Depreciation........................................... 961 136 Accrued liabilities.................................... 26 234 ------- ------- 4,239 370 Intangible assets, principally due to differences in basis and amortization................................ (112) (919) Property and equipment................................. (5,835) (373) ------- ------- (5,947) (1,292) ------- ------- $(1,708) $ (922) ======= =======
The Company has analyzed the sources and expected reversal periods of its deferred tax assets. The Company believes that the tax benefits attributable to deductible temporary differences will be realized by recognition of future taxable amounts. Accordingly, the Company believes a valuation allowance for its federal deferred tax assets is not necessary. The Company is included in the consolidated federal income tax return of its Parent, which has a July 31, year end for income tax purposes. A tax allocation agreement between the Company and its Parent was implemented effective November 4, 1993 which encompasses U.S. federal tax consequences. The Company is responsible to its Parent for its share of current consolidated income tax liabilities. The Parent is responsible to the Company to the extent that the Company's income tax attributes are utilized by the Parent to reduce its consolidated income tax liabilities, subject to certain limitations on net operating loss and credit carryforwards. At December 31, 1996, the income tax benefit receivable from Parent of approximately $11,088,000 was canceled which resulted in a reduction of additional paid-in capital. In certain cases, differences may arise between amounts reported in the financial statements under generally accepted accounting principles and the amounts actually payable or receivable under the tax allocation agreement. Those differences are generally reported as adjustments to capital, as in- substance dividends. The Company recorded $975,000 in 1995 as a reduction to additional paid-in capital reflecting the difference between the current income tax benefit calculable as if the Company filed a separate income tax return and the current income tax benefit calculable under the tax allocation agreement. F-18 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) RELATED PARTY TRANSACTIONS (a) Transactions with Parent Advances from Parent at December 31, 1996 and 1995 includes costs charged to the Company by the Parent and advances received from the Parent to fund operations, net of repayments, and is payable upon demand after December 31, 1996. The Parent incurs certain costs on the Company's behalf, including primarily insurance and corporate transportation services, and allocates such costs to the Company based on actual usage. The cost to the Company for such services was approximately $2,100,000 and $2,500,000 in the years ended December 31, 1996 and 1995, respectively, and was not material in 1994. The Company has agreed to indemnify the Parent and its subsidiaries against any costs or losses incurred by any of them as a result of their providing credit support to the Company (in the form of collateral pledges, guarantees, bonds or otherwise). (b) Transactions with Other Related Parties The Parent owned approximately 25% of Southern Pacific Rail Corporation and its subsidiaries (SPRC) at December 31, 1995. In September 1996, SPRC was acquired by Union Pacific Corporation. As a result of this transaction, the Parent owns approximately 5% of Union Pacific Corporation, and SPRC ceased to be a related party. The Company provides telecommunication services to SPRC and charged SPRC approximately $1,626,000, $3,625,000 and $3,358,000 in the years ended December 31, 1996, 1995 and 1994, respectively, for these services. Amounts due to the Company for telecommunication services totaled approximately $411,000 at December 31, 1995. Services under these agreements can be terminated with notice. In certain instances the Company purchases and has made future commitments (as described in note (13)--Commitments and Contingencies) relating to right- of-way easements from SPRC and utilizes specialized SPRC personnel and equipment for its construction projects. SPRC charged the Company approximately $3,548,000, $2,179,000 and $870,000 for these services in the years ended December 31, 1996, 1995 and 1994, respectively. Amounts due to SPRC for these activities totaled approximately $3,394,000 at December 31, 1995. The Company leases its corporate office in Denver, Colorado from an affiliate of the Parent at prevailing market rates. The cost to the Company for such lease was approximately $1,155,000 and $1,047,000 in the years ended December 31, 1996 and 1995, respectively, and was not material in 1994. (c) Expenses Incurred by Parent on Company's Behalf On November 11, 1996, the president and chief executive of the Company resigned his position. Upon his resignation, the Parent forgave a note receivable from him in the amount of approximately $1,022,000. This charge was allocated to the Company in 1996 and is included in selling, general and administrative expenses and additional paid-in capital in the Company's consolidated financial statements. F-19 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (13) COMMITMENTS AND CONTINGENCIES (a) Network Construction Project In 1996, the Company commenced construction of a coast-to-coast fiber optic telecommunications network (the "Network") that is scheduled for completion in 1998. The Company projects its total remaining cost at December 31, 1996 for completing the construction of the Network will be approximately $765,000,000. This amount includes the Company's commitment to purchase a minimum quantity of materials for approximately $257,000,000 in the year ended December 31, 1997, subject to quality and performance specifications. The Company has the option to extend the materials purchase agreement through December 31, 1999 and may assign some or all of its remaining purchase commitment to a third party or cancel the agreement by paying the seller an amount equal to 7% of any remaining commitment. The Company has contracted to provide a portion of the fibers in the Network to a third party and has granted an option for additional fibers in the Network (as described in note (5)--Network Construction Services Revenue and Expenses). The Company is pursuing financing to accomplish this construction and installation of equipment and also contemplates additional sales of Network fibers and capacity. Management believes that it will be successful in obtaining the necessary financing and completing the sales that will permit it to fulfill its contractual commitments. If all such financing were not obtained or sufficient sales not consummated, the Company could modify its plans and defer certain portions of the project. (b) Leases and Telecommunications Service Commitments The Company leases certain terminal locations and office space under operating lease agreements and has committed to use certain telecommunications capacity services. Future minimum payments under noncancelable operating lease and service commitments as of December 31, 1996 are as follows (in thousands):
CAPACITY SERVICE OPERATING COMMITMENTS LEASES TOTAL ----------- --------- ------- Year ended December 31: 1997...................................... $3,250 $ 4,213 $ 7,463 1998...................................... 3,000 3,327 6,327 1999...................................... -- 2,404 2,404 2000...................................... -- 1,410 1,410 2001...................................... -- 556 556 Thereafter................................ -- 828 828 ------ ------- ------- Total minimum payments.................. $6,250 $12,738 $18,988 ====== ======= =======
Capacity service expenses are included in telecommunications service costs. Amounts expensed in the years ended December 31, 1996, 1995 and 1994 were approximately $18,990,000, $19,622,000 and $17,226,000, respectively. Amounts expensed in the years ended December 31, 1996, 1995 and 1994 related to operating leases were approximately $4,998,000, $4,645,000 and $3,146,000, respectively. F-20 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (c) Easement Agreements The Company has Master Easement Agreements (the Original Agreements) with SPRC and its affiliated railroads which provide for payment of specified amounts based on miles of conduit used by the Company or sold to third parties. The Company has the option under the Original Agreements either to make annual payments for the term of the easement or to make lump sum payments at a discount. The Company has made annual payments through 1996 and retains the option to make the discounted lump sum payments in the future. The Original Agreement was amended effective August 20, 1996 (the Agreement Amendment). The Agreement Amendment grants the Company the right to install up to approximately 3,300 miles of new conduit in specified SPRC rail corridor, through August 9, 2001. The Company is required to construct a minimum of two conduits on a minimum of 1,200 route miles, as follows: (i) 400 miles on or before August 9, 1997; (ii) 400 additional miles on or before August 9, 1998; and (iii) 400 additional miles on or before August 9, 1999. In addition, the Company is required to provide SPRC with limited communications capacity as defined, for its own internal use. The Agreement Amendment requires the Company in some instances, as defined, to make lump-sum payments on a per-mile basis upon completion of conduit construction, or within two years of the creation of the related easement area. In other instances, as defined, the Company is required to make lump sum payments on a per-mile basis when the related conduit is placed in service. In addition to those with SPRC, the Company has easement agreements with other railroads and certain public transportation authorities. The Company's estimate of amounts payable under all noncancelable easement agreements, assuming the Company continues to make annual payments pursuant to the Original Agreement, totals approximately $82,000,000 at December 31, 1996. The Company's estimate of the amounts payable under all noncancelable easement agreements, assuming the Company exercises its option to make discounted lump- sum payments pursuant to the Original and Amended Agreement at December 31, 1996 are as follows (in thousands): Year ended December 31: 1997............................................................. $15,048 1998............................................................. 140 1999............................................................. 101 2000............................................................. 610 2001............................................................. 1,194 Thereafter....................................................... 2,170 ------- $19,263 =======
In addition to the above commitments, in certain limited instances the Company may be obligated to pay costs of relocating certain conduits owned by third-parties on approximately 500 miles of railroad rights-of-way. The majority of such commitments expire in February 2001. The Company accrues for such costs as they are identified. Historically, such costs have not been material. The amounts charged to network construction costs for sub-easements sold to third parties under the Original and Amended Agreement for the years ended December 31, 1996, 1995 and 1994 were approximately $2,633,000, $2,981,000 and $2,696,000, respectively. Amounts charged to selling, general and administrative expenses for easements retained by the Company were approximately $3,498,000 in 1996 and were not material in 1995 and 1994. F-21 QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (d) Mexico Easement Agreement In December 1995, the Company entered into an agreement (as amended January 1997) with Ferrocarriles Nacionales De Mexico, granting the Company easements for the construction of multiple conduit systems along railroad rights-of-way within Mexico, for consideration of approximately $7,700,000, including $1,100,000 in value-added taxes. The Company has capitalized total costs, including rights-of-way, equipment, construction and design costs, relating to this investment of approximately $13,000,000 as of December 31, 1996. (14) GROWTH SHARE PLAN The Company has a Growth Share Plan (the "Plan") for certain employees and directors of Qwest and certain affiliates. The total number of Growth Shares is set at 10,000,000 and the maximum number presently available for grant under the Plan is 850,000. Growth Shares granted under the Plan vest at the rate of 20% for each full year of service completed after the grant date subject to risk of forfeiture. Participants receive their vested portion of the increase in value of the Growth Shares upon a triggering event, as defined, which includes the end of a Growth Share performance cycle. The Company has estimated an increase in value of the Growth Shares at December 31, 1996 due to the signing of an agreement to provide an indefeasible right of use to a third-party (as described in note (5)--Network Construction Services Revenue and Expenses) and has recorded approximately $13,000,000 of additional compensation expense in 1996, approximately $9,000,000 of which is payable subsequent to December 31, 1997. Such expense is included in selling, general and administrative expenses in the consolidated financial statements. No expense was recognized in the accompanying consolidated financial statements for the years ended December 31, 1995 and 1994, as there were no significant compensatory elements in those periods. (15) SAVINGS PLAN The Company sponsors a 401(k) Savings Plan which permits employees to make contributions to the Savings Plan on a pre-tax salary reduction basis in accordance with the Internal Revenue Code. All full-time employees are eligible to participate after one year of service. The Company contributes a base percentage and matches a portion of the voluntary employee contributions. The cost of this Savings Plan charged to expenses was approximately $683,000, $385,000 and $283,000 in the years ended December 31, 1996, 1995 and 1994, respectively. (16) SIGNIFICANT CUSTOMERS During the years ended December 31, 1996, 1995 and 1994, two or more customers, in aggregate, have accounted for 10% or more of the Company's total revenues in one or more periods, as follows:
CUSTOMER A CUSTOMER B CUSTOMER C ---------- ---------- ---------- Year ended December 31: 1996.................................... 4.0% 27.8% 26.3% 1995.................................... 35.4% 6.8% -- 1994.................................... 5.9% 18.0% --
F-22 GLOSSARY Access charges............. The fees paid by long distance carriers to LECs for originating and terminating long distance calls on the LECs' local networks. ATM (Asynchronous Transfer Mode)..................... An information transfer standard that is one of a general class of packet technologies that relay traffic by way of an address contained within the first five bytes of a standard fifty-three-byte- long packet or cell. The ATM format can be used by many different information systems, including local area networks, to deliver traffic at varying rates, permitting a mix of voice, data and video (multimedia). AT&T....................... AT&T Corp. Backbone................... The through-portions of a transmission network, as opposed to spurs which branch off the through- portions. Band....................... A range of frequencies between two defined limits. Bandwidth.................. The relative range of analog frequencies or digital signals that can be passed through a transmission medium, such as glass fibers, without distortion. The greater the bandwidth, the greater the information carrying capacity. Bandwidth is measured in Hertz (analog) or Bits Per Second (digital). Capacity................... Refers to transmission. Carrier.................... A provider of communications transmission services by fiber, wire or radio. CLEC (Competitive Local Exchange Carrier)......... A company that competes with LECs in the local services market. Common Carrier............. A government-defined group of private companies offering telecommunications services or facilities to the general public on a non- discriminatory basis. Dark Fiber................. Fiber that lacks the requisite electronic and optronic equipment necessary to use the fiber for transmission. Digital.................... Describes a method of storing, processing and transmitting information through the use of distinct electronic or optical pulses that represent the binary digits 0 and 1. Digital transmission/ switching technologies employ a sequence of discrete, distinct pulses to represent information, as opposed to the continuously variable analog signal. G-1 DS-0, DS-1, DS-3........... Standard telecommunications industry digital signal formats, which are distinguishable by bit rate (the number of binary digits (0 and 1) transmitted per second). DS-0 service has a bit rate of 64 kilobits per second and typically transmits only one voice conversation at a time. DS-1 service has a bit rate of 1.544 megabits per second and typically transmits 24 simultaneous voice conversations. DS-3 service has a bit rate of 45 megabits per second and typically transmits 672 simultaneous voice conversations. DWDM (Dense Wave Division Multiplexing)............. A technique for transmitting 8 or more different light wave frequencies on a single fiber to increase the information carrying capacity. DS-3 miles................. A measure of the total capacity and length of a transmission path, calculated as the capacity of the transmission path in DS-3s multiplied by the length of the path in miles. Equal access............... The basis upon which customers of interexchange carriers are able to obtain access to their Primary Interexchange Carriers' (PIC) long distance telephone network by dialing "1", thus eliminating the need to dial additional digits and an authorization code to obtain such access. FBCs (Facilities Based Carriers)................. Facilities based carriers that own and operate their own network and equipment. FCC........................ Federal Communications Commission. Frame Relay................ A high-speed, data-packet switching service used to transmit data between computers. Frame Relay supports data units of variable lengths at access speeds ranging from 56 kilobits per second to 1.5 megabits per second. This service is well-suited for connecting local area networks, but is not presently well suited for voice and video applications due to the variable delays which can occur. Frame Relay was designed to operate at high speeds on modern fiber optic networks. Gbps....................... Gigabits per second, which is a measurement of speed for digital signal transmission expressed in billions of bits per second. Hertz...................... The unit for measuring the frequency with which an electromagnetic signal cycles through the zero-value state between lowest and highest states. One Hz (Hertz) equals one cycle per second. kHz (kilohertz) stands for thousands of Hertz; MHz (megahertz) stands for millions of Hertz. ISP (Internet Service Provider)................. A company that provides businesses and consumers with access to the Internet. 10XXX Service.............. The ability for a user to access any carrier's long distance network by dialing the carrier's Carrier Identification Code (CIC) which is a 1 plus 0 plus three specifically assigned digits, thereby bypassing the user's primary interexchange carrier. G-2 Interconnect............... Connection of a telecommunications device or service to the public switched telephone network ("PSTN"). Interexchange carrier...... A company providing inter-LATA or long distance services between LATAs on an intrastate or interstate basis. Kbps....................... Kilobits per second, which is a measurement of speed for digital signal transmission expressed in thousands of bits per second. LATAs (Local Access and Transport Areas).......... The approximately 200 geographic areas that define the areas between which the RBOCs currently are prohibited from providing long distance services. LEC (Local Exchange Carrier).................. A company historically providing local telephone services. Lit fiber.................. Fiber activated or equipped with the requisite electronic and optronic equipment necessary to use the fiber for transmission. Local loop................. A circuit that connects an end user to the LEC central office within a LATA. Long-haul circuit.......... A dedicated telecommunications circuit generally between locations in different LATAs. Mbps....................... Megabits per second, which is a measurement of speed for digital signal transmission expressed in millions of bits per second. MCI........................ MCI Communications, Inc. MOU........................ Minutes of use of long distance service. Multiplexing............... An electronic or optical process that combines a large number of lower speed transmission lines into one high speed line by splitting the total available bandwidth into narrower bands (frequency division), or by allotting a common channel to several different transmitting devices, one at a time in sequence (time division). OC-3, OC-12, OC-48 and OC-192.................... OC is a measure of SONET transmission optical carrier level, which is equal to the corresponding number of DS-3s (e.g. OC-3 is equal to 3 DS-3s and OC-48 is equal to 48 DS-3s). RBOCs (Regional Bell Operating Companies)...... The seven local telephone companies (formerly part of AT&T) established as a result of the AT&T Divestiture Decree. Regeneration/amplifier..... Devices which automatically re-transmit or boost signals on an out-bound circuit. Reseller................... A carrier that does not own transmission facilities, but obtains communications services from another carrier for resale to the public. G-3 SONET (Synchronous Optical Network Technology)....... An electronics and network architecture for variable-bandwidth products which enables transmission of voice, data and video (multimedia) at very high speeds. SONET ring................. A network architecture which provides for instantaneous restoration of service in the event of a fiber cut by automatically rerouting traffic the other direction around the ring. This occurs so rapidly (in 50 milliseconds) it is virtually undetectable to the user. Spectrum................... A term generally applied to radio frequencies. Sprint..................... Sprint Corporation Switch..................... A device that selects the paths or circuits to be used for transmission of information and establishes a connection. Switching is the process of interconnecting circuits to form a transmission path between users and it also captures information for billing purposes. Switched service carriers.................. A carrier that sells switched long distance service and generally refers to a carrier that owns its switch. Switchless resellers....... A carrier that does not own facilities or switches, but purchases minutes in high volumes from other carriers and resells those minutes. Trunk...................... A communications channel between two switches. "Trunking" calls reduces the likelihood of traffic blockage due to network congestion. A trunked system combines multiple channels with unrestricted access in such a manner that user demands for channels are automatically "queued" and then allocated to the first available channel. WorldCom................... WorldCom, Inc. G-4 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN- CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HERE- UNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH IN- FORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SO- LICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SO- LICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICITATION. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 10 Use of Proceeds.......................................................... 17 Dividend Policy.......................................................... 17 Dilution................................................................. 18 Capitalization........................................................... 19 Selected Consolidated Financial Data..................................... 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 22 Industry Overview........................................................ 30 Business................................................................. 34 Regulation............................................................... 46 Management............................................................... 52 Principal Stockholder.................................................... 60 Certain Transactions..................................................... 60 Description of Capital Stock............................................. 62 Shares Eligible for Future Sale.......................................... 64 Description of Certain Indebtedness...................................... 65 Underwriting............................................................. 67 Legal Matters............................................................ 69 Experts.................................................................. 69 Additional Information................................................... 69 Index to Consolidated Financial Statements............................... F-1 Glossary................................................................. G-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF- FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE- MENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES QWEST COMMUNICATIONS INTERNATIONAL INC. COMMON STOCK ($.01 PAR VALUE) [LOGO OF QWEST COMMUNICATIONS INTERNATIONAL INC. APPEARS HERE] SALOMON BROTHERS INC DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN, SACHS & CO. MERRILL LYNCH & CO. PROSPECTUS DATED , 1997 ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE OR JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR + +SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE + +SECURITIES LAWS OF ANY SUCH STATE OR JURISDICTION. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS SUBJECT TO COMPLETION , 1997 PROSPECTUS SHARES QWEST COMMUNICATIONS INTERNATIONAL INC. [LOGO OF QWEST COMMUNICATIONS COMMON STOCK INTERNATIONAL INC. APPEARS HERE] ($.01 PAR VALUE) All of the shares of Common Stock offered hereby (the "Shares") are being sold by Qwest Communications International Inc. (the "Company" or "Qwest"). Of the Shares being offered, Shares are being offered by the International Underwriters (as defined herein) outside the United States and Canada (the "International Offering") and Shares are being offered by the U.S. Underwriters (as defined herein) in a concurrent offering in the United States and Canada (the "U.S. Offering" and, collectively with the International Offering, the "Offerings"), subject to transfers between the International Underwriters and the U.S. Underwriters (collectively, the "Underwriters"). The Price to Public and the Underwriting Discount per Share will be identical for the International Offering and the U.S. Offering. See "Underwriting." The closing of the International Offering and the U.S. Offering are conditioned upon each other. Prior to the Offerings, there has been no public market for the Common Stock. See "Underwriting" for factors to be considered in determining the initial public offering price. Application will be made for listing of the Common Stock on the Nasdaq Stock Market's National Market (the "Nasdaq National Market") under the symbol " ." PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY MATTERS DISCUSSED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 10. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------- PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT COMPANY(1) Per Share................................... $ $ $ Total(2).................................... $ $ $ - --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated to be $ . (2) The Company has granted to the International Underwriters and the U.S. Underwriters 30-day options to purchase up to an aggregate of additional shares, at the Price to Public, less Underwriting Discount, solely to cover over-allotments, if any. If the Underwriters exercise such options in full, the total Price to Public, Underwriting Discount and Proceeds to Company will be $ , $ and $ , respectively. See "Underwriting." The Shares are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part and to withdraw, cancel or modify the offer without notice. It is expected that delivery of the Shares will be made at the office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or through the facilities of The Depository Trust Company, on or about , 1997. SALOMON BROTHERS INTERNATIONAL LIMITED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL The date of this Prospectus is , 1997. ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS The following is a general discussion of certain United States federal tax consequences expected to result from the ownership and disposition of Common Stock by a holder that, for United States federal income tax purposes, is not a "United States person" (each such person is referred to herein as a "Non- United States Holder"). For purposes of this discussion, the term "United States person" means a person that, for United States federal income tax purposes, is (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in or under the laws of the United States or of any State, (iii) an estate the income of which is subject to United States federal income tax, regardless of its source, or (iv) a trust if (a) a court within the United States is able to exercise primary supervision over the administration of the trust and (b) one or more United States fiduciaries have the authority to control all substantial decisions of the trust. Holders who are resident alien individuals will be subject to United States federal taxation with respect to the Common Stock as if they were United States citizens, and thus, are not Non-United States Holders for purposes of this discussion. This discussion is based upon the Internal Revenue Code of 1986, as amended, (the "Code"), the applicable Treasury regulations ("Regulations"), and public administrative and judicial interpretations of the Code and Regulations as of the date hereof, all of which are subject to change, which changes could be applied retroactively. This discussion does not purport to cover all aspects of United Stated federal taxation that may be relevant to, or the actual tax effect that any of the matters described herein will have on, any particular Non-United States Holder and does not address any tax consequences arising under the laws of any foreign, state, or local taxing jurisdiction. The Company has not obtained an opinion of counsel with respect to the matters discussed below, and nothing contained herein should be construed as constituting such an opinion. Moreover, this discussion does not consider any specific facts or circumstances that may apply to a particular Non-United States Holder. THIS DISCUSSION IS FOR GENERAL INFORMATION PURPOSES ONLY. EACH PROSPECTIVE INVESTOR IS EXPECTED AND URGED TO CONSULT ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO SUCH PERSON OF OWNING AND DISPOSING OF COMMON STOCK (INCLUDING SUCH PERSON'S STATUS AS A UNITED STATES PERSON OR A NON- UNITED STATES PERSON) AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY FOREIGN, STATE, OR LOCAL TAXING JURISDICTION. DIVIDENDS Dividends paid by the Company to a Non-United States Holder will generally be subject to withholding of United States federal income tax at the rate of 30 percent, or such lower rate as may be specified by an applicable income tax treaty, unless the dividend is effectively connected with the conduct of a trade or business within the United States by the Non-United States Holder or, if any income tax treaty applies, is attributable to a United States permanent establishment of the Non-United States Holder and the Non-United States Holder provides the payor with proper documentation (Form 4224). In order to claim the benefit of an applicable tax treaty, a Non-United States Holder may have to file with the Company or its dividend paying agent an exemption or reduced treaty rate certificate or letter in accordance with the terms of the treaty. Under current Regulations, for purposes of determining whether tax is to be withheld at a 30 percent rate or at a reduced rate as specified by an income tax treaty, the Company ordinarily will presume that dividends paid to an address in a foreign country are paid to a resident of such country absent knowledge that such presumption is not warranted. However, under proposed Regulations which have not yet been put into effect, additional certification requirements would apply after December 31, 1997. See "--Information Reporting and Backup Withholding." 63 ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS In the case of dividends that are effectively connected with a Non-United States Holder's conduct of a trade or business in the United States or, if an income tax treaty applies, is attributable to a United States permanent establishment of the Non-United States Holder, the Non-United States Holder will generally be subject to the same United States federal income tax on net income that applies to United States persons. A Non-United States Holder that is a corporation receiving effectively connected dividends may also be subject to an additional branch profits tax which is imposed, under certain circumstances, at a rate of 30 percent (or such lower rate as may be specified by an applicable treaty) of the corporate Non-United States Holder's "effectively connected earnings and profits," subject to certain adjustments. GAIN ON DISPOSITION Except under special rules for individuals described below, a Non-United States Holder generally will not be subject to United States federal income tax on gain resulting from a sale or other disposition of Common Stock unless the gain is (i) effectively connected with the conduct of a United States trade or business by the Non-United States Holder or (ii) treated as effectively connected with such a trade or business because the Company is or has been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code and certain other conditions are satisfied as discussed below. Any gain from the disposition of Common Stock that is (or is treated as) effectively connected with a United States trade or business will be subject to substantially the same United States federal income tax treatment that applies to United States persons (and, in the case of corporate Non-United States Holders, may be subject to the branch profits tax), except as otherwise provided by an applicable United States income tax treaty. A corporation is generally a "United States real property holding corporation" for United States federal income tax purposes if the fair market value of its United States real property interests equals or exceeds 50 percent of the sum of the fair market value of its worldwide real property interests plus its other assets used or held for use in a trade or business both within and outside of the United States. The Company does not believe that it is a United States real property holding corporation; however, there can be no assurance that the Company will not become, or be determined to be or have been, such a corporation. Even if the Company becomes a United States real property holding corporation, such status will not cause gain from the disposition of Common Stock to be treated as effectively connected with a United States trade or business so long as (i) the Common Stock is regularly traded on an established securities market (as defined in Regulations) and (ii) the Non-United States Holder has not held, directly or indirectly, more than 5 percent of the Common Stock at any time during the five-year period ending on the date of disposition. Special rules apply to individual Non-United States Holders. An individual Non-United States Holder who recognizes gain from the disposition of Common Stock held as a capital asset and is present in the United States for a period or periods aggregating 183 days or more during the taxable year of disposition generally will be taxed at a rate of 30 percent on any such gain (less certain capital losses, if any, from United States sources), if the Non-United States Holder either (i) has a "tax home" in the United States (as defined in Regulations) or (ii) maintains an office or other fixed place of business in the United States to which such gain is attributable. In addition, certain individual Non-United States Holders who once were United States citizens may be subject to special rules applicable to United States expatriates. 64 ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS FEDERAL ESTATE TAXES Common Stock owned or treated as owned by an individual who is not a citizen or resident (as specially defined for United States federal estate tax purposes) of the United States at the date of death will be included in such individual's estate for United States federal estate tax purposes and thus will be subject to United States federal estate tax, unless an applicable estate tax treaty provides otherwise. INFORMATION REGARDING AND BACKUP WITHHOLDING The Company must report annually to the United States Internal Revenue Service ("IRS") and to each Non-United States Holder the amount of dividends paid to, and the tax withheld with respect to, such Non-United States Holder, regardless of whether any tax was actually withheld because, for example, the dividends were effectively connected with a trade or business of the Non- United States Holder in the United States or the withholding requirement was reduced or eliminated under an applicable United States income tax treaty. That information may also be made available to the tax authorities of the country in which the Non-United States Holder resides under the provisions of an applicable income tax treaty or agreement. United States backup withholding (which generally is imposed at the rate of 31 percent on certain payments to persons not otherwise exempt who fail to furnish certain identifying information to the IRS) will generally not apply to dividends paid to a Non-United States Holder that are subject to withholding at the 30 percent rate (or would be so subject but for a reduced rate under an applicable income tax treaty). In addition, under current law the payor of dividends may rely on the payee's foreign address in determining that the payee is exempt from backup withholding, unless the payor has knowledge that the payee is in fact a United States person. However, under proposed Regulations, in the case of dividends paid after December 31, 1997 (December 31, 1999, in the case of dividends paid to accounts in existence on or before the date that is 60 days after the proposed Regulations are published as final Regulations), a Non-United States Holder generally would be subject to backup withholding at a 31 percent rate, unless certain certification procedures (or, in the case of payments made outside the United States with respect to an offshore account, certain documentary evidence procedures) are complied with directly or through an intermediary. These backup withholding and information reporting requirements also apply to the gross proceeds paid to a Non-United States Holder upon the disposition of Common Stock by or through a United States office of a United States or foreign broker, unless the Non-United States Holder certifies to the broker under penalties of perjury as to its name and address and the holder either is a Non-United States Holder or otherwise establishes an exemption from the requirements. Generally, United States information reporting and backup withholding will not apply to a payment of disposition proceeds if the payment is made outside the United States through a non-United States office of a non- United States broker. However, Information reporting requirements (but not backup withholding) will apply to a payment of the proceeds of a disposition of Common Stock by or through a foreign office of (i) a United States broker, (ii) a foreign broker 50 percent or more of whose gross income for certain periods is effectively connected with the conduct of a trade or business in the United States, or (iii) a foreign broker that is a "controlled foreign corporation" for United States federal income tax purposes, unless the broker has documentary evidence in its records that the holder is a Non-United States Holder and certain other conditions are met, or the holder otherwise establishes an exemption from the requirements. Neither backup withholding nor information reporting will generally apply to a payment of the proceeds of a disposition of Common Stock by or through a foreign office of a foreign broker not described in the preceding sentence. Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Non-United States Holder's United States federal income tax liability, provided that required information is furnished to the IRS. 65 ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS UNDERWRITING Subject to the terms and conditions set forth in an underwriting agreement among the Company and the International Underwriters (the "International Underwriting Agreement"), the Company has agreed to sell to each of the International Underwriters named below (the "International Underwriters"), and each of the International Underwriters, for whom Salomon Brothers International Limited, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman Sachs International and Merrill Lynch International are acting as the representatives (the "International Representatives"), has severally agreed to purchase the number of Shares set forth opposite its name below:
UNDERWRITING INTERNATIONAL UNDERWRITERS COMMITMENT -------------------------- ------------ Salomon Brothers International Limited.......................... Donaldson, Lufkin & Jenrette Secutities Corporation............. Goldman Sachs International .................................... Merrill Lynch International..................................... ---------- Total......................................................... ==========
The Company has been advised by the International Representatives that the several International Underwriters initially propose to offer such Shares to the public at the Price to Public set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Share. The International Underwriters may allow, and such dealers may re-allow, a concession not in excess of $ per Share to other dealers. After the Offerings, the Price to Public and such concessions may be changed. The Company has granted to the International Underwriters and the U.S. underwriters (the "U.S. Underwriters" and, collectively with the International Underwriters, the "Underwriters") options, exercisable during the 30-day period after the date of this Prospectus, to purchase up to additional shares of Common Stock from the Company at the Price to Public less the Underwriting Discount, solely to cover over-allotments. To the extent that the International Underwriters and the U.S. Underwriters exercise such options, each of the International Underwriters and the U.S. Underwriters, as the case may be, will be committed, subject to certain conditions, to purchase a number of option shares proportionate to such International Underwriter's or U.S. Underwriter's initial commitment. The Company has entered into a U.S. Underwriting Agreement with the U.S. Underwriters named therein, for whom Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated are acting as the representatives (the "U.S. Representatives") providing for the concurrent offer and sale of 68 ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS Shares (in addition to the shares covered by the over-allotment options described above) in the United States and Canada. Both the International Underwriting Agreement and the U.S. Underwriting Agreement provide that the obligations of the International Underwriters and the U.S. Underwriters are such that if any of the Shares are purchased by the International Underwriters pursuant to the International Underwriting Agreement, or by the U.S. Underwriters pursuant to the U.S. Underwriting Agreement, all the Shares agreed to be purchased by either the International Underwriters or the U.S. Underwriters, as the case may be, pursuant to their respective agreements must be so purchased. The Price to Public and Underwriting Discount per Share for the International Offering and the U.S. Offering will be identical. The closing of the U.S. Offering is a condition to the closing of the International Offering and the closing of the International Offering is a condition to the closing of the U.S. Offering. Each International Underwriter has severally agreed, that, as part of the distribution of the Shares offered by the International Underwriters, (i) it is not purchasing any Shares for the account of any United States or Canadian Person and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute this Prospectus to any person within the United States or Canada or to any United States or Canadian Person. Each U.S. Underwriter has severally agreed that, as part of the distribution of the Shares by the U.S. Underwriters, (i) it is not purchasing any Shares for the account of anyone other than a United States or Canadian Person, and (ii) it has not offered or sold, and will not offer or sell, directly or indirectly, any Shares or distribute any Prospectus relating to the U.S. Offering to any person outside the United States or Canada or to anyone other than a United States or Canadian Person. The foregoing limitations do not apply to stabilization transactions or to certain other transactions specified in the Agreement Between U.S. Underwriters and International Underwriters. "United States" or "Canadian Person" means any person who is a national or resident of the United States or Canada, any corporation, partnership or other entity created or organized in or under the laws of the United States or Canada or of any political subdivision thereof, and any estate or trust which is subject to United States or Canadian federal income taxation, regardless of the source of its income (other than the foreign branch of any United States or Canadian Person), and includes any United States or Canadian branch of a person other than a United States or Canadian Person. Pursuant to the Agreement Between U.S. Underwriters and International Underwriters, sales may be made between the U.S. Underwriters and the International Underwriters of such number of Shares as may be mutually agreed. The price of any Shares so sold shall be the Price to Public, less an amount not greater than the concession to securities dealers. To the extent that there are sales between the International Underwriters and the U.S. Underwriters pursuant to the Agreement Between U.S. Underwriters and International Underwriters, the number of Shares initially available for sale by the International Underwriters or by the U.S. Underwriters may be more or less than the amount specified on the cover page of this Prospectus. Each International Underwriter has severally represented and agreed that (i) it has not offered or sold and, prior to the date six months after the closing date of the Offerings, will not offer to sell any Shares to persons in the United Kingdom except to persons whose ordinary activities involve them in acquiring, holding, managing or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which have not resulted and will not result in an offer to the public in the United Kingdom within the meaning of the Public Offers of Securities Regulations 1995 (the "Regulations"); (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 of the United Kingdom and the Regulations with respect to anything done by it in relation to the Shares in, from or otherwise involving the United Kingdom; and (iii) it has only issued or passed on, and will only issue or pass on, to any person in the United Kingdom any document received by it in connection with the issue of the Shares to a person who is of a kind described in Article 11 (3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1995, or is a person to whom the document may otherwise lawfully be issued or passed on. 69 ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS Purchasers of the Shares offered hereby may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the Price to Public set forth in the cover page hereof. Any offer of the Shares in Canada will be made only pursuant to an exemption from the registration and qualification requirements in any jurisdiction in Canada in which such offer is made. The International Underwriting Agreement provides that the Company will indemnify the International Underwriters against certain liabilities and expenses, including liabilities under the Securities Act, or contribute to payments the International Underwriters may be required to make in respect thereof. The Company and its parent will agree, and it is expected that the directors and principal officers of the Company will agree, not to offer, sell, contract to sell or otherwise dispose of, directly or indirectly, or announce the offering of any shares of Common Stock, including any such shares beneficially or indirectly owned or controlled by the Company, or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock, for days from the date of this Prospectus, without the prior written consent of the International Representatives, except for (i) shares issued in connection with the Company's Growth Share Plan and (ii) shares issued in connection with the Offerings made hereby. During and after the Offerings, the Underwriters may purchase and sell the Common Stock in the open market. These transactions may include overallotment and stabilizing transactions and purchases to cover syndicate short positions created in connection with the Offerings. The Underwriters also may impose a penalty bid, whereby selling concessions allowed to syndicate members of other broker-dealers in respect of the Shares of Common Stock sold in the Offerings for their account may be reclaimed by the syndicate if such Shares are repurchased by the syndicate in stabilizing or covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the Common Stock which may be higher than the price that might otherwise prevail in the open market. Prior to the Offerings, there has been no public market for the Common Stock. The Price to Public will be determined by negotiations between the Company and the Representatives. Among the factors to be considered in determining the Price to Public are prevailing market conditions, the market values of publicly traded companies that the Underwriters believe to be somewhat comparable to the Company, the demand for the Shares and for similar securities of publicly traded companies that the Underwriters believe to be somewhat comparable to the Company, the future prospects of the Company and its industry in general, sales, earnings and certain other financial and operating information of the Company in recent periods, and other factors deemed relevant. There can be no assurance that the prices at which the Shares will sell in the public market after the Offerings will not be lower than the Price to Public. 70 ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN- FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN- CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UN- DERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OR SO- LICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH SOLICI- TATION. --------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... Risk Factors............................................................. Use of Proceeds.......................................................... Dividend Policy.......................................................... Dilution................................................................. Capitalization........................................................... Selected Consolidated Financial Data..................................... Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... Industry Overview........................................................ Business................................................................. Regulation............................................................... Management............................................................... Principal Stockholder.................................................... Certain Transactions..................................................... Description of Capital Stock............................................. Shares Eligible for Future Sale.......................................... Description of Certain Indebtedness...................................... Certain United States Federal Tax Consequences to Non-United States Holders................................................................. 63 Underwriting............................................................. 68 Legal Matters............................................................ Experts.................................................................. Additional Information................................................... Index to Consolidated Financial Statements............................... F-1 Glossary................................................................. G-1
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF- FECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE- MENT IS IN ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS OR WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. SHARES QWEST COMMUNICATIONS INTERNATIONAL INC. COMMON STOCK ($.01 PAR VALUE) [LOGO OF QWEST COMMUNICATIONS INTERNATIONAL APPEARS HERE] SALOMON BROTHERS INTERNATIONAL LIMITED DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION GOLDMAN SACHS INTERNATIONAL MERRILL LYNCH INTERNATIONAL PROSPECTUS DATED , 1997 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. The expenses (other than underwriting discounts and commissions) payable in connection with the sale of the Common Stock offered hereby (including the Common Stock which may be issued pursuant to the over-allotment option) are as follows:
AMOUNT ---------- SEC registration fee......................................... $87,121.21 NASD filing fee*............................................. Nasdaq National Market listing fee*.......................... Printing and engraving expenses*............................. Legal fees and expenses*..................................... Accounting fees and expenses*................................ Blue Sky fees and expenses (including legal fees and expenses)*.................................................. Transfer agent and registrar fees and expenses*.............. Miscellaneous*............................................... ---------- Total*................................................... $ ==========
-------- *To be filed by amendment All of the above expenses are estimated except for the SEC registration fee, NASD filing fee and Nasdaq National Market listing fee. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 145 of the Delaware General Corporation Law ("DGCL") empowers a Delaware corporation to indemnify any persons who are, or are threatened to be made, parties to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of such corporation), by reason of the fact that such person is or was an officer or director of such corporation, or is or was serving at the request of such corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise. The indemnity may include expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding, if such officer or director acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such officer's or director's conduct was unlawful. A Delaware corporation may indemnify officers and directors in an action by or in the right of the corporation under the same conditions, except that no indemnification is permitted without judicial approval if the officer or director is adjudged to be liable to the corporation in the performance of his duty. Where an officer or director is successful on the merits or otherwise in the defense of any action referred to above, the corporation must indemnify such officer or director against the expenses which such officer or director actually and reasonably incurred. In accordance with Section 102(b)(7) of the DGCL, the Company's Certificate of Incorporation provides that directors shall not be personally liable for monetary damages for breaches of their fiduciary duty as directors except for (i) breaches of their duty of loyalty to the Company or its stockholders, (ii) acts or omissions not in good faith or which involve intentional misconduct or knowing violations of law, (iii) certain transactions under Section 174 of the DGLC (unlawful payment of II-1 dividends or unlawful stock purchases or redemptions) or (iv) transactions from which a director derives an improper personal benefit. The effect of this provision is to eliminate the personal liability of directors for monetary damages for actions involving a breach of their fiduciary duty of care, including any actions involving gross negligence. The Certificate of Incorporation and the By-laws of the Company provide for indemnification of the Company's officers and directors to the fullest extent permitted by applicable law, except that the By-laws provide that the Company is required to indemnify an officer or director in connection with a proceeding initiated by such person only if the proceeding was authorized by the Board of Directors of the Company. In addition, the Company maintains insurance policies which provide coverage for its officers and directors in certain situations where the Company cannot directly indemnify such officers or directors. The Underwriting Agreements provide for indemnification of directors and officers of the Company by the Underwriters against certain liabilities. Pursuant to Section 145 of the DGCL and the Certificate of Incorporation and the By-laws of the Company, the Company maintains directors' and officers' liability insurance coverage. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. In the three years preceding the filing of this Registration Statement, the registrant has issued the following securities that were not registered under the Securities Act of 1933, as amended (the "Securities Act"): (a) $250,000,000 aggregate principal amount of the registrant's 10 7/8% Senior Notes Due 2007 (the "Notes") sold to each of Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. (the "Initial Purchasers"), at an aggregate discount from par value of 2.750%. The Notes have been resold by the Initial Purchasers only to institutional investors that are "qualified institutional buyers" within the meaning of Rule 144A under the Securities Act or "accredited investors" within the meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act; and (b) the issuance, upon formation of the registrant, of 10,000 shares of its Common Stock, at its par value of $.01 per share, to its sole stockholder. Such issuances were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Section 4(2) thereof relative to transactions by an issuer not involving any public offering or the rules and regulations thereunder. All of such shares of Common Stock are deemed restricted securities within the meaning of Rule 144 under the Securities Act. II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a) EXHIBITS:
EXHIBIT NO. DESCRIPTION ------- ----------- 1.1* --Form of Underwriting Agreement 3.1* --Form of Certificate of Incorporation of the Company, to be in effect as of the Effective Date 3.2 --By-laws of the Company 4.1* --Form of Certificate for the shares of Common Stock being offered 4.2 --Indenture dated as of March 31, 1997 with Bankers Trust Company (including form of the Company's 10 7/8% Senior Notes Due 2007 as an exhibit thereto) 4.3 --Registration Agreement dated March 31, 1997 with Salomon Brothers Inc relating to the Company's 10 7/8% Senior Notes Due 2007 5.1* --Opinion of Holme Roberts & Owen LLP as to the validity of the shares of Common Stock being offered 10.1 --Growth Share Plan, as amended, effective October 1, 1996 10.2* --Employment Agreement dated December 21, 1996 with Joseph P. Nacchio 10.3* --Employment Agreement dated July 1994 with Robert S. Woodruff 10.4* --Settlement Agreement, General Release and Covenant Not to Sue dated as of November 11, 1996 with Douglas H. Hanson 10.5* --IRU Agreement dated as of October 18, 1996 with Frontier Communications International Inc. 10.6* --IRU Agreement dated as of February 26, 1996 with WorldCom Network Services, Inc. 11.1* --Statement re Computation of Per Share Earnings 21.1 --Subsidiaries of the Registrant 23.1 --Consent of KPMG Peat Marwick LLP 23.2* --Consent of Holme Roberts & Owen LLP (included in Exhibit 5.1) 24.1 --Powers of Attorney (see signature page on page II-4 of this Registration Statement) 27.1 --Financial Data Schedule
- -------- * To be filed by amendment (b) FINANCIAL STATEMENT SCHEDULES:
SCHEDULE NO. DESCRIPTION -------- ----------- --Condensed Information as to the Financial Position of the I Registrant II --Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The undersigned registrant hereby undertakes (1) to provide to the Underwriters at the closing specified in the Underwriting Agreements, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser; (2) that for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in the form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective; and (3) that for the purpose of determining any liability under the Securities Act, each post- effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the Company has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado on April 17, 1997. Qwest Communications International Inc. /s/ By: _________________________________ Joseph P. Nacchio President and Chief Executive Officer POWER OF ATTORNEY AND SIGNATURES We, the undersigned officers and directors of Qwest Communications International Inc. hereby severally constitute and appoint Joseph P. Nacchio, Robert S. Woodruff and Richard L. Smith, and each of them singly, our true and lawful attorneys, with full power to them and each of them singly, to sign for us in our names in the capacities indicated below, all pre-effective and post- effective amendments to this Registration Statement and any abbreviated Registration Statement in connection with this Registration Statement pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and generally to do all things in our names and on our behalf in such capacities to enable the Company to comply with the provisions of the Securities Act of 1933, as amended, and all requirements of the Securities and Exchange Commission. Pursuant to the requirements of the Securities Act of 1933, as amended, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE(S) DATE --------- -------- ---- /s/ Chairman of the Board April 17, 1997 ____________________________________ Philip F. Anschutz /s/ Director, President and Chief April 17, 1997 ____________________________________ Executive Officer (Principal Executive Officer) Joseph P. Nacchio /s/ Director and Executive Vice April 17, 1997 ____________________________________ President - Finance and Robert S. Woodruff Chief Financial Officer and Treasurer (Principal Financial Officer) /s/ Vice President and Controller April 17, 1997 ____________________________________ (Principal Accounting Officer) Richard L. Smith /s/ Director April 17, 1997 ____________________________________ Cannon Y. Harvey /s/ Director April 17, 1997 ____________________________________ Richard T. Liebhaber /s/ Director April 17, 1997 ____________________________________ Douglas L. Polson /s/ Director April 17, 1997 ____________________________________ Craig D. Slater
II-4 Independent Auditors' Report ---------------------------- The Board of Directors Qwest Communications International Inc.: Under date of February 19, 1997, we reported on the consolidated balance sheets of Qwest Communications International Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholder's equity, and cash flows for each of the years in the three-year period ended December 31, 1996 which are included in the prospectus. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related consolidated financial statement schedules in the registration statement. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits. In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. Denver, Colorado February 19, 1997 KPMG Peat Marwick LLP Schedule 1 ---------- Page 1 of 4 QWEST COMMUNICATIONS INTERNATIONAL INC. Condensed Information as to the Financial Position of the Registrant December 31, 1996 (Amounts in Thousands) - -------------------------------------------------------------------------------- Assets - ------ Current asset - short-term advances to Qwest Corporation $ 19,138 Investment in Qwest Corporation 9,442 ------ Total assets $ 28,580 ====== Liability and Stockholder's Equity - ---------------------------------- Current liability - advances from Anschutz Company (the "Parent") $ 19,138 Stockholder's equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares. No shares issued and outstanding. - Common stock, $.01 par value. Authorized 10,000,000 shares. Issued and outstanding 10,000 shares. - Additional paid-in capital 55,892 Accumulated deficit (46,450) ------ Total stockholder's equity 9,442 ------ Total liability and stockholder's equity $ 28,580 ======
See accompanying note to financial statement schedules. Schedule 1 ---------- Page 2 of 4 QWEST COMMUNICATIONS INTERNATIONAL INC. Condensed Information as to the Operations of the Registrant Year Ended December 31, 1996 (Amounts in Thousands) - -------------------------------------------------------------------------------- Equity in loss of Qwest Corporation $(6,967) ----- Net loss $(6,967) =====
See accompanying note to financial statement schedules. Schedule 1 ---------- Page 3 of 4 QWEST COMMUNICATIONS INTERNATIONAL INC. Condensed Information as to the Cash Flows of the Registrant Year Ended December 31, 1996 (Amounts in Thousands) - -------------------------------------------------------------------------------- Cash flows from operating activities - Net loss $ (6,967) Adjustments to reconcile net loss to net cash used by operating activities - Equity in loss of Qwest Corporation 6,967 ------ Net cash used in operating activities - ------ Cash flows from investing activities - Repayments from Qwest Corporation, net of advances and expenses incurred by Parent on Qwest Corporation's behalf 18,047 ------ Net cash used in investing activities 18,047 ------ Cash flows from financing activities - Repayments to Parent, net of advances (19,069) Expenses incurred by Parent on Qwest Corporation's behalf 1,022 ------ Net cash provided by financing activities (18,047) ------ Net increase in cash and cash equivalents - Cash and cash equivalents, beginning of year - ------ Cash and cash equivalents, end of year $ - ====== Supplemental disclosure of significant non-cash financing activity-Reduction in additional paid-in capital attributable to effect of cancellation of income tax benefit receivable from Parent $ 11,088 ======
See accompanying note to financial statement schedules. Schedule 1 ---------- Page 4 of 4 QWEST COMMUNICATIONS INTERNATIONAL INC. Note to Financial Statement Schedules December 31, 1996 - -------------------------------------------------------------------------------- Qwest Communications International Inc. (the "Company") is wholly-owned by Anschutz Company (the "Parent"). The Company became the sole owner of Qwest Corporation and the ultimate holding company of Qwest Communications Corporation and subsidiaries through a merger in 1996 with another wholly-owned subsidiary of the Parent. The merger was accounted for as a business combination of entities under common control using carryover basis. Schedule II ----------- QWEST COMMUNICATIONS INTERNATIONAL INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Years Ended December 31, 1996, 1995 and 1994 (Amounts in Thousands) - --------------------------------------------------------------------------------
Additions Deductions -------------------------- -------------- Balance at Charged Write-offs, Balance beginning of to profit net of at end of year and loss Other (1) recoveries year ---- -------- --------- ------------ ---- Description Year ended December 31, 1996: Allowance for doubtful receivables - trade $ 2,621 1,867 - (819) 3,669 ===== ===== ==== === ===== Year ended December 31, 1995: Allowance for doubtful receivables - trade $ 1,253 1,758 646 (1,036) 2,621 ===== ===== === ===== ===== Year ended December 31, 1994: Allowance for doubtful receivables - trade $ 1,510 735 - (992) 1,253 ===== ===== ==== === =====
Note (1): Represents additions resulting from acquisitions. EX-3.2 2 BY-LAWS OF THE COMPANY EXHIBIT 3.2 BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC. As Amended April 16, 1997 INDEX TO BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC.
Page ARTICLE I - OFFICES............................................................1 Section 1.01 Business Offices............................................1 Section 1.02 Registered Office...........................................1 ARTICLE II - STOCKHOLDERS......................................................1 Section 2.01 Annual Meeting..............................................1 Section 2.02 Special Meetings............................................1 Section 2.03 Place of Meeting............................................2 Section 2.04 Notice of Meetings..........................................2 Section 2.05 Fixing Date for Determination of Stockholders of Record.....2 Section 2.06 Voting List.................................................3 Section 2.07 Proxies.....................................................3 Section 2.08 Quorum and Manner of Acting.................................3 Section 2.09 Voting of Shares............................................3 Section 2.10 Voting of Shares by Certain Holders.........................3 Section 2.11 Action Without a Meeting....................................4 ARTICLE III - BOARD OF DIRECTORS...............................................5 Section 3.01 General Powers..............................................5 Section 3.02 Number, Tenure and Qualifications...........................5 Section 3.03 Resignation.................................................5 Section 3.04 Removal.....................................................5 Section 3.05 Vacancies...................................................5 Section 3.06 Regular Meetings............................................6 Section 3.07 Special Meetings............................................6 Section 3.08 Meetings by Telephone.......................................6 Section 3.09 Notice of Meetings..........................................6 Section 3.10 Quorum and Manner of Acting.................................7 Section 3.11 Interested Directors........................................7 Section 3.12 Action Without a Meeting....................................7 Section 3.13 Executive and Other Committees..............................7 Section 3.14 Compensation................................................8 ARTICLE IV - OFFICERS..........................................................8 Section 4.01 Number and Qualifications...................................8
-i- Section 4.02 Election and Term of Office.................................9 Section 4.03 Compensation................................................9 Section 4.04 Resignation.................................................9 Section 4.05 Removal.....................................................9 Section 4.06 Vacancies...................................................9 Section 4.07 Authority and Duties........................................9 Section 4.08 Surety Bonds...............................................11 ARTICLE V - STOCK.............................................................11 Section 5.01 Issuance of Shares.........................................11 Section 5.02 Stock Certificates; Uncertificated Shares..................11 Section 5.03 Payment for Shares.........................................11 Section 5.04 Lost Certificates..........................................12 Section 5.05 Transfer of Shares.........................................12 Section 5.06 Registered Holders.........................................13 Section 5.07 Transfer Agents, Registrars and Paying Agents..............13 ARTICLE VI - INDEMNIFICATION..................................................13 Section 6.01 Definitions................................................13 Section 6.02 Right to Indemnification...................................13 Section 6.03 Successful on the Merits...................................14 Section 6.04 Advancement of Expenses....................................14 Section 6.05 Proceedings by a Party.....................................15 Section 6.06 Subrogation................................................15 Section 6.07 Other Payments.............................................15 Section 6.08 Insurance..................................................15 Section 6.09 Other Rights and Remedies..................................15 Section 6.10 Applicability; Effect......................................15 Section 6.11 Severability...............................................15 ARTICLE VII - MISCELLANEOUS .................................................16 Section 7.01 Waivers of Notice..........................................16 Section 7.02 Presumption of Assent......................................16 Section 7.03 Voting of Securities by the Corporation....................16 Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of Employees and Officers.....................................17 Section 7.05 Seal.......................................................17 Section 7.06 Fiscal Year................................................17 Section 7.07 Amendments.................................................17
-ii- BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC. ARTICLE I Offices Section 1.01 Business Offices. The corporation may have such offices, ---------------- either within or outside Delaware, as the board of directors may from time to time determine or as the business of the corporation may require. Section 1.02 Registered Office. The registered office of the corporation ----------------- required by the Delaware General Corporation Law to be maintained in Delaware shall be as set forth in the certificate of incorporation, unless changed as provided by law. ARTICLE II Stockholders Section 2.01 Annual Meeting. An annual meeting of the stockholders shall -------------- be held on such date and at such time as the board of directors shall fix in the notice of meeting, beginning with the year 1998, for the purpose of electing directors and for the transaction of such other business as may come before the meeting. If the day fixed for the annual meeting shall be a legal holiday, such meeting shall be held on the next succeeding business day. If the election of directors shall not be held on the day designated herein for any annual meeting of the stockholders, or at any adjournment thereof, the board of directors shall cause the election to be held at a meeting of the stockholders as soon thereafter as conveniently may be. Failure to hold an annual meeting as required by these bylaws shall not invalidate any action taken by the board of directors or officers of the corporation. Section 2.02 Special Meetings. Special meetings of the stockholders, for ---------------- any purpose or purposes, unless otherwise prescribed by statute, may be called by the Chairman of the Board or by the board of directors pursuant to a resolution approved by the affirmative vote of a majority of directors then in office, and shall be called by the Chairman of the Board at the written request of the holders of not less than 25 percent of the votes of the outstanding shares of the corporation entitled to vote generally in the election of directors, voting together as a single class. Such written request shall state the purpose or purposes of the proposed meeting. Section 2.03 Place of Meeting. Each meeting of the stockholders shall be ---------------- held at such place, either within or outside Delaware, as may be designated in the notice of meeting, or, if no place is designated in the notice, at the principal office of the corporation. Section 2.04 Notice of Meetings. Except as otherwise required by law, ------------------ written notice of each meeting of the stockholders stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be given, either personally (including delivery by private courier) or by first class, certified or registered mail, to each stockholder of record entitled to notice of such meeting, not less than ten nor more than 60 days before the date of the meeting. Such notice shall be deemed to be given, if personally delivered, when delivered to the stockholder, and, if mailed, when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation, but if notice of two consecutive annual meetings and all notices of meetings of or the taking of action by written consent without a meeting to any stockholder during the period between such two consecutive annual meetings, or all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a 12-month period, have been mailed addressed to such person at his address as shown on the records of the corporation and have been returned undeliverable, the giving of such notice to such person shall not be required until another address for such person is delivered to the corporation. When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than 30 days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting in accordance with the foregoing provisions of this Section 2.04. Section 2.05 Fixing Date for Determination of Stockholders of Record. -------------------------------------------------------- For the purpose of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for any other lawful action, the board of directors may fix a date as the record date for any such determination of stockholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall be not more than 60 nor less than ten days before the date of such meeting. If no record date is fixed for determining stockholders entitled to notice of or to vote at a meeting of stockholders, then the record date shall be the close of business on the day next preceding the day on which notice is given, or, if notice is waived, the close of business on the day next preceding the day on which the meeting is held, or, for determining stockholders for any other purpose, the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. Notwithstanding the foregoing provisions of this Section 2.05, the record date for determining stockholders entitled to take, or -2- receive notice of, corporate action in writing without a meeting as provided in Section 2.11 shall be determined as provided in such Section. Section 2.06 Voting List. The officer who has charge of the stock books ----------- of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.07 Proxies. Each stockholder entitled to vote at a meeting of ------- stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act for him by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Section 2.08 Quorum and Manner of Acting. At all meetings of --------------------------- stockholders, a majority of the outstanding shares of the corporation entitled to vote, represented in person or by proxy, shall constitute a quorum. If a quorum is present, the affirmative vote of a majority of the shares represented at a meeting and entitled to vote on the subject matter shall be the act of the stockholders, unless the vote of a greater proportion or number or voting by classes is otherwise required by law, the certificate of incorporation or these bylaws. In the absence of a quorum, a majority of the shares so represented may adjourn the meeting from time to time in accordance with Section 2.04, until a quorum shall be present or represented. Section 2.09 Voting of Shares. Unless otherwise provided in the ---------------- certificate of incorporation and subject to the provisions of Section 2.05, each stockholder entitled to vote shall have one vote for each outstanding share of capital stock held of record by such stockholder on each matter submitted to a vote of the stockholders either at a meeting thereof or pursuant to Section 2.11. In the election of directors each record holder of stock entitled to vote at such election shall have the right to vote the number of shares owned by him for as many persons as there are directors to be elected, and for whose election he has the right to vote. Cumulative voting shall not be allowed. If a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 2.10 Voting of Shares by Certain Holders. ----------------------------------- (a) Fiduciaries; Pledgors. Persons holding stock in a fiduciary --------------------- capacity shall be entitled to vote the shares so held. Persons whose stock is pledged shall be entitled to vote, -3- unless in the transfer by the pledgor on the books of the corporation he has expressly empowered the pledgee to vote thereon, in which case only the pledgee or his proxy may represent such shares and vote thereon. (b) Joint Owners. If shares stand of record in the names of two ------------ or more persons, whether fiduciaries, members of a partnership, joint tenants, tenants in common, tenants by the entirety or otherwise, or if two or more persons have the same fiduciary relationship respecting the same shares, unless the secretary of the corporation is given written notice to the contrary and is furnished with a copy of the instrument or order appointing them or creating the relationship wherein it is so provided, their acts with respect to voting shall have the following effects: (i) if only one votes, his act binds all; (ii) if more than one votes, the act of the majority so voting binds all; and (iii) if more than one votes, but the vote is evenly split on any particular matter, each faction may vote the shares in question proportionally, or any person voting the shares, or a beneficiary, if any, may apply to any court having jurisdiction to appoint an additional person to act with the persons so voting the shares, in which case the shares shall then be voted as determined by a majority of such persons. If the secretary of the corporation is given notice and is furnished a copy of the instrument or order creating a tenancy held in unequal interests, a majority or even split for the purpose of subparagraph (iii) shall be a majority or even split in interest. Section 2.11 Action Without a Meeting. ------------------------ (a) Written Consent. Unless otherwise provided in the --------------- certificate of incorporation, any action required or permitted to be taken at any meeting of the stockholders may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted (which consent may be signed in counterparts). Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the earliest dated consent delivered to the corporation in the manner required by the Delaware General Corporation Law, written consents signed by a sufficient number of stockholders to take the action are delivered to the corporation in the manner required by the Delaware General Corporation Law. (b) Determination of Stockholders Entitled to Act By Consent. -------------------------------------------------------- For purposes of determining stockholders entitled to consent to corporate action in writing without a meeting, the board of directors may fix a date as the record date for any such determination of stockholders, which date shall not precede the date upon which the resolution fixing the record date is adopted by the board of directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the board of directors. If no record date has been fixed by the board of directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the board of directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered -4- to the corporation in the manner required by the Delaware General Corporation Law. If no record date has been fixed by the board of directors and prior action by the board of directors is required by the Delaware General Corporation Law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be the close of business on the day on which the board of directors adopts the resolution taking such prior action. (c) Notice to Non-Consenting Stockholders. Prompt notice of the ------------------------------------- taking of corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date for such meeting had been the date that written consents signed by a sufficient number of holders to take the action were delivered to the corporation in the manner required by the Delaware General Corporation Law. Such notice shall be given in accordance with the applicable provisions of Section 2.04. Section 2.12 Conduct of Meetings. The chairman of the annual or any ------------------- special meeting of the stockholders shall be the chairman of the board, if there is one, or, if there is not one or in his absence, the chief executive officer or president of the corporation (or in his absence, any person designated by the board of directors), unless and until a different person is elected by a majority of the shares entitled to vote at such meeting. The chairman of the meeting shall appoint one or more persons to act as inspectors of election at the meeting and to make a written report thereof. Meetings of stockholders shall be conducted in accordance with the following rules: (a) The chairman of the meeting shall have absolute authority over matters of procedure and there shall be no appeal from the ruling of the chairman. (b) If disorder should arise that prevents continuation of the legitimate business of the meeting, the chairman may quit the chair and announce the adjournment of the meeting to another time and place and upon his so doing the meeting is immediately adjourned. (c) The chairman may ask or require that anyone who is not a bona fide stockholder or proxy leave the meeting. (d) A resolution or motion shall be considered for vote only if proposed in accordance with the provisions of Section 2.12(e) and only if proposed by a stockholder or a duly authorized proxy and seconded by an individual who is a stockholder or a duly authorized proxy, other than the individual who proposed the resolution or motion. (e) At any annual or special meeting of stockholders only such new business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before the meeting. For any new business proposed by management to be properly brought before the annual meeting, such new business shall be approved by the board of -5- directors, either directly or through its approval by proxy solicitation materials related thereto, and shall be stated in writing and filed with the secretary of the corporation at least five days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting. Any stockholder may make any other proposal at a meeting and the same may be discussed and considered, but unless properly brought before the meeting such proposal shall not be acted upon at the meeting. No business may be properly brought before a special meeting unless identified in the notice thereof given in accordance with applicable law and Section 2.04 of these bylaws. For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than 120 days prior to the date of the corporation's proxy statement released to stockholders in connection with the previous year or if the date of the annual meeting has been changed by more than 30 days from the date contemplated at the previous year's annual meeting, then 150 days prior to the date of the annual meeting; provided, however, that in the event that less than 40 days notice is given or made to the stockholders, notice by the stockholder to be timely must be so received not later than the close of business on the tenth day following the day on which such notice of the date of the annual meeting was mailed. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, (iv) any financial interest of the stockholder in such proposal, and (v) any additional information as the Board or the president of the corporation shall deem necessary or desirable. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at an annual or special meeting except in accordance with the procedures set forth in this Section 2.12(e). The chairman of an annual or special meeting shall, if the facts warrant, determine and declare to the meeting that new business of any stockholder was not properly brought before the meeting in accordance with the provisions of this Section 2.12(e), and if the chairman should so determine, the chairman shall so declare to the meeting and any such business or proposal not properly brought before the meeting shall not be acted upon at the meeting. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated and filed as herein provided. -6- Section 2.13 Nomination of Directors. Nomination of persons to stand for ----------------------- election at any annual or special stockholders meeting may be made at any time prior to the vote thereon by the board of directors or a committee of the board of directors. Other than as provided in the immediately preceding sentence, no such nominations shall be entertained unless written notice of such proposed nominations are received by the secretary of the corporation, (i) if for an annual meeting, not less than 90 days in advance of the date that corresponds to the date that the corporation's proxy statement was first mailed or released to stockholders in connection with the previous year's annual meeting of stockholders, except that if no annual meeting was held in the previous year or the date for the annual meeting has been changed by more than 30 calendar days from the date of the previous year's annual meeting, such written notice shall suffice if received not less than 30 days prior to such meeting, and (ii) if for any other stockholders meeting, not less than seven days after notice of such meeting is first given. Such written notice shall provide the name and age of each nominee and complete account of the business experience of each nominee during the past five years, including the present occupation and business activities of the nominee regardless of whether compensation in any form whatever was received for such activities or experience. ARTICLE III Board of Directors Section 3.01 General Powers. The business and affairs of the corporation -------------- shall be managed by or under the direction of its board of directors, except as otherwise provided in the Delaware General Corporation Law or the certificate of incorporation. Section 3.02 Number, Tenure and Qualifications. The board of directors of --------------------------------- the corporation shall consist of one or more members. The number of directors of the corporation shall be as fixed from time to time by resolution of the board of directors. Except as otherwise provided in Sections 2.01 and 3.05, directors shall be elected at each annual meeting of stockholders, by a plurality of the votes present in person or represented by proxy at the meeting and entitled to vote at the election of directors. Each director shall hold office until his successor shall have been elected and qualified or until his earlier death, resignation or removal. Directors need not be residents of Delaware or stockholders of the corporation. Any reduction in the authorized number of directors shall not have the effect of shortening the term of any incumbent director unless such director is also removed from office in accordance with Section 3.04. Section 3.03 Resignation. Any director may resign at any time by giving ----------- written notice to the corporation. A director's resignation shall take effect at the time specified therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 3.04 Removal. Any director or the entire board of directors may ------- removed, with or without cause, by the affirmative vote of holders of at least a majority of the votes of the outstanding shares of stock generally entitled to vote in the election of directors, voting together as a single class, at a meeting for which notice of the proposed removal has been given in accordance with Section 2.04. -7- Section 3.05 Vacancies. Unless otherwise provided in the certificate of --------- incorporation, any vacancy or any newly created directorship resulting from any increase in the authorized number of directors may be filled by a majority of directors then in office, although less than a quorum, or by a sole remaining director, or by the stockholders if there are no directors remaining, and a director so chosen shall hold office until the next annual meeting of stockholders and until his successor is duly elected and qualified. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have the power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office as provided in this Section for the filling of other vacancies. Section 3.06 Regular Meetings. A regular meeting of the board of ---------------- directors shall be held immediately after and at the same place as the annual meeting of stockholders, or as soon thereafter as conveniently may be, at the time and place, either within or without Delaware, determined by the board, for the purpose of electing officers and for the transaction of such other business as may come before the meeting. Failure to hold such a meeting, however, shall not invalidate any action taken by any officer then or thereafter in office. The board of directors may provide by resolution the time and place, either within or outside Delaware, for the holding of additional regular meetings without other notice than such resolution. Section 3.07 Special Meetings. Special meetings of the board of directors ---------------- may be called by or at the request of the chairman of the board or any director. The person authorized to call special meetings of the board of directors may fix any convenient place, either within or outside Delaware, as the place for holding any special meeting of the board of directors called by him. Section 3.08 Meetings by Telephone. Unless otherwise restricted by the --------------------- certificate of incorporation, members of the board of directors or any committee thereof may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting in such manner shall constitute presence in person at the meeting. Section 3.09 Notice of Meetings. Notice of each meeting of the board of ------------------ directors (except those regular meetings for which notice is not required) stating the place, day and hour of the meeting shall be given to each director at least five days prior thereto by the mailing of written notice by first class mail or at least three days prior thereto by personal delivery (including delivery by courier) of written notice or by telephone, telegram, facsimile or other similar form of communication, except that in the case of a meeting to be held pursuant to Section 3.08 notice may be given by personal delivery or by facsimile, telegram or telephone 24 hours prior thereto. The method of notice need not be the same to each director. If mailed, such notice shall be deemed to be given when deposited in the United States mail, with postage -8- thereon prepaid, addressed to the director at his business or residence address. If sent by telegram, facsimile or similar form of communication, such notice shall be deemed to be given when sent by such method to the director during normal business hours at the location of the recipient at the last address or facsimile number of the director furnished by him to the corporation for such purpose. If communicated by telephone, such notice shall be deemed to be given when communicated directly to the director or to the person designated by the director as a person authorized to receive such notice. Neither the business to be transacted at nor the purpose of any meeting of the board of directors need be specified in the notice or waiver of notice of such meeting. Section 3.10 Quorum and Manner of Acting. Except as otherwise may be --------------------------- required by law, the certificate of incorporation or these bylaws, a majority of the number of directors fixed in accordance with these bylaws, present in person, shall constitute a quorum for the transaction of business at any meeting of the board of directors, and the vote of a majority of the directors present at a meeting at which a quorum is present shall be the act of the board of directors. If less than a quorum is present at a meeting, the directors present may adjourn the meeting from time to time without further notice other than announcement at the meeting, until a quorum shall be present. No director may vote or act by proxy or power of attorney at any meeting of the board of directors. Section 3.11 Interested Directors. No contract or transaction between the -------------------- corporation and one or more of its directors or officers, or between a corporation and any other corporation, partnership, association, or other organization in which one or more of its directors or officers are directors or officers or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the board or committee which authorizes the contract or transaction, or solely because his or their votes are counted for such purpose, if the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the board of directors or the committee, and the board or committee in good faith authorizes the contract or transaction by the affirmative votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; the material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or the contract or transactions is fair as to the corporation as of the time it is authorized, approved or ratified, by the board of directors, a committee or the stockholders. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the board of directors or of a committee that authorizes the contract or transaction. Section 3.12 Action Without a Meeting. Unless otherwise restricted by the ------------------------ certificate of incorporation, any action required or permitted to be taken at any meeting of the board of directors or any committee thereof may be taken without a meeting, without prior notice and without a vote, if all members of the board or committee consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the board or committee. -9- Section 3.13 Executive and Other Committees. The board of directors ------------------------------ may designate one or more committees, each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers which may require it; but no such committee shall have the power or authority in reference to (a) approving or adopting, or recommending to the stockholders, any action or matter expressly required by Delaware General Corporation Law to be submitted to stockholders for approval; or (b) adopting, amending or repealing any bylaw of the corporation. The delegation of authority to any committee shall not operate to relieve the board of directors or any member of the board form any responsibility imposed by law. Subject to the foregoing, the board of directors may provide such powers, limitations and procedures for such committees as the board deems advisable. To the extent the board of directors does not establish other procedures, each committee shall be governed by the procedures set forth in Sections 3.06 (except as they relate to an annual meeting), 3.07 through 3.11 and 7.01 and 7.02 as if the committee were the board of directors. Each committee shall keep regular minutes of its meetings, which shall be reported to the board of directors when required and submitted to the secretary of the corporation for inclusion in the corporate records. Section 3.14 Compensation. Unless otherwise restricted by the certificate ------------ of incorporation, the board of directors, or any committee thereof as may be authorized by the board, shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the board of directors and each meeting of any committee of the board of which he is a member and may be paid a fixed sum for attendance at each such meeting or a stated salary or both a fixed sum and a stated salary. No such payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. ARTICLE IV Officers Section 4.01 Number and Qualifications. The officers of the corporation ------------------------- shall consist of a chairman of the board, a chief executive officer, a president, a secretary, a treasurer and such other officers, including one or more vice-presidents and a controller, as may from time to time be elected or appointed by the board. In addition, the board of directors or the president may elect or appoint such assistant and other subordinate officers including assistant vice-presidents, -10- assistant secretaries and assistant treasurers, as it or he shall deem necessary or appropriate. Any number of offices may be held by the same person, except that no person may simultaneously hold the offices of president and secretary. Section 4.02 Election and Term of Office. Except as provided in Sections --------------------------- 4.01 and 4.06, the officers of the corporation shall be elected by the board of directors annually at the first meeting of the board held after each annual meeting of the stockholders as provided in Section 3.06. If the election of officers shall not be held as provided herein, such election shall be held as soon thereafter as conveniently may be. Each officer shall hold office until his successor shall have been duly elected and shall have qualified or until the expiration of his term in office if elected or appointed for a specified period of time or until his earlier death, resignation or removal. Section 4.03 Compensation. Officers shall receive such compensation for ------------ their services as may be authorized or ratified by the board of directors, or any committee of the board as may be authorized, and no officer shall be prevented from receiving compensation by reason of the fact that he is also a director of the corporation. Election or appointment as an officer shall not of itself create a contract or other right to compensation for services performed by such officer. Section 4.04 Resignation. Any officer may resign at any time, subject to ----------- any rights or obligations under any existing contracts between the officer and the corporation, by giving written notice to the corporation. An officer's resignation shall take effect at the time stated therein; and unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 4.05 Removal. Any officer may be removed at any time by the board ------- of directors, or, in the case of assistant and other subordinate officers, by the president (whether or not such officer was appointed by the president), whenever in its or his judgment, as the case may be, the best interests of the corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer shall not in itself create contract rights. Section 4.06 Vacancies. A vacancy occurring in any office by death, --------- resignation, removal or otherwise may be filled by the board of directors, or, if such office may be filled by the president as provided in Section 4.01, by the president, for the unexpired portion of the term. Section 4.07 Authority and Duties. The officers of the corporation shall -------------------- have the authority and shall exercise the powers and perform the duties specified below, and as may be additionally specified by the chief executive officer, the board of directors or these bylaws (and in all cases where the duties of any officer are not prescribed by the bylaws or the board of directors, such officer shall follow the orders and instructions of the president), except that in any event each officer shall exercise such powers and perform such duties as may be required by law: (a) Chairman of the Board. The chairman of the board, who --------------------- shall be elected from among the directors, shall preside at all meetings of the stockholders and directors -11- of the corporation and shall have and may exercise all such powers and perform such other duties as may be assigned to him from time to time by the board of directors. (b) Chief Executive Officer. The chief executive officer ----------------------- shall, subject to the direction and supervision of the board of directors, (i) have general and active control of its affairs and business and general supervision of its officers, agents and employees; (ii) in the absence of the chairman of the board, preside at all meetings of the stockholders and the board of directors; (iii) see that all orders and resolutions of the board of directors are carried into effect; and (iv) perform all other duties incident to the office of Chief Executive Officer and as from time to time may be assigned to him by the board of directors. (c) President. The president shall, subject to the direction and supervision of the board of directors, (i) if there is no chief executive officer, be the chief operating officer of the corporation and have general and active control of its affairs and business and general supervision of its officers, agents and employees; (ii) unless there is a chairman of the board or chief executive officer, preside at all meetings of the stockholders and the board of directors; (iii) see that all orders and resolutions of the board of directors are carried into effect; and (iv) perform all other duties incident to the office of president and as from time to time may be assigned to him by the board of directors. (d) Chief Financial Officer; Treasurer. The chief financial ---------------------------------- officer or, in the absence of a chief financial officer, the treasurer shall: (i) be the principal financial officer of the corporation and have the care and custody of all its funds, securities, evidences of indebtedness and other personal property and deposit the same in accordance with the instructions of the board of directors; (ii) receive and give receipts and acquittances for moneys paid in on account of the corporation, and pay out of the funds on hand all bills, payrolls and other just debts of the corporation of whatever nature upon maturity; (iii) unless there is a controller, be the principal accounting officer of the corporation and as such prescribe and maintain the methods and systems of accounting to be followed, keep complete books and records of account, prepare and file all local, state and federal tax returns, prescribe and maintain an adequate system of internal audit and prepare and furnish to the president and the board of directors statements of account showing the financial position of the corporation and the results of its operations; (iv) upon request of the board, make such reports to it as may be required at any time; and (v) perform all other duties incident to the office of treasurer and such other duties as from time to time may be assigned to him by the board of directors or the president. Assistant treasurers, if any, shall have the same powers and duties, subject to the supervision by the treasurer. (e) Vice-Presidents. The vice-president, if any (or, if there --------------- is more than one, then each vice-president), shall assist the president and shall perform such duties as may be assigned to him by the president or by the board of directors. The vice-president, if there is one (or, if there is more than one, then the vice-president designated by the board of directors, or, if there be no such designation, then the vice-presidents in order of their election), shall, at the request of the president or, in his absence or inability or refusal to act, perform the duties of the president and when so acting shall have all the powers of and be subject to all the restrictions -12- upon the president. Assistant vice-presidents, if any, shall have such powers and perform such duties as may be assigned to them by the president or by the board of directors. (f) Secretary. The secretary shall: (i) prepare and maintain --------- the minutes of the proceedings of the stockholders, the board of directors and any committees of the board; (ii) see that all notices are duly given in accordance with the provisions of these bylaws or as required by law; (iii) be custodian of the corporate records and of the seal of the corporation; (iv) keep at the corporation's registered office or principal place of business within or outside Colorado a record containing the names and addresses of all stockholders and the number and class of shares held by each, unless such a record shall be kept at the office of the corporation's transfer agent or registrar; (v) have general charge of the stock books of the corporation, unless the corporation has a transfer agent; (vi) authenticate records of the corporation; and (vii) in general, perform all duties incident to the office of secretary and such other duties as from time to time may be assigned to him by the president or by the board of directors. Assistant secretaries, if any, shall have the same duties and powers, subject to supervision by the secretary. Section 4.08 Surety Bonds. The board of directors may require any officer ------------ or agent of the corporation to execute to the corporation a bond in such sums and with such sureties as shall be satisfactory to the board, conditioned upon the faithful performance of his duties and for the restoration to the corporation of all books, papers, vouchers, money and other property of whatever kind in his possession or under his control belonging to the corporation. ARTICLE V Stock Section 5.01 Issuance of Shares The issuance or sale by the corporation ------------------ of any shares of its authorized capital stock of any class, including treasury shares, shall be made only upon authorization by the board of directors, except as otherwise may be provided by law. Every issuance of shares shall be recorded on the books of the corporation maintained for such purpose by or on behalf of the corporation. Section 5.02 Stock Certificates; Uncertificated Shares. The shares of ----------------------------------------- stock of the corporation shall be represented by certificates, except that the board of directors may, in accordance with applicable provisions of law, authorize the issuance of some or all of any or all classes or series of stock of the corporation without certificates. If shares are represented by certificates (or if a holder of uncertificated shares requests his shares to be represented by a certificate), each certificate shall be signed by or in the name of the corporation by the chairman or a vice-chairman of the board of directors, or the president or a vice-president, and by the treasurer or an assistant treasurer, or the secretary or an assistant secretary of the corporation, representing the number of shares owned by him in the corporation. Any of or all the signatures on the certificate may be facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such -13- officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. Certificates of stock shall be in such form consistent with law as shall be prescribed by the board of directors. Section 5.03 Payment for Shares. Shares shall be issued for such ------------------ consideration (but not less than the par value thereof) as shall be determined from time to time by the board of directors. Treasury shares shall be disposed of for such consideration as may be determined from time to time by the board. Such consideration shall be paid in such form and in such manner as the directors shall determine. In the absence of actual fraud in the transaction, the judgment of the directors as to the value of such consideration shall be conclusive. The capital stock issued by the corporation shall be deemed to be fully paid and non-assessable stock if: (a) the entire amount of the consideration has been received by the corporation in the form of cash, services rendered, personal property, real property, leases of real property or a combination thereof; or (b) not less than the amount of the consideration determined to be capital pursuant to statute has been received by the corporation in such form and the corporation has received a binding obligation of the subscriber or purchaser to pay the balance of the subscription or purchase price; provided, however, nothing contained herein shall prevent the board of directors from issuing partly paid shares pursuant to statute. The directors may, from time to time, demand payment in respect of each share of stock not fully paid in the manner prescribed by statute. In addition, when the whole of the consideration payable for shares of a corporation has not been paid in, and the assets shall be insufficient to satisfy the claims of its creditors, each holder of or subscriber for such shares shall be bound to pay on each share held or subscribed for by him the sum necessary to complete the amount of the unpaid balance of the consideration for which such shares were issued or are to be issued by the corporation. No person becoming an assignee or transferee of shares or of a subscription for shares in good faith and without knowledge or notice that the full consideration therefor has not been paid shall be personally liable for any unpaid portion of such consideration, but the transferor shall remain liable therefor, and no person holding shares in any corporation as collateral security shall be personally liable as a stockholder but the person pledging such shares shall be considered the holder thereof and shall be so liable. No executor, administrator, guardian, trustee or other fiduciary shall be personally liable as a stockholder, but the estate or funds held by such executor, administrator, guardian, trustee or other fiduciary in such fiduciary capacity shall be liable. Section 5.04 Lost Certificates. In case of the alleged loss, theft or ----------------- destruction of a certificate of stock the board of directors may direct the issuance of a new certificate in lieu thereof upon such terms and conditions in conformity with law as it may prescribe. The board of directors may in its discretion require the owner of the lost, stolen or destroyed certificate, or his legal representative to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 5.05 Transfer of Shares. Upon presentation and surrender to the ------------------ corporation or to a transfer agent of the corporation of a certificate of stock duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, payment of all transfer taxes, -14- if any, and the satisfaction of any other requirements of law, including inquiry into and discharge of any adverse claims of which the corporation has notice, the corporation or the transfer agent shall issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction on the books maintained for such purpose by or on behalf of the corporation. No transfer of shares shall be effective until it has been entered on such books. The corporation or a transfer agent of the corporation may require a signature guaranty or other reasonable evidence that any signature is genuine and effective before making any transfer. Transfers of uncertificated shares shall be made in accordance with applicable provisions of law. Section 5.06 Registered Holders. The corporation shall be entitled to ------------------ recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. Section 5.07 Transfer Agents, Registrars and Paying Agents. The board of --------------------------------------------- directors may at its discretion appoint one or more transfer agents, registrars and agents for making payment upon any class of stock, bond, debenture or other security of the corporation. Such agents and registrars may be located either within or outside Delaware. They shall have such rights and duties and shall be entitled to such compensation as may be agreed. ARTICLE VI Indemnification Section 6.01 Definitions. For purposes of this Article, the following ----------- terms shall have the meanings set forth below: (a) The Corporation. The term "the corporation" means the --------------- corporation and shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this Article with respect to the resulting or surviving corporation as he would have with respect to such constituent corporation if its separate existence had continued. (b) Other Enterprises. The term "other enterprises" shall include ----------------- employee benefit plans; references to "fines" shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to "serving at the request of the corporation" -15- shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee, or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the interest of the participants and the beneficiaries of an employee benefit plan shall be deemed to have acted in a manner "not opposed to the best interests of the corporation" as referred to in this Article. Section 6.02 Right to Indemnification. The corporation shall indemnify, ------------------------ to the fullest extent permitted by law, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. The corporation may indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys' fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnify for such expenses which the Court of Chancery or such other court shall deem proper. Any indemnification under this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, officer, employee or agent is proper in the circumstances because he has met the applicable standard of conduct set forth in this section. Such determination shall be made (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (3) by the stockholders. -16- Section 6.03 Successful on the Merits. To the extent that a ------------------------ director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in section 6.02, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6.04 Advancement of Expenses. Expenses (including attorneys' ----------------------- fees) incurred by an officer or director in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article VI. Such expenses (including attorneys' fees) incurred by other employees and agents may be so paid upon such terms and conditions, if any, as the board of directors deems appropriate. Section 6.05 Proceedings by a Party. The corporation shall indemnify or ---------------------- advance expenses to a party in connection with any proceeding (or part thereof) initiated by the party only if such proceeding (or part thereof) was authorized by the board of directors of the corporation. Section 6.06 Subrogation. In the event of any payment under this Article, ----------- the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnified party, who shall execute all papers and do everything that may be necessary to assure such rights of subrogation to the corporation. Section 6.07 Other Payments. The corporation shall not be liable under -------------- this Article to make any payment in connection with any proceeding against or involving a party to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of the amounts otherwise indemnifiable hereunder. A party shall repay to the corporation the amount of any payment the corporation makes to the party under this Article in connection with any proceeding against or involving the party, to the extent the party has otherwise actually received payment (under any insurance policy, agreement or otherwise) of such amount. Section 6.08 Insurance. The corporation shall have power to purchase and --------- maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under this Article. Section 6.09 Other Rights and Remedies. The indemnification and ------------------------- advancement of expenses provided by, or granted pursuant to this Article shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled -17- under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in his official capacity and as to action in another capacity while holding such office. Section 6.10 Applicability; Effect. The indemnification and advancement --------------------- of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 6.11 Severability. If any provision of this Article shall be held ------------ to be invalid, illegal or unenforceable for any reason whatsoever (a) the validity, legality and enforceability of the remaining provisions of this Article (including without limitation, all portions of any Sections of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby, and (b) to the fullest extent possible, the provisions of this Article (including, without limitation, all portions of any Section of this Article containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent of this Article that each party covered hereby is entitled to the fullest protection permitted by law. ARTICLE VII Miscellaneous Section 7.01 Waivers of Notice. Whenever notice is required to be given ----------------- by law, by the certificate of incorporation or by these bylaws, a written waiver thereof, signed by the person entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting or (in the case of a stockholder) by proxy shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting need be specified in any written waiver of notice unless required by these bylaws to be included in the notice of such meeting. Section 7.02 Presumption of Assent. A director or stockholder of the --------------------- corporation who is present at a meeting of the board of directors or stockholders at which action on any corporate matter is taken shall be presumed to have assented to the action taken unless his dissent shall be entered in the minutes of the meeting or unless he shall file his written dissent to such action with the person acting as the secretary of the meeting before the adjournment thereof or shall forward such dissent by registered mail to the secretary of the corporation immediately after the adjournment of the meeting. Such right to dissent shall not apply to a director or stockholder who voted in favor of such action. Section 7.03 Voting of Securities by the Corporation. Unless otherwise --------------------------------------- provided by resolution of the board of directors, on behalf of the corporation the president or any vice- -18- president shall attend in person or by substitute appointed by him, or shall execute written instruments appointing a proxy or proxies to represent the corporation at, all meetings of the stockholders of any other corporation, association or other entity in which the corporation holds any stock or other securities, and may execute written waivers of notice with respect to any such meetings. At all such meetings and otherwise, the president or any vice- president, in person or by substitute or proxy as aforesaid, may vote the stock or other securities so held by the corporation and may execute written consents and any other instruments with respect to such stock or securities and may exercise any and all rights and powers incident to the ownership of said stock or securities, subject, however, to the instructions, if any, of the board of directors. Section 7.04 Loans to Employees and Officers; Guaranty of Obligations of ----------------------------------------------------------- Employees and Officers. The corporation may lend money to, or guarantee any - ---------------------- obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest, and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing contained in this section shall be deemed to deny, limit or restrict the powers of guaranty or warranty of any corporation at common law or under any statute. Section 7.05 Seal. The corporate seal of the corporation shall be in such ---- form as adopted by the board of directors, and any officer of the corporation may, when and as required, affix or impress the seal, or a facsimile thereof, to or on any instrument or document of the corporation. Section 7.06 Fiscal Year. The fiscal year of the corporation shall be as ----------- established by the board of directors. Section 7.07 Amendments. These bylaws may be amended or repealed and new ---------- bylaws adopted by the board of directors or by the stockholders entitled to vote. (END) -19- EX-4.2 3 INDENTURE DATED MARCH 31, 1997 WITH BANKERS TRUST EXHIBIT 4.2 ================================================================================ QWEST COMMUNICATIONS INTERNATIONAL INC., Issuer to BANKERS TRUST COMPANY, Trustee -------------------- Indenture Dated as of March 31, 1997 -------------------- $250,000,000 10 7/8% Senior Notes Due 2007 ================================================================================ TABLE OF CONTENTS
Page PARTIES..................................................................... 1 RECITALS OF THE COMPANY..................................................... 1 ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions................................................... 1 Acquired Debt................................................. 2 Act........................................................... 2 Affiliate..................................................... 2 Agent Member.................................................. 2 Asset Disposition............................................. 2 Attributable Value............................................ 3 Board of Directors............................................ 3 Board Resolution.............................................. 3 Business Day.................................................. 3 Capital Lease Obligation...................................... 3 Capital Stock................................................. 4 Cash Equivalents.............................................. 4 Change of Control............................................. 4 Commission.................................................... 4 Common Stock.................................................. 4 Company....................................................... 5 Company Order................................................. 5 Company Request............................................... 5 Consolidated Capital Ratio.................................... 5 Consolidated Cash Flow Available for Fixed Charges............ 5 Consolidated Income Tax Expense............................... 5 Consolidated Interest Expense................................. 5 Consolidated Net Income....................................... 6 Consolidated Net Worth........................................ 6 Consolidated Tangible Assets.................................. 6 Continuing Director........................................... 7
- -------------------- Note: This table of contents shall not, for any purpose, be deemed to be a part of the Indenture. ii
Page Corporate Trust Office........................................ 7 Corporation................................................... 7 Credit Facilities............................................. 7 Debt.......................................................... 7 Debt Securities............................................... 8 Default....................................................... 8 Defaulted Interest............................................ 8 Depository.................................................... 8 Designation................................................... 8 Designation Amount............................................ 8 Disqualified Stock............................................ 8 Eligible Institution.......................................... 9 Eligible Receivables.......................................... 9 Event of Default.............................................. 9 Exchange Act.................................................. 9 Expiration Date............................................... 9 Fair Market Value............................................. 9 Federal Bankruptcy Code....................................... 9 Global Security............................................... 9 Government Securities......................................... 9 Group......................................................... 9 Guarantee..................................................... 9 Guarantor..................................................... 10 Holder........................................................ 10 Incur......................................................... 10 Indenture..................................................... 10 Indenture Obligations......................................... 10 Initial Purchasers............................................ 10 Interest Payment Date......................................... 11 Interest Rate or Currency Protection Agreement................ 11 Investment.................................................... 11 Lien.......................................................... 11 Liquidated Interest........................................... 11 Maturity...................................................... 11 Net Available Proceeds........................................ 11 Non-Global Purchasers......................................... 12 Notice of Default............................................. 12 Offer......................................................... 12 Offer to Purchase............................................. 12 Offering Memorandum........................................... 14
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Page Officers' Certificate........................................ 14 Opinion of Counsel........................................... 14 Outstanding.................................................. 14 Paying Agent................................................. 15 Permitted Holders............................................ 15 Permitted Interest Rate or Currency Protection Agreement..... 16 Permitted Investments........................................ 16 Permitted Joint Venture...................................... 16 Permitted Liens.............................................. 16 Permitted Telecommunications Capital Asset Disposition....... 17 Person....................................................... 17 Physical Security............................................ 17 Predecessor Security......................................... 17 Preferred Dividends.......................................... 17 Preferred Stock.............................................. 18 Private Placement Legend..................................... 18 Public Equity Offering....................................... 18 Purchase Amount.............................................. 18 Purchase Date................................................ 18 Purchase Money Debt.......................................... 18 Purchase Price............................................... 18 QIB.......................................................... 18 Qualified Institutional Buyer................................ 18 Rating Decline............................................... 18 Receivables.................................................. 18 Receivables Sale............................................. 18 Redemption Date.............................................. 18 Redemption Price............................................. 19 Regular Record Date.......................................... 19 Regulation S................................................. 19 Regulation S Global Security................................. 19 Related Person............................................... 19 Responsible Officer.......................................... 19 Restricted Payment........................................... 19 Restricted Subsidiary........................................ 19 Restricted Subsidiary Guarantee.............................. 19 Revocation................................................... 19 Rule 144A.................................................... 19 Rule 144A Global Security.................................... 20 Sale and Leaseback Transaction............................... 20
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Page Securities................................................... 20 Securities Act............................................... 20 Security Register............................................ 20 Security Registrar........................................... 20 Special Record Date.......................................... 20 Stated Maturity.............................................. 20 Strategic Investor........................................... 20 Subordinated Debt............................................ 20 Subsidiary................................................... 21 Telecommunications Assets.................................... 21 Telecommunications Business.................................. 21 Trust Indenture Act.......................................... 21 TIA.......................................................... 21 Trustee...................................................... 22 Unrestricted Subsidiary...................................... 22 Vice President............................................... 22 Voting Stock................................................. 22 Wholly Owned Subsidiary...................................... 22 SECTION 102. Compliance Certificates and Opinions......................... 22 SECTION 103. Form of Documents Delivered to Trustee....................... 23 SECTION 104. Acts of Holders.............................................. 23 SECTION 105. Notices, etc., to Trustee and Company........................ 25 SECTION 106. Notice to Holders; Waiver.................................... 25 SECTION 107. Effect of Headings and Table of Contents..................... 26 SECTION 108. Successors and Assigns....................................... 26 SECTION 109. Separability Clause.......................................... 26 SECTION 110. Benefits of Indenture........................................ 26 SECTION 111. Governing Law................................................ 26 SECTION 112. Conflict with Trust Indenture Act............................ 26 SECTION 113. Legal Holidays............................................... 27 SECTION 114. No Personal Liability of Directors, Officers, Employees and Stockholders................................................. 27 SECTION 115. Independence of Covenants.................................... 27 SECTION 116. Exhibits..................................................... 27 SECTION 117. Counterparts................................................. 27 SECTION 118. Duplicate Originals.......................................... 28
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Page ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally.............................................. 28 ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms.............................................. 28 SECTION 302. Denominations................................................ 29 SECTION 303. Execution, Authentication, Delivery and Dating............... 29 SECTION 304. Temporary Securities......................................... 31 SECTION 305. Registration, Registration of Transfer and Exchange.......... 32 SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities............. 33 SECTION 307. Payment of Interest; Interest Rights Preserved............... 34 SECTION 308. Persons Deemed Owners........................................ 35 SECTION 309. Cancellation................................................. 35 SECTION 310. Computation of Interest...................................... 36 SECTION 311. CUSIP Number................................................. 36 SECTION 312. Book-Entry Provisions for Global Securities.................. 36 SECTION 313. Special Transfer Provisions.................................. 37 ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture...................... 40 SECTION 402. Application of Trust Money................................... 41 ARTICLE FIVE REMEDIES SECTION 501. Events of Default............................................ 42 SECTION 502. Acceleration of Maturity; Rescission and Annulment........... 43 SECTION 503. Collection of Indebtedness and Suits for Enforcement by Trustee...................................................... 45 SECTION 504. Trustee May File Proofs of Claim............................. 45
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Page SECTION 505. Trustee May Enforce Claims Without Possession of Securities.. 46 SECTION 506. Application of Money Collected............................... 46 SECTION 507. Limitation on Suits.......................................... 47 SECTION 508. Unconditional Right of Holders to Receive Principal, Premium and Interest......................................... 48 SECTION 509. Restoration of Rights and Remedies........................... 48 SECTION 510. Rights and Remedies Cumulative............................... 48 SECTION 511. Delay or Omission Not Waiver................................. 48 SECTION 512. Control by Holders........................................... 49 SECTION 513. Waiver of Past Defaults...................................... 49 SECTION 514. Waiver of Stay or Extension Laws............................. 49 ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities.......................... 50 SECTION 602. Notice of Default............................................ 51 SECTION 603. Certain Rights of Trustee.................................... 51 SECTION 604. Trustee Not Responsible for Recitals or Issuance of Securities................................................... 53 SECTION 605. May Hold Securities.......................................... 53 SECTION 606. Money Held in Trust.......................................... 53 SECTION 607. Compensation and Reimbursement............................... 53 SECTION 608. Corporate Trustee Required; Eligibility; Conflicting Interests.................................................... 54 SECTION 609. Resignation and Removal; Appointment of Successor............ 55 SECTION 610. Acceptance of Appointment by Successor....................... 56 SECTION 611. Merger, Conversion, Consolidation or Succession to Business..................................................... 56 ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Disclosure of Names and Addresses of Holders................. 57 SECTION 702. Reports by Trustee........................................... 57 SECTION 703. Reports by Company........................................... 57
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Page ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms......... 58 SECTION 802. Successor Substituted........................................ 59 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders........... 59 SECTION 902. Supplemental Indentures with Consent of Holders.............. 60 SECTION 903. Execution of Supplemental Indentures......................... 61 SECTION 904. Effect of Supplemental Indentures............................ 61 SECTION 905. Conformity with Trust Indenture Act.......................... 61 SECTION 906. Reference in Securities to Supplemental Indentures........... 61 SECTION 907. Notice of Supplemental Indentures............................ 62 ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if Any, and Interest.......... 62 SECTION 1002. Maintenance of Office or Agency.............................. 62 SECTION 1003. Money for Security Payments to Be Held in Trust.............. 63 SECTION 1004. Corporate Existence.......................................... 64 SECTION 1005. Payment of Taxes and Other Claims............................ 64 SECTION 1006. Maintenance of Properties.................................... 65 SECTION 1007. Insurance.................................................... 65 SECTION 1008. Provision of Financial Statements............................ 65 SECTION 1009. Statement by Officers as to Default.......................... 65 SECTION 1010. Purchase of Securities upon Change of Control................ 66 SECTION 1011. Limitation on Consolidated Debt.............................. 67 SECTION 1012. Limitation on Debt and Preferred Stock of Restricted Subsidiaries................................................. 69 SECTION 1013. Limitation on Restricted Payments............................ 71 SECTION 1014. Limitation on Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries............................ 73 SECTION 1015. Limitation on Liens.......................................... 74 SECTION 1016. Limitation on Issuances of Certain Guarantees by, and
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Page Debt Securities of, Restricted Subsidiaries.................. 75 SECTION 1017. Limitation on Sale and Leaseback Transactions................ 75 SECTION 1018. Limitation on Asset Dispositions............................. 75 SECTION 1019. Limitation on Issuances and Sales of Capital Stock of Restricted Subsidiaries................................... 76 SECTION 1020. Transactions with Affiliates and Related Persons............. 77 SECTION 1021. Limitation on Designations of Unrestricted Subsidiaries...... 77 SECTION 1022. No Repayment of Existing Parent Company Advances with the Proceeds of the Securities.......................... 78 SECTION 1023. Waiver of Certain Covenants.................................. 79 SECTION 1024. Trustee Not to Monitor Performance........................... 79 ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Right of Redemption.......................................... 79 SECTION 1102. Applicability of Article..................................... 79 SECTION 1103. Election to Redeem; Notice to Trustee........................ 79 SECTION 1104. Selection by Trustee of Securities to Be Redeemed............ 80 SECTION 1105. Notice of Redemption......................................... 80 SECTION 1106. Deposit of Redemption Price.................................. 81 SECTION 1107. Securities Payable on Redemption Date........................ 81 SECTION 1108. Securities Redeemed in Part.................................. 81 ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company's Option to Effect Defeasance or Covenant Defeasance................................................... 82 SECTION 1202. Defeasance and Discharge..................................... 82 SECTION 1203. Covenant Defeasance.......................................... 83 SECTION 1204. Conditions to Defeasance or Covenant Defeasance.............. 83 SECTION 1205. Deposited Money and Government Securities to Be Held in Trust; Other Miscellaneous Provisions........................ 84 SECTION 1206. Reinstatement................................................ 85
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Page TESTIMONIUM............................................................... 86 SIGNATURES AND SEALS...................................................... 86
EXHIBIT A - Form of Security EXHIBIT B - Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors EXHIBIT C - Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S INDENTURE, dated as of March 31, 1997 between Qwest Communications International Inc., a corporation duly organized and existing under the laws of the State of Delaware (herein called the "Company"), having its principal office at 555 Seventeenth Street, Denver, Colorado 80202, and Bankers Trust Company, a New York banking corporation, as Trustee (herein called the "Trustee"). RECITALS OF THE COMPANY The Company has duly authorized the creation of an issue of 10 7/8% Senior Notes Due 2007 (herein called the "Securities"), of substantially the tenor and amount hereinafter set forth, and to provide therefor the Company has duly authorized the execution and delivery of this Indenture. All things necessary have been done to make the Securities, when executed by the Company and authenticated and delivered hereunder and duly issued by the Company, the valid obligations of the Company and to make this Indenture a valid agreement of each of the Company and the Trustee, in accordance with their and its terms. NOW, THEREFORE, THIS INDENTURE WITNESSETH: For and in consideration of the premises and the purchase of the Securities by the Holders thereof, it is mutually covenanted and agreed, for the equal and proportionate benefit of all Holders of the Securities, as follows: ARTICLE ONE DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 101. Definitions. ----------- For all purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; (b) all other terms used herein which are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein, and the terms "cash transaction" and "self-liquidating paper", as used in TIA Section 311, shall have the meanings assigned to them in the rules of the Commission adopted under the Trust Indenture Act; 2 (c) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with generally accepted accounting principles, and, except as otherwise herein expressly provided, the term "generally accepted accounting principles" with respect to any computation required or permitted hereunder shall mean such accounting principles as are generally accepted at the date of such computation; (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular Article, Section, paragraph or other subdivision; and (e) unless otherwise indicated, references to Articles, Sections, paragraphs or other subdivisions are references to such Articles, Sections, paragraphs or other subdivisions of this Indenture. "Acquired Debt" means, with respect to any specified Person, (i) Debt of any other Person existing at the time such Person merges with or into or consolidates with or becomes a Subsidiary of such specified Person and (ii) Debt secured by a Lien encumbering any asset acquired by such specified Person, which Debt was not incurred in anticipation of, and was outstanding prior to, such merger, consolidation or acquisition. "Act", when used with respect to any Holder, has the meaning specified in Section 104. "Affiliate" of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, "control" when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Agent Member" has the meaning specified in Section 312. "Asset Disposition" means any transfer, conveyance, sale, lease or other disposition by the Company or any Restricted Subsidiary in one or more related transactions occurring within any 12-month period (including a consolidation or merger or other sale of any such Restricted Subsidiary with, into or to another Person in a transaction in which such Restricted Subsidiary ceases to be a Restricted Subsidiary of the Company, but excluding a disposition by a Restricted Subsidiary to the Company or a Restricted Subsidiary or by the Company to a Restricted Subsidiary) of (i) shares of Capital Stock or other ownership interests of a Restricted Subsidiary (other than as permitted by clauses (iii), (iv) and (v) of Section 1019), (ii) substantially all of the assets of the Company or any Restricted Subsidiary representing a division or line of business or (iii) other assets or rights of the Company or any Restricted 3 Subsidiary outside of the ordinary course of business (excluding any transfer, conveyance, sale, lease or other disposition of equipment that is obsolete or no longer used by or useful to the Company, provided that the Company has delivered to the Trustee an Officers' Certificate stating that such criteria are satisfied); provided in each case that the aggregate consideration for such transfer, conveyance, sale, lease or other disposition is equal to $500,000 or more in any 12-month period and provided further that the following shall not be Asset Dispositions: (x) Permitted Telecommunications Capital Asset Dispositions, (y) exchanges of Telecommunications Assets for other Telecommunications Assets where the Fair Market Value of the Telecommunications Assets received is at least equal to the Fair Market Value of the Telecommunications Assets disposed of or, if less, the difference is received in cash and such cash is Net Available Proceeds and (z) Liens permitted to be Incurred pursuant to the second paragraph of Section 1015. "Attributable Value" means, as to any particular lease under which any Person is at the time liable other than a Capital Lease Obligation, and at any date as of which the amount thereof is to be determined, the total net amount of rent required to be paid by such Person under such lease during the initial term thereof as determined in accordance with generally accepted accounting principles, discounted from the last date of such initial term to the date of determination at a rate per annum equal to the discount rate which would be applicable to a Capital Lease Obligation with like term in accordance with generally accepted accounting principles. The net amount of rent required to be paid under any such lease for any such period shall be the aggregate amount of rent payable by the lessee with respect to such period after excluding amounts required to be paid on account of insurance, taxes, assessments, utility, operating and labor costs and similar charges. In the case of any lease which is terminable by the lessee upon the payment of penalty, such net amount shall also include the lesser of the amount of such penalty (in which case no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated) or the rent which would otherwise be required to be paid if such lease is not so terminated. "Attributable Value" means, as to a Capital Lease Obligation, the principal amount thereof. "Board of Directors" means the board of directors of the Company. "Board Resolution" means a copy of a resolution certified by the Secretary or an Assistant Secretary of the Company to have been duly adopted by the Board of Directors and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means each Monday, Tuesday, Wednesday, Thursday and Friday which is not a day on which banking institutions in The City of New York are authorized or obligated by law or executive order to close. "Capital Lease Obligation" of any Person means the obligation to pay rent or other payment amounts under a lease of (or other Debt arrangements conveying the right to use) 4 real or personal property of such Person which is required to be classified and accounted for as a capital lease or a liability on the face of a balance sheet of such Person in accordance with generally accepted accounting principles (a "Capital Lease"). The stated maturity of such obligation shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. The principal amount of such obligation shall be the capitalized amount thereof that would appear on the face of a balance sheet of such Person in accordance with generally accepted accounting principles. "Capital Stock" of any Person means any and all shares, interests, participations or other equivalents (however designated) of corporate stock or other equity participations, including partnership interests, whether general or limited, of such Person. "Cash Equivalents" means (i) any Debt with a maturity of 365 days or less issued or directly and fully guaranteed as insured by the United States or any agency or instrumentality thereof (provided that the full faith and credit of the United States is pledged in support thereof or such Debt constitutes a general obligation of such country); (ii) deposits, certificates of deposit or acceptances with a maturity of 365 days or less of any financial institution that is a member of the Federal Reserve System, in each case having combined capital and surplus and undivided profits (or any similar capital concept) of not less than $500 million and whose senior unsecured debt is rated at least "A- 1" by Standard & Poor's Ratings Services or "P-1" by Moody's Investors Service, Inc.; (iii) commercial paper with a maturity of 365 days or less issued by a Corporation (other than an Affiliate of the Company) organized under the laws of the United States or any state thereof and rated at least "A-1" by Standard & Poor's Ratings Services or "P-1" by Moody's Investors Service, Inc.; and (iv) repurchase agreements and reverse repurchase agreements relating to marketable direct obligations issued or unconditionally guaranteed by the United States or issued by any agency or instrumentality thereof and backed by the full faith and credit of the United States maturing within 365 days from the date of acquisition. "Change of Control" has the meaning specified in Section 1010. "Commission" means the Securities and Exchange Commission, as from time to time constituted, created under the Exchange Act, or, if at any time after the execution of this Indenture such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Stock" of any Person means Capital Stock of such Person that does not rank prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. 5 "Company" means the Person named as the "Company" in the first paragraph of this Indenture, until a successor Person shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Company" shall mean such successor Person. "Company Order" or "Company Request" means a written request or order signed in the name of the Company by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or a Vice President, and by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. "Consolidated Capital Ratio" of any Person as of any date means the ratio of (i) the aggregate consolidated principal amount of Debt of such Person then outstanding to (ii) the greater of either (a) the aggregate consolidated paid-in capital of such Person as of such date or (b) the stockholders' equity as of such date as shown on the consolidated balance sheet of such Person in accordance with generally accepted accounting principles. "Consolidated Cash Flow Available for Fixed Charges" for any period means the Consolidated Net Income of the Company and its Restricted Subsidiaries for such period increased by the sum of (i) Consolidated Interest Expense of the Company and its Restricted Subsidiaries for such period, plus (ii) Consolidated Income Tax Expense of the Company and its Subsidiaries for such period, plus (iii) the consolidated depreciation and amortization expense or other non-cash write-offs of assets included in the income statement of the Company and its Restricted Subsidiaries for such period, plus (iv) any charge related to any premium or penalty paid in connection with redeeming or retiring any Debt prior to its stated maturity; provided, however, that there shall be excluded therefrom the Consolidated Cash Flow Available for Fixed Charges (if positive) of any Restricted Subsidiary (calculated separately for such Restricted Subsidiary in the same manner as provided above for the Company) that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary to the extent of such restriction. "Consolidated Income Tax Expense" for any period means the aggregate amounts of the provisions for income taxes of the Company and its Subsidiaries for such period calculated on a consolidated basis in accordance with generally accepted accounting principles. "Consolidated Interest Expense" means for any period the interest expense included in a consolidated income statement (excluding interest income) of the Company and its Restricted Subsidiaries for such period in accordance with generally accepted accounting principles, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers' acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of the Company and its Subsidiaries (other than dividends paid 6 in shares of Preferred Stock that is not Disqualified Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of the Company and its Restricted Subsidiaries, whether or not declared or paid; (vi) interest on Debt guaranteed by the Company and its Restricted Subsidiaries; and (vii) the portion of any Capital Lease Obligation paid during such period that is allocable to interest expense. "Consolidated Net Income" for any period means the net income (or loss) of the Company and its Restricted Subsidiaries for such period determined on a consolidated basis in accordance with generally accepted accounting principles; provided that there shall be excluded therefrom (a) the net income (or loss) of any Person acquired by the Company or a Restricted Subsidiary in a pooling-of- interests transaction for any period prior to the date of such transaction, (b) the net income (or loss) of any Person that is not a Restricted Subsidiary except to the extent of the amount of dividends or other distributions actually paid to the Company or a Restricted Subsidiary by such Person during such period, (c) gains or losses on Asset Dispositions by the Company or its Restricted Subsidiaries, (d) all extraordinary gains and extraordinary losses, determined in accordance with generally accepted accounting principles, (e) the cumulative effect of changes in accounting principles, (f) non-cash gains or losses resulting from fluctuations in currency exchange rates, (g) any non-cash expense related to the issuance to employees or directors of the Company or any Restricted Subsidiary or any Affiliate of the Company of (i) options to purchase Capital Stock of the Company or such Restricted Subsidiary or (ii) other compensatory rights (including under the Company's Growth Share Plan), provided, in either case, that such options or rights, by their terms, can be redeemed only for Capital Stock, (h) with respect to a Restricted Subsidiary that is not a Wholly Owned Subsidiary, any aggregate net income (or loss) in excess of the Company's or any Restricted Subsidiary's pro rata share of the net income (or loss) of such Restricted Subsidiary that is not a Wholly Owned Subsidiary shall be excluded and (i) the tax effect of any of the items described in clauses (a) through (h) above; provided further that for purposes of any determination pursuant to Section 1013, there shall further be excluded therefrom the net income (but not net loss) of any Restricted Subsidiary that is subject to a restriction which prevents the payment of dividends or the making of distributions to the Company or another Restricted Subsidiary to the extent of such restriction. "Consolidated Net Worth" of any Person means the stockholders' equity of such Person, determined on a consolidated basis in accordance with generally accepted accounting principles, less amounts attributable to Disqualified Stock of such Person; provided that, with respect to the Company, adjustments following the date of execution of this Indenture to the accounting books and records of the Company in accordance with Accounting Principles Board Opinions Nos. 16 and 17 (or successor opinions thereto) or otherwise resulting from the acquisition of control of the Company by another Person shall not be given effect to. "Consolidated Tangible Assets" of any Person means the total amount of assets (less applicable reserves and other properly deductible items) which under generally accepted 7 accounting principles would be included on a consolidated balance sheet of such Person and its Subsidiaries after deducting therefrom all goodwill, trade names, trademarks, patents, unamortized debt discount and expense and other like intangibles, which in each case under generally accepted accounting principles would be included on such consolidated balance sheet. "Continuing Director" means, as of any date of determination, any member of the Board of Directors who (i) was a member of such Board of Directors on the date of execution of this Indenture or (ii) was nominated for election or elected to the Board of Directors with the affirmative vote of a majority of the Continuing Directors who were members of the Board of Directors at the time of such nomination or election or the affirmative vote of Permitted Holders. "Corporate Trust Office" means the principal corporate trust office of the Trustee, at which at any particular time its corporate trust business shall be administered, which office at the date of execution of this Indenture is located at Four Albany Street, New York, New York 10006, except that, with respect to presentation of Securities for payment or for registration of transfer or exchange, such term shall mean the office or agency of the Trustee at which, at any particular time, its corporate agency business shall be conducted. "Corporation" includes corporations, associations, companies and business trusts. "Credit Facilities" means one or more credit agreements, loan agreements or similar facilities, secured or unsecured, entered into from time to time by the Company and its Restricted Subsidiaries, and including any related notes, Guarantees, collateral documents, instruments and agreements executed in connection therewith, as the same may be amended, supplemented, modified, restated or replaced from time to time. "Debt" means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (including securities repurchase agreements but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business), (v) every Capital Lease Obligation of such Person, (vi) all Receivables Sales of such Person, together with any obligation of such Person to pay any discount, interest, fees, indemnities, penalties, recourse, expenses or other amounts in connection therewith, (vii) all obligations to redeem Disqualified Stock issued by such Person, (viii) every obligation under Interest Rate and Currency Protection Agreements of such Person and (ix) every obligation of the type referred to in clauses (i) through (viii) of another Person and all dividends of another 8 Person the payment of which, in either case, such Person has Guaranteed. The "amount" or "principal amount" of Debt at any time of determination as used herein represented by (a) any Debt issued at a price that is less than the principal amount at maturity thereof shall be the amount of the liability in respect thereof determined in accordance with generally accepted accounting principles, (b) any Receivables Sale shall be the amount of the unrecovered capital or principal investment of the purchaser (other than the Company or a Wholly Owned Subsidiary of the Company) thereof, excluding amounts representative of yield or interest earned on such investment, or (c) any Disqualified Stock shall be the maximum fixed redemption or repurchase price in respect thereof. "Debt Securities" means any debt securities (including any guarantee of such securities) issued by the Company or any Restricted Subsidiary of the Company in connection with a public offering or a private placement (excluding Debt permitted to be Incurred pursuant to paragraph (b) of Section 1011). "Default" means any event, act or condition the occurrence of which is, or after notice or the passage of time or both would be, an Event of Default. "Defaulted Interest" has the meaning specified in Section 307. "Depository" means The Depository Trust Company, its nominees and successors. "Designation" and "Designation Amount" have the respective meanings specified in Section 1021. "Disqualified Stock" of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of such Person, any Subsidiary of such Person or the holder thereof, in whole or in part, on or prior to the final Stated Maturity of the Securities, provided, however, that any Preferred Stock which would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require the Company to repurchase or redeem such Preferred Stock upon the occurrence of a Change of Control occurring prior to the final Stated Maturity of the Securities shall not constitute Disqualified Stock if the change of control provisions applicable to such Preferred Stock are no more favorable to the holders of such Preferred Stock than the provisions applicable to the Securities contained in Section 1010 and such Preferred Stock specifically provides that the Company shall not repurchase or redeem any such stock pursuant to such provisions prior to the Company's repurchase of such Securities as are required to be repurchased pursuant to Section 1010. 9 "Eligible Institution" means a commercial banking institution that has combined capital and surplus of not less than $500 million or its equivalent in foreign currency, whose debt is rated "A" (or higher) according to Standard & Poor's Ratings Services or Moody's Investors Service, Inc. at the time as of which any investment or rollover therein is made. "Eligible Receivables" means, at any time, Receivables of the Company and its Restricted Subsidiaries, as evidenced on the most recent quarterly consolidated balance sheet of the Company as at a date at least 45 days prior to such time, less Receivables of the Company or any Restricted Subsidiary employed to secure Debt Incurred pursuant to clause (vii) of paragraph (b) of Section 1011. "Event of Default" has the meaning specified in Section 501. "Exchange Act" means the Securities Exchange Act of 1934, as amended (or any successor act), and the rules and regulations thereunder (or respective successors thereto). "Expiration Date" has the meaning specified in "Offer to Purchase" below. "Fair Market Value" means, with respect to any asset or property, the price that could be negotiated in an arm's-length free market transaction, for cash, between a willing seller and a willing buyer, neither of whom is under pressure or compulsion to complete the transaction. Fair Market Value shall be determined by the Board of Directors acting in good faith and shall be evidenced by a Board Resolution. "Federal Bankruptcy Code" means the Bankruptcy Act of Title 11 of the United States Code, as amended from time to time. "Global Security" means a Rule 144A Global Security or a Regulation S Global Security, as the case may be. "Government Securities" means direct obligations of, or obligations guaranteed by, the United States of America for the payment of which guarantee or obligations the full faith and credit of the United States is pledged and which have a remaining weighted average life to maturity of not less than one year from the date of investment therein. "Group" has the meaning specified in Section 1010. "Guarantee" by any Person means any obligation, contingent or otherwise, of such Person guaranteeing, or having the economic effect of guaranteeing, any Debt of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds 10 for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and "Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to the foregoing); provided, however, that the Guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. "Guarantor" means a Restricted Subsidiary of the Company that has executed a Restricted Subsidiary Guarantee. "Holder" means a Person in whose name a Security is registered in the Security Register. "Incur" means, with respect to any Debt or other obligation of any Person, to create, issue, incur (by conversion, exchange or otherwise), assume, Guarantee or otherwise become liable in respect of such Debt or other obligation including by acquisition of Subsidiaries or the recording, as required pursuant to generally accepted accounting principles or otherwise, of any such Debt or other obligation on the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and "Incurring" shall have meanings correlative to the foregoing); provided, however, that a change in generally accepted accounting principles that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of such Debt and that neither the accrual of interest nor the accretion of original issue discount shall be deemed an Incurrence of Debt. "Indenture" means this instrument as originally executed and as it may from time to time be supplemented or amended by one or more indentures supplemental hereto entered into pursuant to the applicable provisions hereof. "Indenture Obligations" means the obligations of the Company and any other obligor under this Indenture or under the Securities to pay principal of, premium, if any, and interest on the Securities when due and payable, whether at maturity, by acceleration, call for redemption or repurchase or otherwise, and all other amounts due or to become due under or in connection with this Indenture or the Securities and the performance of all other obligations to the Trustee (including, but not limited to, payment of all amounts due the Trustee under Section 607), Paying Agent, Security Registrar and the Holders of the Securities under this Indenture and the Securities according to the terms thereof. "Initial Purchasers" means Salomon Brothers Inc, Donaldson, Lufkin & Jenrette Securities Corporation and Goldman, Sachs & Co. 11 "Interest Payment Date" means the Stated Maturity of an installment of interest on the Securities. "Interest Rate or Currency Protection Agreement" of any Person means any forward contract, futures contract, swap, option or other financial agreement or arrangement (including, without limitation, caps, floors, collars and similar agreements) relating to, or the value of which is dependent upon, interest rates or currency exchange rates or indices. "Investment" by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person, including any payment on a Guarantee of any obligation of such other Person. "Lien" means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, Receivables Sale, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). For purposes of this definition the sale, lease, conveyance or other transfer by the Company or any Subsidiary of, including the grant of indefeasible rights of use or equivalent arrangements with respect to, dark or lit communications fiber capacity or communications conduit shall not constitute a Lien. "Liquidated Interest" has the meaning specified in Exhibit A. "Maturity", when used with respect to any Security, means the date on which the principal of such Security or an installment of principal becomes due and payable as therein or herein provided, whether at the Stated Maturity or by declaration of acceleration, notice of redemption or otherwise. "Net Available Proceeds" from any Asset Disposition by any Person means cash or cash equivalents received (including amounts received by way of sale or discounting of any note, installment receivable or other receivable, but excluding any other consideration received in the form of assumption by the acquiror of Debt or other obligations relating to such properties or assets) therefrom by such Person, net of (i) any portion thereof invested within 360 days of such Asset Disposition in Telecommunications Assets, (ii) all legal, title and recording tax expenses, commissions and other fees and expenses Incurred and all federal, state, provincial, foreign and local taxes required to be accrued as a liability as a consequence of such Asset Disposition, (iii) all payments made by such Person or its Subsidiaries on any Debt which is 12 secured by such assets in accordance with the terms of any Lien upon or with respect to such assets or which must by the terms of such Lien, or in order to obtain a necessary consent to such Asset Disposition or by applicable law, be repaid out of the proceeds from such Asset Disposition, (iv) all distributions and other payments made to minority interest holders in Subsidiaries of such Person or Permitted Joint Ventures as a result of such Asset Disposition and (v) appropriate amounts to be provided by such Person or any Subsidiary thereof, as the case may be, as a reserve in accordance with generally accepted accounting principles against any liabilities associated with such assets and retained by such Person or any Subsidiary thereof, as the case may be, after such Asset Disposition, including, without limitation, liabilities under any indemnification obligations and severance and other employee termination costs associated with such Asset Disposition, in each case as determined by the Board of Directors of such Person, in its reasonable good faith judgment evidenced by Board Resolution; provided, however, that any reduction in such reserve within twelve months following the consummation of such Asset Disposition shall be for all purposes of this Indenture and the Securities treated as a new Asset Disposition at the time of such reduction with Net Available Proceeds equal to the amount of such reduction. "Non-Global Purchasers" has the meaning specified in Section 303. "Notice of Default" has the meaning specified in Section 501. "Offer" has the meaning specified in "Offer to Purchase" below. "Offer to Purchase" means a written offer (the "Offer") sent by the Company by first class mail, postage prepaid, to each Holder of Securities at his address appearing in the Security Register on the date of the Offer offering to purchase up to the total aggregate principal amount of Securities specified in such Offer at the purchase price specified in such Offer (as determined pursuant to Section 1010). Unless otherwise required by applicable law, the Offer shall specify an expiration date (the "Expiration Date") of the Offer to Purchase which shall be, subject to any contrary requirements of applicable law, not less than 30 days or more than 60 days after the date of such Offer and a settlement date (the "Purchase Date") for purchase of Securities within five Business Days after the Expiration Date. The Company shall notify the Trustee at least 15 Business Days (or such shorter period as is acceptable to the Trustee) prior to the mailing of the Offer of the Company's obligation to make an Offer to Purchase, and the Offer shall be mailed by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. The Offer shall contain information concerning the business of the Company and its Subsidiaries which the Company in good faith believes will enable such Holders to make an informed decision with respect to the Offer to Purchase (which at a minimum will include (i) the most recent annual and quarterly financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the documents required to be filed with the Trustee pursuant to Section 1008 (which requirements may be satisfied by delivery of such documents together with the Offer), (ii) a 13 description of material developments in the Company's business subsequent to the date of the latest of such financial statements referred to in clause (i) (including a description of the events requiring the Company to make the Offer to Purchase), (iii) if applicable, appropriate pro forma financial information concerning the Offer to Purchase and the events requiring the Company to make the Offer to Purchase and (iv) any other information required by applicable law to be included therein). The Offer shall contain all instructions and materials necessary to enable such Holders to tender Securities pursuant to the Offer to Purchase. The Offer shall also state: (a) the Section of this Indenture pursuant to which the Offer to Purchase is being made; (b) the Expiration Date and the Purchase Date; (c) the aggregate principal amount of the Outstanding Securities offered to be purchased by the Company pursuant to the Offer to Purchase (including, if less than 100%, the manner by which such has been determined pursuant to the Section hereof requiring the Offer to Purchase) (the "Purchase Amount"); (d) the purchase price to be paid by the Company for each $1,000 aggregate principal amount of Securities accepted for payment (as specified pursuant to Section 1010) (the "Purchase Price"); (e) that the Holder may tender all or any portion of the Securities registered in the name of such Holder and that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount; (f) the place or places where Securities are to be surrendered for tender pursuant to the Offer to Purchase; (g) that any Securities not tendered or tendered but not purchased by the Company will continue to accrue interest, as the case may be; (h) that on the Purchase Date the Purchase Price will become due and payable upon each Security being accepted for payment pursuant to the Offer to Purchase and that interest thereon, if any, shall cease to accrue on and after the Purchase Date; (i) that each Holder electing to tender a Security pursuant to the Offer to Purchase will be required to surrender such Security at the place or places specified in the Offer prior to the close of business on the Expiration Date (such Security being, if the Company or the Trustee so requires, duly endorsed by, or accompanied by a written 14 instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or its attorney duly authorized in writing); (j) that Holders will be entitled to withdraw all or any portion of Securities tendered if the Company (or their Paying Agent) receives, not later than the close of business on the Expiration Date, a telegram, telex, facsimile transmission or letter setting forth the name of the Holder, the principal amount of the Security the Holder tendered, the certificate number of the Security the Holder tendered and a statement that such Holder is withdrawing all or a portion of its tender; (k) that (i) if Securities in an aggregate principal amount less than or equal to the Purchase Amount are duly tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase all such Securities and (ii) if Securities in an aggregate principal amount in excess of the Purchase Amount are tendered and not withdrawn pursuant to the Offer to Purchase, the Company shall purchase Securities having an aggregate principal amount equal to the Purchase Amount on a pro rata basis (with such adjustments as may be deemed appropriate so that only Securities in denominations of $1,000 or integral multiples thereof shall be purchased); and (l) that in the case of any Holder whose Security is purchased only in part, the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in an aggregate principal amount equal to and in exchange for the unpurchased portion of the Security so tendered. Any Offer to Purchase shall be governed by and effected in accordance with the Offer for such Offer to Purchase. "Offering Memorandum" means the Offering Memorandum dated March 25, 1997 pursuant to which the Securities were offered, and any supplement thereto. "Officers' Certificate" means a certificate signed by the Chairman of the Board of Directors, a Vice Chairman of the Board of Directors, the President or a Vice President, and by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an Assistant Treasurer, the Secretary or an Assistant Secretary of the Company and delivered to the Trustee. "Opinion of Counsel" means an opinion of counsel acceptable to the Trustee (who may be counsel to the Company, including an employee of the Company). "Outstanding", when used with respect to Securities, means, as of the date of determination, all Securities theretofore authenticated and delivered under this Indenture, except: 15 (i) Securities theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Securities, or portions thereof, for whose payment or redemption money in the necessary amount has been theretofore deposited with the Trustee or any Paying Agent (other than the Company) in trust or set aside and segregated in trust by the Company (if the Company shall act as its own Paying Agent) for the Holders of such Securities; provided that, if such Securities are to be redeemed, notice of such redemption has been duly given pursuant to this Indenture; (iii) Securities, except to the extent provided in Sections 1202 and 1203, with respect to which the Company has effected defeasance and/or covenant defeasance as provided in Article Twelve; and (iv) Securities which have been paid pursuant to Section 306 or in exchange for or in lieu of which other Securities have been authenticated and delivered pursuant to this Indenture, other than any such Securities in respect of which there shall have been presented to the Trustee proof satisfactory to it that such Securities are held by a bona fide purchaser in whose hands the Securities are valid obligations of the Company; provided, however, that in determining whether the Holders of the requisite principal amount of Outstanding Securities have given any request, demand, authorization, direction, consent, notice or waiver hereunder, and for the purpose of making the calculations required by TIA Section 313, Securities owned by the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor shall be disregarded and deemed not to be Outstanding, except that, in determining whether the Trustee shall be protected in making such calculation or in relying upon any such request, demand, authorization, direction, notice, consent or waiver, only Securities which any Responsible Officer of the Trustee knows to be so owned shall be so disregarded. Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Trustee the pledgee's right so to act with respect to such Securities and that the pledgee is not the Company or any other obligor upon the Securities or any Affiliate of the Company or such other obligor. "Paying Agent" means any Person (including the Company acting as Paying Agent) authorized by the Company to pay the principal of (and premium, if any) or interest on any Securities on behalf of the Company. "Permitted Holders" means any Person who was the beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of stock of the Company on the date of execution of this Indenture, and any Affiliates of such Person (i) who were Affiliates of such Person on the date of execution of this Indenture or (ii) who were formed, directly or indirectly, by any such Person after the date of execution of this Indenture; provided, however, that Persons 16 who were beneficial owners (within the meaning of Rule 13d-3 under the Exchange Act) of such Person on the date of execution of this Indenture continued to be beneficial owners (within the meaning of Rule 13d-3 under the Exchange Act) at the time of formation of such Affiliate. "Permitted Interest Rate or Currency Protection Agreement" of any Person means any Interest Rate or Currency Protection Agreement entered into with one or more financial institutions in the ordinary course of business that is designed to protect such Person against fluctuations in interest rates or currency exchange rates with respect to Debt Incurred and which shall have a notional amount no greater than the payments due with respect to the Debt being hedged thereby and not for purposes of speculation. "Permitted Investments" means (a) Cash Equivalents; (b) Investments in prepaid expenses, negotiable instruments held for collection and lease, utility and workers' compensation, performance and other similar deposits; (c) loans, advances or extensions of credit to employees and directors made in the ordinary course of business and consistent with past practice; (d) obligations under Interest Rate or Currency Protection Agreements; (e) bonds, notes, debentures and other securities received as a result of Asset Dispositions pursuant to and in compliance with Section 1018; (f) Investments made in the ordinary course of business as partial payment for constructing a network relating to a Telecommunications Business; (g) commercially reasonable extensions of trade credit; (h) Investments in any Person as a result of which such Person becomes a Restricted Subsidiary; (i) Investments in Permitted Joint Ventures in an aggregate amount not to exceed $25 million; (j) Investments in Affiliates or Related Persons in an aggregate amount not to exceed $11 million, provided that the making of such Investments is permitted pursuant to Section 1020; and (k) Investments in an aggregate amount not to exceed $15 million consisting of the contribution by the Company or any Restricted Subsidiary of assets located in Mexico to joint ventures in which the Company or a Restricted Subsidiary has an interest. "Permitted Joint Venture" means a Corporation, partnership or other entity other than a Restricted Subsidiary engaged in one or more Telecommunications Businesses over which the Company and/or one or more Strategic Investors have, directly or indirectly, the power to direct the policies, management and affairs. "Permitted Liens" means (a) Liens for taxes, assessments, governmental charges, levies or claims which are not yet delinquent or which are being contested in good faith by appropriate proceedings, if a reserve or other appropriate provision, if any, as shall be required in conformity with generally accepted accounting principles shall have been made therefor; (b) other Liens incidental to the conduct of the Company's and its Restricted Subsidiaries' business or the ownership of its property and assets not securing any Debt, and which do not in the aggregate materially detract from the value of the Company's and its Restricted Subsidiaries' property or assets when taken as a whole, or materially impair the use thereof in the operation of its business; (c) Liens with respect to assets of a Restricted Subsidiary granted 17 by such Restricted Subsidiary to the Company or a Restricted Subsidiary to secure Debt owing to the Company or such Restricted Subsidiary; (d) Liens, pledges and deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other types of statutory obligations; (e) Liens, pledges or deposits made to secure the performance of tenders, bids, leases, public or statutory obligations, sureties, stays, appeals, indemnities, performance or other similar bonds and other obligations of like nature Incurred in the ordinary course of business (exclusive of obligations for the payment of borrowed money); (f) zoning restrictions, servitudes, easements, rights-of-way, restrictions and other similar charges or encumbrances Incurred in the ordinary course of business which, in the aggregate, do not materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the Company or its Restricted Subsidiaries; (g) Liens arising out of judgments or awards against or other court proceedings concerning the Company or any Restricted Subsidiary with respect to which the Company or such Restricted Subsidiary is prosecuting an appeal or proceeding for review and the Company or such Restricted Subsidiary is maintaining adequate reserves in accordance with generally accepted accounting principles; and (h) any interest or title of a lessor in the property subject to any lease other than a Capital Lease. "Permitted Telecommunications Capital Asset Disposition" means the transfer, conveyance, sale, lease or other disposition of a capital asset that is a Telecommunications Asset (including fiber, conduit and related equipment) (i) the proceeds of which are treated as revenues by the Company in accordance with generally accepted accounting principles and (ii) that, in the case of the sale of fiber, would not result in the Company retaining less than 24 fibers per route mile on any segment of the Company's network. "Person" means any individual, Corporation, partnership, joint venture, association, joint stock company, trust, unincorporated organization, government or agency or political subdivision thereof or any other entity. "Physical Security" has the meaning specified in Section 303. "Predecessor Security" of any particular Security means every previous Security evidencing all or a portion of the same debt as that evidenced by such particular Security; and, for the purposes of this definition, any Security authenticated and delivered under Section 306 in exchange for a mutilated security or in lieu of a lost, destroyed or stolen Security shall be deemed to evidence the same debt as the mutilated, lost, destroyed or stolen Security. "Preferred Dividends" for any Person means for any period the quotient determined by dividing the amount of dividends and distributions paid or accrued (whether or not declared) on Preferred Stock of such Person during such period calculated in accordance with generally accepted accounting principles, by 1 minus the maximum statutory income tax rate then applicable to the Company (expressed as a decimal). 18 "Preferred Stock" of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Private Placement Legend" means the third paragraph of the legend set forth in the Securities in the form set forth in Exhibit A. "Public Equity Offering" means an underwritten public offering of common stock made on a primary basis by the Company pursuant to a registration statement filed with, and declared effective by, the Commission in accordance with the Securities Act. "Purchase Amount" has the meaning specified in "Offer to Purchase" above. "Purchase Date" has the meaning specified in "Offer to Purchase" above. "Purchase Money Debt" means Debt Incurred at any time within 270 days of, and for the purposes of financing all or any part of the cost of, the construction, installation, acquisition or improvement by the Company or any Restricted Subsidiary of the Company of any new Telecommunications Assets constructed, installed, acquired or improved after the date of execution of this Indenture, provided that the proceeds of such Debt are expended for such purposes within such 270-day period. "Purchase Price" has the meaning specified in "Offer to Purchase" above. "Qualified Institutional Buyer" or " QIB" has the meaning specified in Rule 144A. "Rating Decline" means the Securities cease to be rated B+ (or the equivalent thereof) or better by Standard & Poor's Ratings Services or B2 (or the equivalent thereof) or better by Moody's Investors Service, Inc. "Receivables" means receivables, chattel paper, instruments, documents or intangibles evidencing or relating to the right to payment of money, excluding allowances for doubtful accounts. "Receivables Sale" of any Person means any sale of Receivables of such Person (pursuant to a purchase facility or otherwise), other than in connection with a disposition of the business operations of such Person relating thereto or a disposition of defaulted Receivables for purposes of collection and not as a financing arrangement. "Redemption Date", when used with respect to any Security to be redeemed, in whole or in part, means the date fixed for such redemption by or pursuant to this Indenture. 19 "Redemption Price", when used with respect to any Security to be redeemed, means the price at which it is to be redeemed pursuant to this Indenture. "Regular Record Date" for the interest payable on any Interest Payment Date means the September 15 or March 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. "Regulation S" means Regulation S under the Securities Act. "Regulation S Global Security" has the meaning specified in Section 303. "Related Person" of any Person means any other Person directly or indirectly owning (a) 5% or more of the outstanding Common Stock of such Person (or, in the case of a Person that is not a Corporation, 5% or more of the outstanding equity interest in such Person) or (b) 5% or more of the combined outstanding voting power of the Voting Stock of such Person. "Responsible Officer", when used with respect to the Trustee, means any officer within the Trustee's Corporate Trust Office, including any vice president, the Managing Director, the secretary, any assistant secretary, any assistant treasurer, or any other officer of the Trustee customarily performing functions similar to those performed by any of the above-designated officers, and also means, with respect to a particular corporate trust matter, any other officer to whom such matter is referred because of his knowledge of and familiarity with the particular subject. "Restricted Payment" has the meaning specified in Section 1013. "Restricted Subsidiary" means a Subsidiary of the Company, or of a Restricted Subsidiary that is a Wholly Owned Subsidiary of the Company, that has not been designated by the Board of Directors (by a Board Resolution) as an Unrestricted Subsidiary pursuant to and in compliance with Section 1021. "Restricted Subsidiary Guarantee" means a supplemental indenture to this Indenture, in form satisfactory to the Trustee, executed in accordance with Article Nine, providing for an unconditional Guarantee of payment in full of the principal of, premium, if any, and interest on the Securities. Any such Restricted Subsidiary Guarantee shall not be subordinate in right of payment to any Debt of the Restricted Subsidiary providing the Restricted Subsidiary Guarantee. "Revocation" has the meaning specified in Section 1021. "Rule 144A" means Rule 144A under the Securities Act. 20 "Rule 144A Global Security" has the meaning specified in Section 303. "Sale and Leaseback Transaction" of any Person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such Person of any property or asset of such Person which has been or is being sold or transferred by such Person more than 365 days after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any Person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. The stated maturity of such arrangement shall be the date of the last payment of rent or any other amount due under such arrangement prior to the first date on which such arrangement may be terminated by the lessee without payment of a penalty. "Securities" has the meaning stated in the first recital of this Indenture and more particularly means any Securities authenticated and delivered under this Indenture. "Securities Act" means the Securities Act of 1933, as amended. "Security Register" and " Security Registrar" have the respective meanings specified in Section 305. "Special Record Date" for the payment of any Defaulted Interest means a date fixed by the Trustee pursuant to Section 307. "Stated Maturity", when used with respect to any Security or any installment of interest thereon, means the date specified in such Security as the fixed date on which the principal of such Security or such installment of interest is due and payable. "Strategic Investor" means a Corporation, partnership or other entity engaged in one or more Telecommunications Businesses that has, or 80% or more of the Voting Stock of which is owned by a Person that has, an equity market capitalization, at the time of its initial Investment in the Company or in a Permitted Joint Venture with the Company, in excess of $2 billion. "Subordinated Debt" means Debt of the Company as to which the payment of principal of (and premium, if any) and interest and other payment obligations in respect of such Debt shall be subordinate to the prior payment in full of the Securities to at least the following extent: (i) no payments of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be permitted for so long as any default in the payment of principal (or premium, if any) or interest on the Securities exists; (ii) in the event that any other Default exists with respect to the Securities, upon notice by 25% or more in principal amount of the Securities, to the Trustee, the Trustee shall have the right to give notice to the Company and the holders of such Debt (or trustees or agents therefor) of a payment blockage, and thereafter no payments 21 of principal of (or premium, if any) or interest on or otherwise due in respect of such Debt may be made for a period of 179 days from the date of such notice; and (iii) such Debt may not (x) provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the final Stated Maturity of the Securities or (y) permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such other Debt at the option of the holder thereof prior to the final Stated Maturity of the Securities, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change of control of the Company pursuant to provisions substantially similar to those described in Section 1010 (and which shall provide that such Debt shall not be repurchased pursuant to such provisions prior to the Company's repurchase of the Securities required to be repurchased by the Company pursuant to the provisions of Section 1010). "Subsidiary" of any Person means (i) a Corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a Corporation) in which such Person, or one or more other Subsidiaries of such Person or such Person and one or more other Subsidiaries thereof, directly or indirectly, has at least a majority ownership and power to direct the policies, management and affairs thereof. "Telecommunications Assets" means all assets, rights (contractual or otherwise) and properties, whether tangible or intangible, used or intended for use in connection with a Telecommunications Business. "Telecommunications Business" means the business of (i) transmitting, or providing services relating to the transmission of, voice, data or video through owned or leased transmission facilities, (ii) constructing, creating, developing or marketing communications related network equipment, software and other devices for use in a telecommunications business or (iii) evaluating, participating or pursuing any other activity or opportunity that is primarily related to those identified in (i) or (ii) above, provided that the determination of what constitutes a Telecommunications Business shall be made in good faith by the Board of Directors. "Trust Indenture Act" or " TIA" means the Trust Indenture Act of 1939 as in force at the date as of which this Indenture was executed, except as provided in Section 905. 22 "Trustee" means the Person named as the "Trustee" in the first paragraph of this Indenture until a successor Trustee shall have become such pursuant to the applicable provisions of this Indenture, and thereafter "Trustee" shall mean such successor Trustee. "Unrestricted Subsidiary" means any Subsidiary of the Company designated as such pursuant to and in compliance with Section 1021. "Vice President", when used with respect to the Company or the Trustee, means any vice president, whether or not designated by a number or a word or words added before or after the title "vice president". "Voting Stock" of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only for so long as no senior class of securities has such voting power by reason of any contingency. "Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all of the outstanding Voting Stock or other ownership interests (other than directors' qualifying shares) of which shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person. SECTION 102. Compliance Certificates and Opinions. ------------------------------------ Upon any application or request by the Company to the Trustee to take any action under any provision of this Indenture, the Company shall furnish to the Trustee an Officers' Certificate stating that all conditions precedent, if any, provided for in this Indenture (including any covenant compliance with which constitutes a condition precedent) relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any such application or request as to which the furnishing of such documents is specifically required by any provision of this Indenture relating to such particular application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture (other than pursuant to Section 1009(a)) shall include: (1) a statement that each individual signing such certificate or opinion has read such covenant or condition and the definitions herein relating thereto; 23 (2) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (3) a statement that, in the opinion of each such individual, he has made such examination or investigation as is necessary to enable him to express an informed opinion as to whether or not such covenant or condition has been complied with; and (4) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with. SECTION 103. Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by, or covered by an opinion of, any specified Person, it is not necessary that all such matters be certified by, or covered by the opinion of, only one such Person, or that they be so certified or covered by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matters in one or several documents. Any certificate or opinion of an officer of the Company may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate or Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Company stating that the information with respect to such factual matters is in the possession of the Company, unless such counsel knows, or in the exercise of reasonable care should know, that the certificate or opinion or representations with respect to such matters are erroneous. Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated (with proper identification of each matter covered therein) and form one instrument. SECTION 104. Acts of Holders. --------------- (a) Any request, demand, authorization, direction, notice, consent, waiver or other action provided by this Indenture to be given or taken by Holders may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Holders in person or by agents duly appointed in writing; and, except as herein otherwise expressly 24 provided, such action shall become effective when such instrument or instruments are delivered to the Trustee and, where it is hereby expressly required, to the Company. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Holders signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Indenture and (subject to Section 601) conclusive in favor of the Trustee and the Company, if made in the manner provided in this Section. (b) The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner that the Trustee deems sufficient. (c) The principal amount and serial numbers of Securities held by any Person, and the date of holding the same, shall be proved by the Security Register. (d) If the Company shall solicit from the Holders of Securities any request, demand, authorization, direction, notice, consent, waiver or other Act, the Company may, at its option, by or pursuant to a Board Resolution, fix in advance a record date for the determination of Holders entitled to give such request, demand, authorization, direction, notice, consent, waiver or other Act, but the Company shall have no obligation to do so. Notwithstanding TIA Section 316(c), such record date shall be the record date specified in or pursuant to such Board Resolution, which shall be a date not earlier than the date 30 days prior to the first solicitation of Holders generally in connection therewith and not later than the date such solicitation is completed. If such a record date is fixed, such request, demand, authorization, direction, notice, consent, waiver or other Act may be given before or after such record date, but only the Holders of record at the close of business on such record date shall be deemed to be Holders for the purposes of determining whether Holders of the requisite proportion of Outstanding Securities have authorized or agreed or consented to such request, demand, authorization, direction, notice, consent, waiver or other Act, and for that purpose the Outstanding Securities shall be computed as of such record date; provided that no such authorization, agreement or consent by the Holders on such record date shall be deemed effective unless it shall become effective pursuant to the provisions of this Indenture not later than eleven months after the record date. (e) Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Holder of any Security shall bind every future Holder of the same Security and the Holder of every Security issued upon the registration of transfer thereof or in exchange 25 therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustee or the Company in reliance thereon, whether or not notation of such action is made upon such Security. SECTION 105. Notices, etc., to Trustee and Company. ------------------------------------- Any request, demand, authorization, direction, notice, consent, waiver or Act of Holders or other document provided or permitted by this Indenture to be made upon, given or furnished to, or filed with, (1) the Trustee by any Holder or by the Company shall be sufficient for every purpose hereunder if made, given, furnished or filed in writing to or with the Trustee at its Corporate Trust Office, Attention: Corporate Market Services, or (2) the Company by the Trustee or by any Holder shall be sufficient for every purpose hereunder (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to the Company addressed to it at the address of its principal office specified in the first paragraph of this Indenture, or at any other address previously furnished in writing to the Trustee by the Company. SECTION 106. Notice to Holders; Waiver. ------------------------- Where this Indenture provides for notice of any event to Holders by the Company or the Trustee, such notice shall be sufficiently given (unless otherwise herein expressly provided) if in writing and mailed, first-class postage prepaid, to each Holder affected by such event, at the address of such Holder as it appears in the Security Register, not later than the latest date, and not earlier than the earliest date, prescribed for the giving of such notice. In any case where notice to Holders is given by mail, neither the failure to mail such notice, nor any defect in any notice so mailed, to any particular Holder shall affect the sufficiency of such notice with respect to other Holders. Any notice mailed to a Holder in the manner herein prescribed shall be conclusively deemed to have been received by such Holder, whether or not such Holder actually receives such notice. Where this Indenture provides for notice in any manner, such notice may be waived in writing by the Person entitled to receive such notice, either before or after the event, and such waiver shall be the equivalent of such notice. Waivers of notice by Holders shall be filed with the Trustee, but such filing shall not be a condition precedent to the validity of any action taken in reliance upon such waiver. In case by reason of the suspension of or irregularities in regular mail service or by reason of any other cause, it shall be impracticable to mail notice of any event to Holders when such notice is required to be given pursuant to any provision of this Indenture, then any manner of giving such notice as shall be satisfactory to the Trustee shall be deemed to be a sufficient giving of such notice for every purpose hereunder. 26 SECTION 107. Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 108. Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Company shall bind its successors and assigns, whether so expressed or not. SECTION 109. Separability Clause. ------------------- In case any provision in this Indenture or in the Securities shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 110. Benefits of Indenture. --------------------- Nothing in this Indenture or in the Securities, express or implied, shall give to any Person, other than the parties hereto, any Paying Agent, any Security Registrar and their successors hereunder and the Holders any legal or equitable right, remedy or claim under this Indenture. SECTION 111. Governing Law. ------------- This Indenture and the Securities shall be governed by and construed in accordance with the law of the State of New York. SECTION 112. Conflict with Trust Indenture Act. --------------------------------- The Trust Indenture Act shall apply as a matter of contract to this Indenture for purposes of interpretation, construction and defining the rights and obligations hereunder. If any provision hereof limits, qualifies or conflicts with any provision of the Trust Indenture Act or another provision which is required or deemed to be included in this Indenture by any of the provisions of the Trust Indenture Act, such provision or requirement of the Trust Indenture Act shall control. If any provision of this Indenture modifies or excludes any provision of the Trust Indenture Act that may be so modified or excluded, the latter provision shall be deemed to apply to this Indenture as so modified or excluded, as the case may be. 27 SECTION 113. Legal Holidays. -------------- In any case where any Interest Payment Date, Redemption Date, or Stated Maturity or Maturity of any Security shall not be a Business Day, then (notwithstanding any other provision of this Indenture or of the Securities) payment of principal (or premium, if any) or interest need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Interest Payment Date or Redemption Date or at the Stated Maturity or Maturity; provided that no interest shall accrue for the period from and after such Interest Payment Date, Redemption Date, Stated Maturity or Maturity, as the case may be. SECTION 114. No Personal Liability of Directors, Officers, Employees ------------------------------------------------------- and Stockholders. - ---------------- No director, officer, employee, incorporator or stockholder of the Company, as such, shall have any liability for any obligations of the Company under the Securities or this Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation, solely by reason of its status as a director, officer, employee, incorporator or stockholder of the Company. By accepting a Security, each Holder waives and releases all such liability (but only such liability). The waiver and release are part of the consideration for issuance of the Securities. SECTION 115. Independence of Covenants. ------------------------- All covenants and agreements in this Indenture shall be given independent effect so that if a particular action or condition is not permitted by any of such covenants, the fact that it would be permitted by an exception to, or be otherwise within the limitations of, another covenant shall not avoid the occurrence of a Default if such action is taken or condition exists. SECTION 116. Exhibits. -------- All exhibits attached hereto are by this reference made a part hereof with the same effect as if herein set forth in full. SECTION 117. Counterparts. ------------ This Indenture may be executed in any number of counterparts, each of which shall be an original; but such counterparts shall together constitute but one and the same instrument. 28 SECTION 118. Duplicate Originals. ------------------- The parties may sign any number of copies of this Indenture. Each signed copy shall be an original, but all of them together represent the same agreement. ARTICLE TWO SECURITY FORMS SECTION 201. Forms Generally. --------------- The Securities and the Trustee's certificate of authentication with respect thereto shall be in substantially the form set forth in Exhibit A hereto, with such appropriate insertions, omissions, substitutions and other variations as are required or permitted by this Indenture, and may have such letters, numbers or other marks of identification and such legends or endorsements placed thereon as may be required to comply with the rules of any securities exchange or system on which the Securities may be listed or eligible for trading or as may, consistently herewith, be determined by the officers executing such Securities, as evidenced by their execution of the Securities. Any portion of the text of any Security may be set forth on the reverse thereof, with an appropriate reference thereto on the face of the Security. The definitive Securities shall be printed, lithographed or engraved on steel-engraved borders or may be produced in any other manner permitted by the rules of any securities exchange or system on which the Securities may be listed or eligible for trading, all as determined by the officers of the Company executing such Securities, as evidenced by their execution of such Securities. ARTICLE THREE THE SECURITIES SECTION 301. Title and Terms. --------------- The aggregate principal amount of Securities which may be authenticated and delivered under this Indenture is limited to $250,000,000, except for Securities authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Securities pursuant to Section 304, 305, 306, 906, 1010, 1018 or 1108. The Securities shall be known and designated as the "10 7/8 % Senior Notes Due 2007" of the Company. Their Stated Maturity shall be April 1, 2007, and they shall bear 29 interest at the rate of 10 7/8% per annum from March 31, 1997, or from the most recent Interest Payment Date to which interest has been paid or duly provided for, payable on October 1, 1997 and semiannually thereafter on April 1 and October 1, in each year and at said Stated Maturity, until the principal thereof is paid or duly provided for. Interest will be computed on the basis of a 360- day year comprised of twelve 30-day months. Principal of, premium, if any, and interest on the Securities will be payable, and the Securities may be exchanged or transferred, at the office or agency of the Company in The City of New York, which, unless otherwise provided by the Company, will be the offices of the Trustee. At the option of the Company, interest may be paid by check mailed to addresses of the Persons entitled thereto as such addresses shall appear on the Security Register. The interest rate on the Securities is subject to increase by the addition of Liquidated Interest and otherwise, all as set forth or referred to in the text of the Securities appearing in Exhibit A hereto. The Securities shall be redeemable as provided in Article Eleven. At the election of the Company, the entire Debt on the Securities or certain of the Company's obligations and covenants and certain Events of Default thereunder may be defeased as provided in Article Twelve. The Securities will be senior unsecured obligations of the Company, ranking pari passu in right of payment with all existing and future senior unsecured Debt of the Company, and will be senior in right of payment to all existing and future Subordinated Debt of the Company. SECTION 302. Denominations. ------------- The Securities will be issued without coupons and in fully registered form only, in minimum denominations of $1,000 principal amount and integral multiples thereof. SECTION 303. Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Securities shall be executed on behalf of the Company by its Chairman, its President or a Vice President, under its corporate seal reproduced thereon and attested by its Secretary or an Assistant Secretary. The signature of any of these officers on the Securities may be manual or facsimile signatures of the present or any future such authorized officer and may be imprinted or otherwise reproduced on the Securities. Securities bearing the manual or facsimile signatures of individuals who were at any time the proper officers of the Company shall bind the Company, notwithstanding that such 30 individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Securities or did not hold such offices at the date of such Securities. At any time and from time to time after the execution and delivery of this Indenture, the Company may deliver Securities executed by the Company to the Trustee for authentication, together with a Company Order for the authentication and delivery of such Securities, and the Trustee in accordance with such Company Order shall authenticate and deliver such Securities. Each Security shall be dated the date of its authentication. No Security shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Security a certificate of authentication substantially in the form provided for herein duly executed by the Trustee by manual signature of an authorized signatory, and such certificate upon any Security shall be conclusive evidence, and the only evidence, that such Security has been duly authenticated and delivered hereunder and is entitled to the benefits of this Indenture. The Trustee shall authenticate Securities for original issue in an aggregate principal amount not to exceed $250,000,000 upon receipt of a Company Order, which shall, specify the amount of Securities to be authenticated, the names of the persons in which such Securities shall be registered and the date on which such Securities are to be authenticated and direct the Trustee to authenticate such Securities together with an Officers' Certificate certifying that all conditions precedent to the issuance of such Securities contained herein have been complied with. The aggregate principal amount of Securities Outstanding at any time shall not exceed $250,000,000, except as provided in Section 304. Except as described below, the Securities will be deposited with, or on behalf of, the Depository, and registered in the name of Cede & Co. as the Depository's nominee in the form of a global note certificate substantially in the form of Exhibit A (the "Rule 144A Global Security"), for credit to the respective accounts of the beneficial owners of the Securities represented thereby. Securities purchased by persons outside the United States pursuant to sales in accordance with Regulation S under the Securities Act shall be deposited with, or on behalf of, the Depository, and registered in the name of Cede & Co. as the Depository's nominee in the form of one or more global note certificates substantially in the form of Exhibit A (each a "Regulation S Global Security"), for credit to the respective accounts of the beneficial owners of the Securities represented thereby (or such other accounts as they may direct), provided that upon such deposit all such Securities shall be credited to or through accounts maintained at the Depository by or on behalf of the Euroclear System or Cedel Bank, societe anonyme. Securities represented by a Regulation S Global Security will not be exchangeable for Physical Securities 31 until the expiration of the "40-day restricted period" within the meaning of Rule 903(c)(3) of Regulation S under the Securities Act. Securities purchased by or transferred to (i) Institutional Accredited Investors who are not Qualified Institutional Buyers or (ii) any other persons who are not Qualified Institutional Buyers (other than persons outside the United States pursuant to sales or transfers in accordance with Regulation S under the Securities Act) (collectively, "Non-Global Purchasers") will be issued in registered definitive form without coupons substantially in the form of Exhibit A (the "Physical Securities"). Upon the transfer to a Qualified Institutional Buyer or to a person outside the United States pursuant to a sale or transfer in accordance with Regulation S under the Securities Act of Physical Securities initially issued to a Non-Global Purchaser, such Physical Security will be exchanged for an interest in a Global Security representing the principal amount of Securities being transferred. In case the Company, pursuant to Article Eight, shall be consolidated or merged with or into any other Person or shall convey, transfer, lease or otherwise dispose of its properties and assets substantially as an entirety to any Person, and the successor Person resulting from such consolidation, or surviving such merger, or into which the Company shall have been merged, or the Person which shall have received a conveyance, transfer, lease or other disposition as aforesaid, shall have executed an indenture supplemental hereto with the Trustee pursuant to Article Eight, any of the Securities authenticated or delivered prior to such consolidation, merger, conveyance, transfer, lease or other disposition may, from time to time, at the request of the successor Person, be exchanged for other Securities executed in the name of the successor Person with such changes in phraseology and form as may be appropriate, but otherwise in substance of like tenor as the Securities surrendered for such exchange and of like principal amount; and the Trustee, upon Company Request of the successor Person, shall authenticate and deliver Securities as specified in such request for the purpose of such exchange. If Securities shall at any time be authenticated and delivered in any new name of a successor Person pursuant to this Section in exchange or substitution for or upon registration of transfer of any Securities, such successor Person, at the option of the Holders but without expense to them, shall provide for the exchange of all Securities at the time Outstanding for Securities authenticated and delivered in such new name. SECTION 304. Temporary Securities. -------------------- Pending the preparation of definitive Securities, the Company may execute, and upon Company Order the Trustee shall authenticate and deliver, temporary Securities which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Securities in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers executing such Securities may determine, as conclusively evidenced by their execution of such Securities. 32 If temporary Securities are issued, the Company will cause definitive Securities to be prepared without unreasonable delay. After the preparation of definitive Securities, the temporary Securities shall be exchangeable for definitive Securities upon surrender of the temporary Securities at the office or agency of the Company designated for such purpose pursuant to Section 1002, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Securities, the Company shall execute and the Trustee shall authenticate and deliver in exchange therefor a like principal amount of definitive Securities of authorized denominations. Until so exchanged, the temporary Securities shall in all respects be entitled to the same benefits under this Indenture as definitive Securities. SECTION 305. Registration, Registration of Transfer and Exchange. --------------------------------------------------- The Company shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency designated pursuant to Section 1002 being herein sometimes referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Company shall provide for the registration of Securities and of transfers of Securities. The Security Register shall be in written form or any other form capable of being converted into written form within a reasonable time. At all reasonable times, the Security Register shall be open to inspection by the Trustee. The Trustee is hereby initially appointed as security registrar (the "Security Registrar") for the purpose of registering Securities and transfers of Securities as herein provided. Upon surrender for registration of transfer of any Security at the office or agency of the Company designated pursuant to Section 1002, the Company shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Securities of any authorized denomination or denominations of a like aggregate principal amount. At the option of the Holder, Securities may be exchanged for other Securities of any authorized denomination and of a like aggregate principal amount, upon surrender of the Securities to be exchanged at such office or agency. Whenever any Securities are so surrendered for exchange, the Company shall execute, and the Trustee shall authenticate and deliver, the Securities which the Holder making the exchange is entitled to receive. All Securities issued upon any registration of transfer or exchange of Securities shall be the valid obligations of the Company, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Securities surrendered upon such registration of transfer or exchange. Every Security presented or surrendered for registration of transfer or for exchange shall (if so required by the Company or the Security Registrar) be duly endorsed, or 33 be accompanied by a written instrument of transfer, in form satisfactory to the Company and the Security Registrar, duly executed by the Holder thereof or his attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange or redemption of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Securities, other than exchanges pursuant to Section 304, 906, 1010, 1018 or 1108 not involving any transfer. The Company shall not be required (i) to issue, register the transfer of or exchange any Security during a period beginning at the opening of business 15 days before the selection of Securities to be redeemed under Section 1104 and ending at the close of business on the day of such mailing of the relevant notice of redemption or (ii) to register the transfer of or exchange any Security so selected for redemption in whole or in part, except the unredeemed portion of any Security being redeemed in part. SECTION 306. Mutilated, Destroyed, Lost and Stolen Securities. ------------------------------------------------ If (i) any mutilated Security is surrendered to the Trustee or (ii) the Company and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Security, and there is delivered to the Company and the Trustee such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Company or the Trustee that such Security has been acquired by a bona fide purchaser, the Company shall execute and upon Company Order the Trustee shall authenticate and deliver, in exchange for any such mutilated Security or in lieu of any such destroyed, lost or stolen Security, a new Security of like tenor and principal amount, bearing a number not contemporaneously outstanding. In case any such mutilated, destroyed, lost or stolen Security has become or is about to become due and payable, the Company in its discretion may, instead of issuing a new Security, pay such Security. Upon the issuance of any new Security under this Section, the Company may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Security issued pursuant to this Section in lieu of any mutilated, destroyed, lost or stolen Security shall constitute an original additional contractual obligation of the Company, whether or not the mutilated, destroyed, lost or stolen Security shall be at any time enforceable by anyone, and shall be entitled to all benefits of this Indenture equally and proportionately with any and all other Securities duly issued hereunder. 34 The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities. SECTION 307. Payment of Interest; Interest Rights Preserved. ---------------------------------------------- Interest on any Security which is payable, and is punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest at the office or agency of the Company maintained for such purpose pursuant to Section 1002; provided, however, that each installment of interest may at the Company's option be paid by mailing a check for such interest, payable to or upon the written order of the Person entitled thereto pursuant to Section 308, to the address of such Person as it appears in the Security Register. Any interest on any Security which is payable, but is not punctually paid or duly provided for, on any Interest Payment Date shall forthwith cease to be payable to the Holder on the Regular Record Date by virtue of having been such Holder, and such defaulted interest and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities (such defaulted interest and interest thereon herein collectively called "Defaulted Interest") may be paid by the Company, at its election in each case, as provided in paragraph (1) or (2) below: (1) The Company may elect to make payment of any Defaulted Interest to the Persons in whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on a Special Record Date for the payment of such Defaulted Interest, which shall be fixed in the following manner. The Company shall notify the Trustee in writing of the amount of Defaulted Interest proposed to be paid on each Security and the date of the proposed payment, and at the same time the Company shall deposit with the Trustee an amount of money equal to the aggregate amount proposed to be paid in respect of such Defaulted Interest or shall make arrangements satisfactory to the Trustee for such deposit prior to the date of the proposed payment, such money when deposited to be held in trust for the benefit of the Persons entitled to such Defaulted Interest as in this clause provided. Thereupon the Trustee shall fix a Special Record Date for the payment of such Defaulted Interest which shall be not more than 15 days and not less than 10 days prior to the date of the proposed payment and not less than 10 days after the receipt by the Trustee of the notice of the proposed payment. The Trustee shall promptly notify the Company of such Special Record Date, and in the name and at the expense of the Company, shall cause notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor to be given in the manner provided for in Section 106, not less than 10 days prior to such Special Record Date. Notice of the proposed payment of such Defaulted Interest and the Special Record Date therefor having been so given, such Defaulted Interest shall be paid to the Persons in 35 whose names the Securities (or their respective Predecessor Securities) are registered at the close of business on such Special Record Date and shall no longer be payable pursuant to the following paragraph (2). (2) The Company may make payment of any Defaulted Interest in any other lawful manner not inconsistent with the requirements of any securities exchange or system on which the Securities may be listed or eligible for trading, and upon such notice as may be required by such exchange or system, if, after notice given by the Company to the Trustee of the proposed payment pursuant to this clause, such manner of payment shall be deemed practicable by the Trustee. Subject to the foregoing provisions of this Section, each Security delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Security shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Security. SECTION 308. Persons Deemed Owners. --------------------- Prior to the due presentment of a Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name such Security is registered as the owner of such Security for the purpose of receiving payment of principal of (and premium, if any) and (subject to Sections 305 and 307) interest on such Security and for all other purposes whatsoever, whether or not such Security be overdue, and none of the Company, the Trustee or any agent of the Company or the Trustee shall be affected by notice to the contrary. SECTION 309. Cancellation. ------------ All Securities surrendered for payment, redemption, registration of transfer or exchange shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly cancelled by it. The Company may at any time deliver to the Trustee for cancellation any Securities previously authenticated and delivered hereunder which the Company may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Securities previously authenticated hereunder which the Company has not issued and sold, and all Securities so delivered shall be promptly cancelled by the Trustee. If the Company shall so acquire any of the Securities, however, such acquisition shall not operate as a redemption or satisfaction of the indebtedness represented by such Securities unless and until the same are surrendered to the Trustee for cancellation. No Securities shall be authenticated in lieu of or in exchange for any Securities cancelled as provided in this Section, except as expressly permitted by this Indenture. All cancelled Securities held by the Trustee shall be disposed of by the Trustee in accordance with 36 its customary procedures and certification of their disposal delivered to the Company unless by Company Order the Company shall direct that cancelled Securities be returned to it. SECTION 310. Computation of Interest. ----------------------- Interest on the Securities shall be computed on the basis of a 360-day year comprised of twelve 30-day months. SECTION 311. CUSIP Number. ------------ The Company in issuing the Securities may use a "CUSIP" number (if then generally in use), and if so, the Trustee may use the CUSIP numbers in notices of redemption or exchange as a convenience to Holders; provided, however, that any such notice may state that no representation is made as to the correctness or accuracy of the CUSIP number printed in the notice or on the Securities, and that reliance may be placed only on the other identification numbers printed on the Securities. The Company shall promptly notify the Trustee in writing of any change in the CUSIP number of the Securities. SECTION 312. Book-Entry Provisions for Global Securities. ------------------------------------------- (a) The Global Securities initially shall (i) be registered in the name of the Depository or the nominee of such Depository, (ii) be delivered to the Trustee as custodian for such Depository and (iii) bear legends as set forth in Exhibit A. Members of, or participants in, the Depository ("Agent Members") shall have no rights under this Indenture with respect to any Global Security held on their behalf by the Depository, or the Trustee as its custodian, or under the Global Security, and the Depository may be treated by the Company, the Trustee and any agent of the Company or the Trustee as the absolute owner of the Global Security for all purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent the Company, the Trustee or any agent of the Company or the Trustee from giving effect to any written certification, proxy or other authorization furnished by the Depository or impair, as between the Depository and its Agent Members, the operation of customary practices governing the exercise of the rights of a Holder of any Security. (b) Transfers of Global Securities shall be limited to transfers in whole, but not in part, to the Depository, its successors or their respective nominees. Interests of beneficial owners in a Rule 144A Global Security may be transferred or exchanged for interests in a Regulation S Global Security, and interests of beneficial owners in a Regulation S Global Security may be transferred or exchanged for interests in a Rule 144A Global Security, in each case in accordance with the rules and procedures of the Depository and the provisions of Section 313. Interests of beneficial owners in the Global Securities may be transferred or exchanged for 37 Physical Securities in accordance with the rules and procedures of the Depository and the provisions of Section 313. In addition, Physical Securities shall be transferred to all beneficial owners in exchange for their beneficial interests in a Global Security if (i) the Depository notifies the Company that it is unwilling or unable to continue as a depository for such Global Security or if at any time the Depository ceases to be a clearing agency registered under the Exchange Act, and a successor depository is not appointed by the Company within 90 days, (ii) the Company executes and delivers to the Trustee a notice that such Global Security shall be so transferable, registrable and exchangeable, and such transfer shall be registrable, or (iii) there shall have occurred and be continuing a Default or Event of Default with respect to the Securities represented by such Global Security. (c) In connection with any transfer or exchange of a portion of the beneficial interest in any Global Security to beneficial owners pursuant to paragraph (b), the Security Registrar shall (if one or more Physical Securities are to be issued) reflect on its books and records the date and a decrease in the principal amount of the Global Security in an amount equal to the principal amount of the beneficial interest in the Global Security to be transferred, and the Company shall execute, and the Trustee shall authenticate and deliver, one or more Physical Securities of like tenor and principal amount of authorized denominations. (d) In connection with the transfer of Global Securities as an entirety to beneficial owners pursuant to paragraph (b), the Global Securities shall be deemed to be surrendered to the Trustee for cancellation, and the Company shall execute, and the Trustee shall authenticate and deliver, to each beneficial owner identified by the Depository in exchange for its beneficial interest in the Global Securities, an equal aggregate principal amount of Physical Securities of like tenor of authorized denominations. (e) Any Physical Security delivered in exchange for an interest in a Global Security pursuant to paragraph (b) or (c) of this Section 312 shall, except as otherwise provided by clauses (a)(1)(x) and (b)(1)(x) and paragraph (d) of Section 313, bear the legend regarding transfer restrictions applicable to the Physical Securities set forth in Exhibit A. (f) The Holder of any Global Security may grant proxies and otherwise authorize any person, including Agent Members and persons that may hold interests through Agent Members, to take any action which a Holder is entitled to take under this Indenture or the Securities. SECTION 313. Special Transfer Provisions. --------------------------- (a) Transfers to Non-QIB Institutional Accredited Investors. The ------------------------------------------------------- following provisions shall apply with respect to the registration of any proposed transfer of a Security to any Institutional Accredited Investor which is not a QIB: 38 (1) the Security Registrar shall register the transfer of any Security if (x) the requested transfer is not prior to the date which is three years (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original issue date of such Security (or of any Predecessor Security) or the last day on which the Company or any Affiliate of the Company was the owner of such Security or any Predecessor Security or (y) the proposed transferee has delivered to the Security Registrar a certificate substantially in the form of Exhibit B hereto; and (2) the Security Registrar shall register the transfer of any Security if the proposed transferor is an Agent Member holding a beneficial interest in a Global Security, upon receipt by the Security Registrar of (x) the certificate, if any, required by paragraph (1) above and (y) instructions given in accordance with the Depository's and the Security Registrar's procedures; whereupon (A) the Security Registrar shall reflect on its books and records the date of such transfer and (if the transfer involves a transfer of a beneficial interest in a Global Security) a decrease in the principal amount of a Global Security in an amount equal to the principal amount of the beneficial interest in a Global Security to be transferred, and (B) the Company shall execute and the Trustee shall authenticate and deliver one or more Physical Securities of like tenor and principal amount of authorized denominations. (b) Transfers to Non-U.S. Persons. The following provisions shall apply ----------------------------- with respect to the registration of any proposed transfer of a Security to any non-U.S. person: (1) the Security Registrar shall register the transfer of any Security if (x) the requested transfer is not prior to the date which is three years (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original issue date of such Security (or of any Predecessor Security) or the last day on which the Company or any Affiliate of the Company was the owner of such Security or any Predecessor Security or (y) the proposed transferee has delivered to the Security Registrar a certificate substantially in the form of Exhibit C hereto; and (2) the Security Registrar shall register the transfer of any Security if the proposed transferor is an Agent Member holding a beneficial interest in a Rule 144A Global Security, upon receipt by the Security Registrar of (x) the certificate, if any, required by paragraph (1) above and (y) instructions given in accordance with the Depository's and the Security Registrar's procedures; whereupon the Security Registrar shall reflect on its books and records the date of such transfer and (A) (if the transfer involves a transfer of a beneficial interest in a Rule 144A Global 39 Security) a decrease in the principal amount of such Rule 144A Global Security in an amount equal to the principal amount to be transferred and (B) an increase in the principal amount of a Regulation S Global Security in an amount equal to the principal amount to be transferred. (c) Transfers to QIBs. The following provisions shall apply with ----------------- respect to the registration of any proposed transfer of a Security to a person purporting to be a QIB (excluding transfers to non-U.S. persons): (1) the Security Registrar shall register the transfer of any Security if such transfer is being made by a proposed transferor who has checked the box provided for on the form of Security stating, or who has otherwise advised the Company and the Security Registrar in writing, that the transfer has been made in compliance with the exemption from registration under the Securities Act provided under Rule 144A to a transferee who has signed the certification provided for on the form of Security stating, or has otherwise advised the Company and the Security Registrar in writing, that such transferee represents and warrants that it is purchasing the Security for its own account or an account with respect to which it exercises sole investment discretion and that each of it and any such account is a QIB within the meaning of Rule 144A and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon the foregoing representations in order to claim the exemption from registration provided by Rule 144A; and (2) the Security Registrar shall register the transfer of any Security if the proposed transferee is an Agent Member, and the Securities to be transferred consist of Physical Securities which after transfer are to be evidenced by an interest in the Rule 144A Global Security, upon receipt by the Security Registrar of instructions given in accordance with the Depository's and the Security Registrar's procedures, the Security Registrar shall reflect on the Security Register the date and an increase in the principal amount of the Rule 144A Global Security in an amount equal to the principal amount of the Physical Securities to be transferred, and the Trustee shall cancel the Physical Securities so transferred. (d) Private Placement Legend. Upon the registration of transfer, ------------------------ exchange or replacement of Securities, the Security Registrar shall deliver only Securities that bear the Private Placement Legend unless (i) (x) the circumstances contemplated by clause (a)(1)(x) or (b)(1)(x) of this Section 313 exist or (y) such Security has been sold pursuant to an effective registration statement under the Securities Act and (ii) there is delivered to the Security Registrar and the Trustee an Opinion of Counsel reasonably satisfactory to the Company and the Trustee to the effect that neither such legend nor the related restrictions on transfer are required in order to maintain compliance with the provisions of the Securities Act. 40 (e) Other Transfers. If a Holder proposes to transfer a Security --------------- pursuant to any exemption from the registration requirements of the Securities Act other than as provided for by Sections 313(a), 313(b) and 313(c), the Security Registrar shall only register such transfer or exchange if such transferor delivers to the Security Registrar and the Trustee an Opinion of Counsel satisfactory to the Company and the Security Registrar that such transfer is in compliance with the Securities Act and the terms of this Indenture; provided that the Company may, based upon the opinion of its counsel, instruct the Security Registrar by a Company Order not to register such transfer in any case where the proposed transferee is not a QIB, non-U.S. person or Institutional Accredited Investor. (f) General. By its acceptance of any Security bearing the Private ------- Placement Legend, each Holder of such a Security acknowledges the restrictions on transfer of such Security set forth in this Indenture and in the Private Placement Legend and agrees that it will transfer such Security only as provided in this Indenture. The Security Registrar shall retain copies of all letters, notices and other written communications received pursuant to Section 312 or this Section 313 for a period of two years, after which time such letters, notices and other written communications shall at the written request of the Company be delivered to the Company. The Company shall have the right to inspect and make copies of all such letters, notices or other written communications at any reasonable time upon the giving of reasonable prior written notice to the Security Registrar. ARTICLE FOUR SATISFACTION AND DISCHARGE SECTION 401. Satisfaction and Discharge of Indenture. --------------------------------------- This Indenture shall upon Company Request cease to be of further effect (except as to surviving rights of registration of transfer or exchange of Securities expressly provided for herein or pursuant hereto) and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture when (1) either (a) all Securities theretofore authenticated and delivered (other than (i) Securities which have been destroyed, lost or stolen and which have been replaced or paid as provided in Section 306 and (ii) Securities for whose payment money has theretofore been deposited in trust with the Trustee or any Paying Agent or segregated and held in trust by the Company and thereafter repaid to the 41 Company or discharged from such trust as provided in Section 1003) have been delivered to the Trustee for cancellation; or (b) all such Securities not theretofore delivered to the Trustee for cancellation (i) have become due and payable, or (ii) will become due and payable at their Stated Maturity within one year, or (iii) are to be called for redemption within one year under arrangements satisfactory to the Trustee for the giving of notice of redemption by the Trustee in the name, and at the expense, of the Company, and the Company, in the case of (i), (ii) or (iii) above, has irrevocably deposited or caused to be deposited with the Trustee as trust funds in trust for such purpose an amount sufficient to pay and discharge the entire indebtedness on such Securities not theretofore delivered to the Trustee for cancellation, for principal (and premium, if any) and interest to the date of such deposit (in the case of Securities which have become due and payable) or to the Stated Maturity or Redemption Date, as the case may be; (2) the Company has paid or caused to be paid all other sums payable hereunder by the Company; and (3) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Notwithstanding the satisfaction and discharge of this Indenture, the obligations of the Company to the Trustee under Section 607 and, if money shall have been deposited with the Trustee pursuant to clause (1)(b) of this Section 401, the obligations of the Trustee under Section 402 and the last paragraph of Section 1003 shall survive. SECTION 402. Application of Trust Money. -------------------------- Subject to the provisions of the last paragraph of Section 1003, all money deposited with the Trustee pursuant to Section 401 shall be held in trust and applied by it, in accordance with the provisions of the Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) 42 as the Trustee may determine, to the Persons entitled thereto, of the principal (and premium, if any) and interest for whose payment such money has been deposited with the Trustee; but such money need not be segregated from other funds except to the extent required by law. ARTICLE FIVE REMEDIES SECTION 501. Events of Default. ----------------- "Event of Default", wherever used herein, means any one of the following events (whatever the reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (1) default in the payment of the principal of (or premium, if any, on) any Security at its Maturity; or (2) default in the payment of any interest on any Security when it becomes due and payable, and continuance of such default for a period of 30 days; or (3) default in the payment of principal and interest on any Security required to be purchased pursuant to an Offer to Purchase pursuant to Section 1010 or 1018; or (4) default in the performance, or breach, of Section 801 or 1018; or (5) default in the performance, or breach, of any covenant or warranty of the Company in this Indenture or in any Security (other than a covenant or warranty a default in whose performance or whose breach is elsewhere in this Section specifically dealt with), and continuance of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the Company by the Trustee or to the Company and the Trustee by the Holders of at least 25% in aggregate principal amount of the Outstanding Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (6) a default or defaults under any bond(s), debenture(s), note(s) or other evidence(s) of indebtedness by the Company or any Restricted Subsidiary or under any mortgage(s), indenture(s) or instrument(s) under which there may be issued or by which there may be secured or evidenced any indebtedness of such type by the Company or any such Restricted Subsidiary with a principal amount then outstanding, individually or in 43 the aggregate, in excess of $10 million, whether such indebtedness now exists or shall hereafter be created, which default or defaults shall result in the acceleration of the payment of such indebtedness or shall constitute a failure to pay the principal of such indebtedness when due at the final maturity thereof, or shall have resulted in excess of $10 million of indebtedness becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable (after expiration of any applicable grace period); or (7) a final judgment or final judgments for the payment of money are entered against the Company or any Restricted Subsidiary in an aggregate amount in excess of $10 million by a court or courts of competent jurisdiction, which judgment or judgments remain undischarged or unbonded for a period (during which execution shall not be effectively stayed) of 45 days after the right to appeal all such judgments has expired; or (8) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Company or any Restricted Subsidiary a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Company or any Restricted Subsidiary under the Federal Bankruptcy Code or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or any Restricted Subsidiary or of any substantial part of its property, or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (9) the institution by the Company or any Restricted Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under the Federal Bankruptcy Code or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee or sequestrator (or other similar official) of the Company or any Restricted Subsidiary or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due. SECTION 502. Acceleration of Maturity; Rescission and Annulment. -------------------------------------------------- If an Event of Default (other than an Event of Default specified in Section 501(8) or 501(9)) occurs and is continuing, then and in every such case the Trustee or the Holders of not less than 25% in principal amount of the Outstanding Securities may declare the principal amount of all the Securities to be due and payable immediately, by a notice in writing to the Company (and to the Trustee if given by Holders), and upon any such declaration such principal 44 amount shall become immediately due and payable. If an Event of Default specified in Section 501(8) or 501(9) occurs and is continuing, then the principal amount of all the Securities shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration has been made and before a judgment or decree for payment of the money due has been obtained by the Trustee as hereinafter provided in this Article Five, the Holders of a majority in principal amount of the Outstanding Securities, by written notice to the Company and the Trustee, may rescind and annul such declaration and its consequences if (1) the Company has paid or deposited with the Trustee a sum sufficient to pay (A) all overdue interest on all Outstanding Securities, (B) all unpaid principal of (and premium, if any, on) any Outstanding Securities which has become due otherwise than by such declaration of acceleration, and interest on such unpaid principal at the rate borne by the Securities, (C) to the extent that payment of such interest is lawful, interest on overdue interest at the rate borne by the Securities, and (D) all sums paid or advanced by the Trustee hereunder and the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel; and (2) all Events of Default, other than the nonpayment of amounts of principal of (or premium, if any, on) Securities which have become due solely by such declaration of acceleration, have been cured or waived as provided in Section 513. No such rescission shall affect any subsequent default or impair any right consequent thereon. Notwithstanding the preceding paragraph, in the event that a declaration of acceleration in respect of the Securities due to an Event of Default specified in Section 501(6) shall have occurred and be continuing, such declaration of acceleration shall be automatically annulled if the Debt that is the subject of such Event of Default has been discharged or the holders thereof have rescinded their declaration of acceleration in respect of such Debt, and written notice of such discharge or rescission, as the case may be, shall have been given to the Trustee by the Company and countersigned by the holders of such Debt or a trustee, fiduciary or agent for such holders, within 30 days after such declaration of acceleration in respect of the 45 Securities, and no other Event of Default has occurred during such 30-day period which has not been cured or waived during such period. SECTION 503. Collection of Indebtedness and Suits for Enforcement by ------------------------------------------------------- Trustee. ------- The Company covenants that if (a) default is made in the payment of any installment of interest on any Security when such interest becomes due and payable and such default continues for a period of 30 days, or (b) default is made in the payment of the principal of (or premium, if any, on) any Security at the Maturity thereof, the Company will, upon demand of the Trustee, pay to the Trustee for the benefit of the Holders of such Securities the whole amount then due and payable on such Securities for principal (and premium, if any) and interest, and interest on any overdue principal (and premium, if any) and, to the extent that payment of such interest shall be legally enforceable, upon any overdue installment of interest, at the rate borne by the Securities, and, in addition thereto, such further amount as shall be sufficient to cover the costs and expenses of collection, including the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel. If the Company fails to pay such amounts forthwith upon such demand, the Trustee, in its own name as trustee of an express trust, may institute a judicial proceeding for the collection of the sums so due and unpaid, may prosecute such proceeding to judgment or final decree and may enforce the same against the Company or any other obligor upon the Securities and collect the moneys adjudged or decreed to be payable in the manner provided by law out of the property of the Company or any other obligor upon the Securities, wherever situated. If an Event of Default occurs and is continuing, the Trustee may in its discretion proceed to protect and enforce its rights and the rights of the Holders by such appropriate judicial proceedings as the Trustee shall deem most effectual to protect and enforce any such rights, whether for the specific enforcement of any covenant or agreement in this Indenture or in aid of the exercise of any power granted herein, or to enforce any other proper remedy. SECTION 504. Trustee May File Proofs of Claim. -------------------------------- In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment, composition or other judicial proceeding relative to the Company or any other obligor upon the Securities or the property of the Company or of such 46 other obligor or their creditors, the Trustee (irrespective of whether the principal of the Securities shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Trustee shall have made any demand on the Company for the payment of overdue principal, premium, if any, or interest) shall be entitled and empowered, by intervention in such proceeding or otherwise, (i) to file and prove a claim for the whole amount of principal (and premium, if any) and interest owing and unpaid in respect of the Securities and to file such other papers or documents as may be necessary or advisable in order to have the claims of the Trustee (including any claim for the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel) and of the Holders allowed in such judicial proceeding, and (ii) to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator or sequestrator (or other similar official) in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, and any other amounts due the Trustee under Section 607. Nothing herein contained shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of reorganization, arrangement, adjustment or composition affecting the Securities or the rights of any Holder thereof, or to authorize the Trustee to vote in respect of the claim of any Holder in any such proceeding. SECTION 505. Trustee May Enforce Claims Without Possession of ------------------------------------------------ Securities. ---------- All rights of action and claims under this Indenture or the Securities may be prosecuted and enforced by the Trustee without the possession of any of the Securities or the production thereof in any proceeding relating thereto, and any such proceeding instituted by the Trustee shall be brought in its own name and as trustee of an express trust, and any recovery of judgment shall, after provision for the payment of the reasonable compensation, expenses, disbursements and advances of the Trustee and its agents and counsel, be for the ratable benefit of the Holders of the Securities in respect of which such judgment has been recovered. 47 SECTION 506. Application of Money Collected. ------------------------------ Any money collected by the Trustee pursuant to this Article Five shall be applied in the following order, at the date or dates fixed by the Trustee and, in case of the distribution of such money on account of principal (or premium, if any) or interest, upon presentation of the Securities and the notation thereon of the payment if only partially paid and upon surrender thereof if fully paid: FIRST: To the payment of all amounts due the Trustee under Section 607; SECOND: To the payment of the amounts then due and unpaid for principal of (and premium, if any) and interest on the Securities in respect of which or for the benefit of which such money has been collected, ratably, without preference or priority of any kind, according to the amounts due and payable on such Securities for principal (and premium, if any) and interest, respectively; and THIRD: The balance, if any, to the Person or Persons entitled thereto. SECTION 507. Limitation on Suits. ------------------- No Holder of any Securities shall have any right to institute any proceeding, judicial or otherwise, with respect to this Indenture, or for the appointment of a receiver or trustee, or for any other remedy hereunder, unless (1) such Holder has previously given written notice to the Trustee of a continuing Event of Default; (2) the Holders of not less than 25% in aggregate principal amount of the Outstanding Securities shall have made written request to the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder; (3) such Holder or Holders have offered to the Trustee indemnity reasonably satisfactory to it against the costs, expenses and liabilities to be incurred in compliance with such request; (4) the Trustee for 60 days after its receipt of such notice, request and offer of indemnity has failed to institute any such proceeding; and (5) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Holders of a majority or more in aggregate principal amount of the Outstanding Securities; 48 it being understood and intended that no one or more Holders shall have any right in any manner whatsoever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and ratable benefit of all the Holders. SECTION 508. Unconditional Right of Holders to Receive Principal, ---------------------------------------------------- Premium and Interest. - -------------------- Notwithstanding any other provision in this Indenture, the Holder of any Security shall have the right, which is absolute and unconditional, to receive payment as provided herein (including, if applicable, Article Twelve) and in such Security of the principal of (and premium, if any) and (subject to Section 307) interest on such Security on the respective Stated Maturities expressed in such Security (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 509. Restoration of Rights and Remedies. ---------------------------------- If the Trustee or any Holder has instituted any proceeding to enforce any right or remedy under this Indenture and such proceeding has been discontinued or abandoned for any reason, or has been determined adversely to the Trustee or to such Holder, then and in every such case, subject to any determination in such proceeding, the Company, the Trustee and the Holders shall be restored severally and respectively to their former positions hereunder and thereafter all rights and remedies of the Trustee and the Holders shall continue as though no such proceeding had been instituted. SECTION 510. Rights and Remedies Cumulative. ------------------------------ Except as otherwise provided with respect to the replacement or payment of mutilated, destroyed, lost or stolen Securities in the last paragraph of Section 306, no right or remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 49 SECTION 511. Delay or Omission Not Waiver. ---------------------------- No delay or omission of the Trustee or of any Holder of any Security to exercise any right or remedy accruing upon any Event of Default shall impair any such right or remedy or constitute a waiver of any such Event of Default or an acquiescence therein. Every right and remedy given by this Article Five or by law to the Trustee or to the Holders may be exercised from time to time, and as often as may be deemed expedient, by the Trustee or by the Holders, as the case may be. SECTION 512. Control by Holders. ------------------ The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee, provided that (1) such direction shall not be in conflict with any rule of law or with this Indenture, (2) the Trustee may take any other action deemed proper by the Trustee which is not inconsistent with such direction, and (3) the Trustee need not take any action which might involve it in personal liability or be unjustly prejudicial to the Holders not consenting. SECTION 513. Waiver of Past Defaults. ----------------------- The Holders of not less than a majority in aggregate principal amount of the Outstanding Securities may on behalf of the Holders of all the Securities waive any past default hereunder and its consequences, except a default (1) in respect of the payment of the principal of (or premium, if any) or interest on any Security, or (2) in respect of a covenant or provision hereof which under Article Nine cannot be modified or amended without the consent of the Holder of each Outstanding Security affected. Upon any such waiver, such default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. 50 SECTION 514. Waiver of Stay or Extension Laws. -------------------------------- The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, or plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay or extension law wherever enacted, now or at any time hereafter in force, which may affect the covenants or the performance of this Indenture; and the Company (to the extent that it may lawfully do so) hereby expressly waives all benefit or advantage of any such law and covenants that it shall not hinder, delay or impede the execution of any power herein granted to the Trustee, but shall suffer and permit the execution of every such power as though no such law had been enacted. ARTICLE SIX THE TRUSTEE SECTION 601. Certain Duties and Responsibilities. ----------------------------------- (a) Except during the continuance of an Event of Default, (1) the Trustee undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (2) in the absence of bad faith on its part, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but, in the case of any such certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture. (b) In case an Event of Default has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent man would exercise or use under the circumstances in the conduct of his own affairs. (c) No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that 51 (1) this paragraph (c) shall not be construed to limit the effect of paragraph (a) of this Section 601; (2) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (3) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of a majority in principal amount of the Outstanding Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (4) no provision of this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or indemnity reasonably satisfactory to it against such risk or liability is not reasonably assured to it. (d) Whether or not therein expressly so provided, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to the provisions of this Section 601. SECTION 602. Notice of Default. ----------------- Within 60 days after the occurrence of any Default hereunder, the Trustee shall transmit, in the manner and to the extent provided in TIA Section 313(c), notice of such Default hereunder known to any Responsible Officer of the Trustee, unless such Default shall have been cured or waived; provided, however, that, except in the case of a Default in the payment of the principal of (or premium, if any) or interest on any Security, the Trustee shall be protected in withholding such notice if and so long as the board of directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Trustee in good faith determines that the withholding of such notice is in the interest of the Holders; and provided further that in the case of any Default of the character specified in Section 501(5) no such notice to Holders shall be given until at least 30 days after the occurrence thereof. SECTION 603. Certain Rights of Trustee. ------------------------- Subject to Section 601 and to the provisions of TIA Sections 315(a) through 315(d): 52 (1) the Trustee may conclusively rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (2) any request or direction of the Company mentioned herein shall be sufficiently evidenced by a Company Request or Company Order and any resolution of the Board of Directors may be sufficiently evidenced by a Board Resolution; (3) whenever in the administration of this Indenture the Trustee shall deem it desirable that a matter be proved or established prior to taking, suffering or omitting any action hereunder, the Trustee (unless other evidence be herein specifically prescribed) may, in the absence of bad faith on its part, receive and rely upon an Officers' Certificate; (4) the Trustee may consult with counsel and the written advice of such counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon; (5) the Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture at the request or direction of any of the Holders pursuant to this Indenture, unless such Holders shall have offered to the Trustee security or indemnity reasonably satisfactory to it against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (6) the Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit, and, if the Trustee shall determine to make such further inquiry or investigation, it shall be entitled to examine the books, records and premises of the Company, personally or by agent or attorney; (7) the Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys and the Trustee shall not be responsible for any misconduct or negligence on the part of any agent or attorney appointed with due care by it hereunder; 53 (8) the Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture; and (9) the Trustee shall have no duties, obligations or liability in connection with any Event of Default hereunder unless a Responsible Officer of the Trustee has knowledge thereof. The Trustee shall not be required to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder, or in the exercise of any of its rights or powers, if it shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. SECTION 604. Trustee Not Responsible for Recitals or Issuance of --------------------------------------------------- Securities. - ---------- The recitals contained herein and in the Securities, except for the Trustee's certificates of authentication, shall be taken as the statements of the Company, and the Trustee assumes no responsibility for their correctness. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Securities, except that the Trustee represents that it is duly authorized to execute and deliver this Indenture, authenticate the Securities and perform its obligations hereunder. The Trustee shall not be accountable for the use or application by the Company of Securities or the proceeds thereof. SECTION 605. May Hold Securities. ------------------- The Trustee, any Paying Agent, any Security Registrar or any other agent of the Company or of the Trustee, in its individual or any other capacity, may become the owner or pledgee of Securities and, subject to TIA Sections 310(b) and 311, may otherwise deal with the Company with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other agent. SECTION 606. Money Held in Trust. ------------------- Money held by the Trustee in trust hereunder need not be segregated from other funds except to the extent required by law. The Trustee shall be under no liability for interest on any money received by it hereunder except as otherwise agreed with the Company. 54 SECTION 607. Compensation and Reimbursement. ------------------------------ The Company agrees: (1) to pay to the Trustee from time to time reasonable compensation for all services rendered by it hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); (2) except as otherwise expressly provided herein, to reimburse the Trustee upon its request for all reasonable expenses, disbursements and advances incurred or made by the Trustee in accordance with any provision of this Indenture (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to the Trustee's negligence or bad faith; and (3) to indemnify the Trustee and its directors, officers, employees and agents for, and to hold them harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of any of them, arising out of or in connection with the acceptance or administration of this trust, including the costs and expenses of defending itself or themselves against any claim or liability in connection with the exercise or performance of any of its or their powers or duties hereunder. The obligations of the Company under this Section 607 to compensate the Trustee, to pay or reimburse the Trustee for expenses, disbursements and advances and to indemnify and hold harmless the Trustee shall constitute additional indebtedness hereunder and shall survive the satisfaction and discharge of this Indenture or the earlier resignation or removal of the Trustee. As security for the performance of such obligations of the Company, the Trustee shall have a claim prior to the Securities upon all property and funds held or collected by the Trustee as such, except funds held in trust for the payment of principal of (and premium, if any) or interest on particular Securities. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 501(8) or (9), the expenses (including the reasonable charges and expenses of its counsel) of and the compensation for such services are intended to constitute expenses of administration under any applicable federal or state bankruptcy, insolvency or other similar law. The provisions of this Section 607 shall survive the termination of this Indenture or the earlier resignation or removal of the Trustee. 55 SECTION 608. Corporate Trustee Required; Eligibility; Conflicting ---------------------------------------------------- Interests. - --------- (a) There shall be at all times a Trustee hereunder which shall be subject to and comply with the provisions of Section 310(a)(1) of the Trust Indenture Act and shall have a combined capital and surplus of at least $50,000,000. If such Corporation publishes reports of condition at least annually, pursuant to law or to the requirements of federal, state, territorial or District of Columbia supervising or examining authority, then, for the purposes of this Section 608, the combined capital and surplus of such Corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Trustee shall cease to be eligible in accordance with the provisions of this Section 608, it shall resign immediately in the manner and with the effect hereinafter specified in this Article Six. (b) The Trustee shall be subject to and comply with Section 310(b) of the Trust Indenture Act. SECTION 609. Resignation and Removal; Appointment of Successor. ------------------------------------------------- (a) No resignation or removal of the Trustee and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 610. (b) The Trustee may resign at any time by giving written notice thereof to the Company. If the instrument of acceptance by a successor Trustee required by Section 610 shall not have been delivered to the Trustee within 30 days after the giving of such notice of resignation, the resigning Trustee may petition any court of competent jurisdiction for the appointment of a successor Trustee. (c) The Trustee may be removed at any time by Act of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, delivered to the Trustee and to the Company. (d) If at any time: (1) the Trustee shall fail to comply with the provisions of TIA Section 310(b) after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or (2) the Trustee shall cease to be eligible under Section 608(a) and shall fail to resign after written request therefor by the Company or by any Holder who has been a bona fide Holder of a Security for at least six months, or 56 (3) the Trustee shall become incapable of acting or shall be adjudged a bankrupt or insolvent or a receiver of the Trustee or of its property shall be appointed or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation, then, in any such case, (i) the Company, by a Board Resolution, may remove the Trustee or (ii) subject to TIA Section 315(e), any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. (e) If the Trustee shall resign, be removed or become incapable of acting, or if a vacancy shall occur in the office of Trustee for any cause, the Company, by a Board Resolution, shall promptly appoint a successor Trustee. If, within one year after such resignation, removal or incapability, or the occurrence of such vacancy, a successor Trustee shall be appointed by Act of the Holders of a majority in aggregate principal amount of the Outstanding Securities delivered to the Company and the retiring Trustee, the successor Trustee so appointed shall, forthwith upon its acceptance of such appointment, become the successor Trustee and supersede the successor Trustee appointed by the Company. If no successor Trustee shall have been so appointed by the Company or the Holders and accepted appointment in the manner hereinafter provided, any Holder who has been a bona fide Holder of a Security for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the appointment of a successor Trustee. (f) The Company shall give notice of each resignation and each removal of the Trustee and each appointment of a successor Trustee to the Holders of Securities in the manner provided for in Section 106. Each notice shall include the name of the successor Trustee and the address of its Corporate Trust Office. (g) The retiring Trustee shall not be liable for any of the acts or omissions of any successor Trustee appointed hereunder. SECTION 610. Acceptance of Appointment by Successor. -------------------------------------- Every successor Trustee appointed hereunder shall execute, acknowledge and deliver to the Company and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on request of the Company or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and shall duly assign, transfer and deliver to such successor Trustee all property 57 and money held by such retiring Trustee hereunder. Upon request of any such successor Trustee, the Company shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Trustee all such rights, powers and trusts. No successor Trustee shall accept its appointment unless at the time of such acceptance such successor Trustee shall be qualified and eligible under this Article. SECTION 611. Merger, Conversion, Consolidation or Succession to -------------------------------------------------- Business. - -------- Any Corporation into which the Trustee may be merged or converted or with which it may be consolidated, or any Corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Corporation succeeding to all or substantially all of the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder, provided that such Corporation shall be otherwise qualified and eligible under this Article Six, without the execution or filing of any paper or any further act on the part of any of the parties hereto. In case any Securities shall have been authenticated, but not delivered, by the Trustee then in office, any successor by merger, conversion or consolidation to such authenticating Trustee may adopt such authentication and deliver the Securities so authenticated with the same effect as if such successor Trustee had itself authenticated such Securities. In case at that time any of the Securities shall not have been authenticated, any successor Trustee may authenticate such Securities either in the name of any predecessor hereunder or in the name of the successor Trustee. In all such cases such certificates shall have the full force and effect which this Indenture provides that the certificate of authentication of the Trustee shall have; provided, however, that the right to adopt the certificate of authentication of any predecessor Trustee or to authenticate Securities in the name of any predecessor Trustee shall apply only to its successor or successors by merger, conversion or consolidation. ARTICLE SEVEN HOLDERS' LISTS AND REPORTS BY TRUSTEE AND COMPANY SECTION 701. Disclosure of Names and Addresses of Holders. -------------------------------------------- Every Holder of Securities, by receiving and holding the same, agrees with the Company and the Trustee that none of the Company or the Trustee or any agent of either of them shall be held accountable by reason of the disclosure of any such information as to the names and addresses of the Holders in accordance with TIA Section 312, regardless of the source from which such information was derived, and that the Trustee shall not be held accountable by reason of mailing any material pursuant to a request made under TIA Section 312(b). 58 SECTION 702. Reports by Trustee. ------------------ Within 60 days after May 15 of each year commencing with the first May 15 after the first issuance of Securities, the Trustee shall transmit to the Holders, in the manner and to the extent provided in TIA Section 313(c), a brief report dated as of such May 15 if required by TIA Section 313(a). SECTION 703. Reports by Company. ------------------ The Company shall file with the Trustee and deliver to the Holders of Securities the reports and other information required to be provided by it pursuant to Section 1008. ARTICLE EIGHT CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE SECTION 801. Company May Consolidate, etc., Only on Certain Terms. ---------------------------------------------------- The Company shall not, in a single transaction or a series of related transactions, (i) consolidate with or merge into any other Person or Persons or permit any other Person to consolidate with or merge into the Company (other than a merger of Qwest Corporation into the Company in which the Company shall be the surviving Person) or (ii) directly or indirectly, transfer, sell, lease or otherwise dispose of all or substantially all of its assets to any other Person or Persons, unless, in any such transaction specified in clause (i) or (ii): (1) in a transaction in which the Company is not the surviving Person or in which the Company sells, leases or otherwise disposes of all or substantially all of its assets to any other Person, the resulting, surviving or transferee Person (the "successor entity") is organized under the laws of the United States of America or any State thereof or the District of Columbia and shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Company's obligations under this Indenture; (2) immediately before and after giving effect to such transaction and treating any Debt which becomes an obligation of the Company or a Restricted Subsidiary as a result of such transaction as having been Incurred by the Company or such Restricted Subsidiary at the time of the transaction, no Default or Event of Default shall have occurred and be continuing; 59 (3) immediately after giving effect to such transaction, the Consolidated Net Worth of the Company (or other successor entity to the Company) is equal to or greater than that of the Company immediately prior to the transaction; (4) immediately after giving effect to such transaction and treating any Debt which becomes an obligation of the Company or a Restricted Subsidiary as a result of such transaction as having been Incurred by the Company or such Restricted Subsidiary at the time of the transaction, the Company (including any successor entity to the Company) could Incur at least $1.00 of additional Debt pursuant to the provisions of paragraph (a) of Section 1011; (5) if, as a result of any such transaction, property or assets of the Company would become subject to a Lien prohibited by the provisions of Section 1015, the Company or the successor entity to the Company shall have secured the Securities as required by such Section 1015; and (6) the Company has delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each in form and substance reasonably satisfactory to the Trustee, stating that such consolidation, merger, conveyance, transfer, lease or acquisition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture, complies with this Article and that all conditions precedent herein provided for relating to such transaction have been complied with, and, with respect to such Officers' Certificate, setting forth the manner of determination of the Consolidated Net Worth, in accordance with clause (3) of this Section 801, of the Company or, if applicable, of the successor entity as required pursuant to the foregoing. SECTION 802. Successor Substituted. --------------------- Upon any consolidation of the Company with or merger of the Company with or into any other Corporation or any conveyance, transfer or lease of the properties and assets of the Company substantially as an entirety to any Person or Persons in accordance with Section 801, the successor Person formed by such consolidation or into which the Company is merged or to which such conveyance, transfer or lease is made shall succeed to, and be substituted for, and may exercise every right and power of, the Company under this Indenture with the same effect as if such successor Person had been named as the Company herein, and, in the event of any such conveyance or transfer, the Company (which term shall for this purpose mean the Person named as the "Company" in the first paragraph of this Indenture or any successor Person which shall have become such in the manner described in Section 801), except in the case of a lease, shall be discharged of all obligations and covenants under this Indenture and the Securities and may be dissolved and liquidated. 60 ARTICLE NINE SUPPLEMENTAL INDENTURES SECTION 901. Supplemental Indentures Without Consent of Holders. -------------------------------------------------- Without the consent of any Holders, the Company, when authorized by a Board Resolution, and the Trustee, at any time and from time to time, may enter into one or more indentures supplemental hereto, in form and substance satisfactory to the Trustee, for any of the following purposes: (1) to evidence the succession of another Person to the Company and the assumption by any such successor of the covenants of the Company contained herein and in the Securities; or (2) to add to the covenants of the Company for the benefit of the Holders or to surrender any right or power herein conferred upon the Company; or (3) to add any additional Events of Default; or (4) to evidence and provide for the acceptance of appointment hereunder by a successor Trustee pursuant to the requirements of Section 610; or (5) to cure any ambiguity, to correct or supplement any provision herein which may be inconsistent with any other provision herein, or to make any other provisions with respect to matters or questions arising under this Indenture; provided that such action shall not adversely affect the interests of the Holders in any material respect; or (6) to secure the Securities pursuant to the requirements of Section 1016. SECTION 902. Supplemental Indentures with Consent of Holders. ----------------------------------------------- With the consent of the Holders of not less than a majority in aggregate principal amount of the Outstanding Securities, by Act of said Holders delivered to the Company and the Trustee, the Company, when authorized by a Board Resolution, and the Trustee may enter into an indenture or indentures supplemental hereto for the purpose of adding any provisions to or changing in any manner or eliminating any of the provisions of this Indenture or of modifying in any manner the rights of the Holders under this Indenture; provided, however, that no such supplemental indenture shall, without the consent of the Holder of each Outstanding Security affected thereby: 61 (1) change the Stated Maturity of the principal of or any installment of interest on any Security, or reduce the principal amount thereof (or premium, if any) or the rate of interest thereon or reduce the amount of the principal of the Securities that would be due and payable upon a declaration of acceleration of the Maturity thereof pursuant to Section 502 or the amount thereof provable in bankruptcy pursuant to Section 504, or change the coin or currency in which any Security or any premium or the interest thereon is payable, or impair the right to institute suit for the enforcement of any such payment after the Stated Maturity thereof (or, in the case of redemption, on or after the Redemption Date); or (2) reduce the percentage in aggregate principal amount of the Outstanding Securities the consent of whose Holders is required for any such supplemental indenture, or the consent of whose Holders is required for any waiver of compliance with certain provisions of this Indenture or certain defaults hereunder and their consequences provided for in this Indenture; or (3) modify any of the provisions of this Section 902 or Sections 513 and 1023, except to increase any such percentage or to provide that certain other provisions of this Indenture cannot be modified or waived without the consent of the Holder of each Outstanding Security affected thereby. It shall not be necessary for any Act of Holders under this Section 902 to approve the particular form of any proposed supplemental indenture, but it shall be sufficient if such Act shall approve the substance thereof. SECTION 903. Execution of Supplemental Indentures. ------------------------------------ In executing, or accepting the additional trusts created by, any supplemental indenture permitted by this Article Nine or the modifications thereby of the trusts created by this Indenture, the Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel stating that the execution of such supplemental indenture is authorized or permitted by this Indenture and an Officers' Certificate stating that all conditions precedent to the execution of such supplemental indenture have been fulfilled. The Trustee may, but shall not be obligated to, enter into any such supplemental indenture which affects the Trustee's own rights, duties or immunities under this Indenture or otherwise. SECTION 904. Effect of Supplemental Indentures. --------------------------------- Upon the execution of any supplemental indenture under this Article Nine, this Indenture shall be modified in accordance therewith, and such supplemental indenture shall form a part of this Indenture for all purposes; and every Holder of Securities theretofore or thereafter authenticated and delivered hereunder shall be bound thereby. 62 SECTION 905. Conformity with Trust Indenture Act. ----------------------------------- Every supplemental indenture executed pursuant to this Article Nine shall conform as a matter of contract or law to the requirements of the Trust Indenture Act as then in effect. SECTION 906. Reference in Securities to Supplemental Indentures. -------------------------------------------------- Securities authenticated and delivered after the execution of any supplemental indenture pursuant to this Article Nine may bear a notation in form approved by the Trustee and the Company as to any matter provided for in such supplemental indenture. If the Company shall so determine, new Securities so modified as to conform, in the opinion of the Trustee and the Company, to any such supplemental indenture may be prepared and executed by the Company and authenticated and delivered by the Trustee in exchange for Outstanding Securities. SECTION 907. Notice of Supplemental Indentures. --------------------------------- Promptly after the execution by the Company and the Trustee of any supplemental indenture pursuant to the provisions of Section 902, the Company shall give notice thereof to the Holders of each Outstanding Security affected, in the manner provided for in Section 106, setting forth in general terms the substance of such supplemental indenture. ARTICLE TEN COVENANTS SECTION 1001. Payment of Principal, Premium, if Any, and Interest. --------------------------------------------------- The Company covenants and agrees for the benefit of the Holders that it shall duly and punctually pay the principal of (and premium, if any) and interest on the Securities in accordance with the terms of the Securities and this Indenture. SECTION 1002. Maintenance of Office or Agency. ------------------------------- The Company shall maintain in The City of New York an office or agency where Securities may be presented or surrendered for payment, where Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and this Indenture may be served. The Corporate Trust Office of the Trustee shall be such office or agency of the Company, unless the Company shall designate and maintain some other office or agency for one or more of such purposes. The Company shall give prompt written notice to the Trustee of any change in the location of any such office or agency. If at any time the Company shall fail to maintain any such required office or agency 63 or shall fail to furnish the Trustee with the address thereof, such presentations, surrenders, notices and demands may be made or served at the Corporate Trust Office of the Trustee, and the Company hereby appoints the Trustee as its agent to receive all such presentations, surrenders, notices and demands. The Company may also from time to time designate one or more other offices or agencies (in or outside of The City of New York) where the Securities may be presented or surrendered for any or all such purposes and may from time to time rescind any such designation; provided, however, that no such designation or rescission shall in any manner relieve the Company of its obligation to maintain an office or agency in The City of New York for such purposes. The Company shall give prompt written notice to the Trustee of any such designation or rescission and any change in the location of any such other office or agency. SECTION 1003. Money for Security Payments to Be Held in Trust. ----------------------------------------------- If the Company shall at any time act as its own Paying Agent, it shall, on or before each due date of the principal of (or premium, if any) or interest on any of the Securities, segregate and hold in trust for the benefit of the Persons entitled thereto a sum sufficient to pay the principal of (or premium, if any) or interest so becoming due until such sums shall be paid to such Persons or otherwise disposed of as herein provided and shall promptly notify the Trustee of its action or failure so to act. Whenever the Company shall have one or more Paying Agents for the Securities, it shall, on or before each due date of the principal of (or premium, if any) or interest on any Securities, deposit with a Paying Agent a sum sufficient to pay the principal (and premium, if any) or interest so becoming due, such sum to be held in trust for the benefit of the Persons entitled to such principal, premium or interest, and (unless such Paying Agent is the Trustee) the Company will promptly notify the Trustee of such action or any failure so to act. The Company shall cause each Paying Agent (other than the Trustee) to execute and deliver to the Trustee an instrument in which such Paying Agent shall agree with the Trustee, subject to the provisions of this Section 1003, that such Paying Agent shall: (1) hold all sums held by it for the payment of the principal of, premium, if any, or interest on Securities in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (2) give the Trustee notice of any default by the Company (or any other obligor upon the Securities) in the making of any payment of principal, premium, if any, or interest; 64 (3) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent; and (4) indemnify the Trustee and its officers, directors, employees and agents against any loss, cost or liability caused by, or incurred as a result of, such Paying Agent's acts or omissions. The Company may at any time, for the purpose of obtaining the satisfaction and discharge of this Indenture or for any other purpose, pay, or by Company Order direct any Paying Agent to pay, to the Trustee all sums held in trust by the Company or such Paying Agent, such sums to be held by the Trustee upon the same trusts as those upon which such sums were held by the Company or such Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying Agent shall be released from all further liability with respect to such sums. Any money deposited with the Trustee or any Paying Agent, or then held by the Company, in trust for the payment of the principal of, premium, if any, or interest on any Security and remaining unclaimed for two years after such principal, premium or interest has become due and payable shall be paid to the Company on Company Request, or (if then held by the Company) shall be discharged from such trust; and the Holder of such Security shall thereafter, as an unsecured general creditor, look only to the Company for payment thereof, and all liability of the Trustee or such Paying Agent with respect to such trust money, and all liability of the Company as trustee thereof, shall thereupon cease; provided, however, that the Trustee or such Paying Agent, before being required to make any such repayment, may at the expense of the Company cause to be published once, in a newspaper published in the English language, customarily published on each Business Day and of general circulation in the Borough of Manhattan, The City of New York, notice that such money remains unclaimed and that, after a date specified therein, which shall not be less than 30 days from the date of such publication, any unclaimed balance of such money then remaining will be repaid to the Company. SECTION 1004. Corporate Existence. ------------------- Subject to Article Eight, the Company shall do or cause to be done all things necessary to preserve and keep in full force and effect the corporate existence, rights (charter and statutory) and franchises of the Company and each Subsidiary; provided, however, that the Company shall not be required to preserve, with respect to the Company, any such right or franchise or, with respect to any Subsidiary (subject to all the other covenants in this Indenture), any such corporate existence, right or franchise, if the Board of Directors shall determine that the preservation thereof is no longer desirable in the conduct of the business of the Company and its Subsidiaries as a whole and that the loss thereof is not disadvantageous in any material respect to the Holders. 65 SECTION 1005. Payment of Taxes and Other Claims. --------------------------------- The Company shall pay or discharge or cause to be paid or discharged, before the same shall become delinquent, (a) all taxes, assessments and governmental charges levied or imposed upon the Company or any Restricted Subsidiary or upon the income, profits or property of the Company or any Restricted Subsidiary and (b) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien upon the property of the Company or any Restricted Subsidiary; provided, however, that the Company shall not be required to pay or discharge or cause to be paid or discharged any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings. SECTION 1006. Maintenance of Properties. ------------------------- The Company shall cause all properties owned by the Company or any Restricted Subsidiary or used or held for use in the conduct of its business or the business of any Restricted Subsidiary to be maintained and kept in good condition, repair and working order and supplied with all necessary equipment and shall cause to be made all necessary repairs, renewals, replacements, betterments and improvements thereof, all as in the judgment of the Company may be necessary so that the business carried on in connection therewith may be properly and advantageously conducted at all times; provided, however, that nothing in this Section 1006 shall prevent the Company from discontinuing the maintenance of any of such properties if such discontinuance is, in the judgment of the Company, desirable in the conduct of its business or the business of any Subsidiary and not disadvantageous in any material respect to the Holders. SECTION 1007. Insurance. --------- The Company shall at all times keep all of its and its Restricted Subsidiaries' properties which are of an insurable nature insured with insurers, believed by the Company to be responsible, against loss or damage to the extent that property of similar character is usually so insured by Corporations similarly situated and owning like properties. SECTION 1008. Provision of Financial Statements. --------------------------------- Until such time as the Company shall be subject to the reporting requirements of Section 13 or 15(d) of the Securities Act, the Company shall provide the Trustee, the Initial Purchasers of the Securities, the Holders of the Securities and (upon request) prospective holders of the Securities without cost with annual and quarterly reports and such other information as is specified under Sections 13 and 15(d) of the Securities Act on the date on which the Company would have been required to file the same with the Commission. 66 SECTION 1009. Statement by Officers as to Default. ----------------------------------- (a) The Company shall deliver to the Trustee, on the date of delivery of each quarterly report to be delivered pursuant to Section 1008, a brief certificate from the principal executive officer, principal financial officer or principal accounting officer as to his or her knowledge of the Company's compliance with all conditions and covenants under this Indenture. For purposes of this Section 1009(a), such compliance shall be determined without regard to any period of grace or requirement of notice under this Indenture. (b) When any Default has occurred and is continuing under this Indenture, or if the trustee for or the holder of any other evidence of Debt of the Company or any Restricted Subsidiary gives any notice or takes any other action with respect to a claimed default (other than with respect to Debt in the principal amount of less than $5,000,000), the Company shall deliver to the Trustee by registered or certified mail or by telegram, telex or facsimile transmission an Officers' Certificate specifying such event, notice or other action within five Business Days of its occurrence. SECTION 1010. Purchase of Securities upon Change of Control. --------------------------------------------- (a) Upon the occurrence of a Change of Control, each Holder shall have the right to require that the Company repurchase such Holder's Securities in whole or in part in integral multiples of $1,000, in accordance with the procedures set forth in this Section 1010 and this Indenture. (b) Within 30 days of the occurrence of a Change of Control, the Company shall mail an Offer with respect to an Offer to Purchase all Outstanding Securities at a price in cash equal to 101% of the principal amount of the Securities plus accrued and unpaid interest thereon and premium, if any, to the purchase date. Installments of interest (including Liquidated Interest) whose Stated Maturity is on or prior to the Purchase Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. Each Holder shall be entitled to tender all or any portion of the Securities owned by such Holder pursuant to the Offer to Purchase, subject to the requirement that any portion of a Security tendered must be tendered in an integral multiple of $1,000 principal amount. (c) The Company and the Trustee shall perform their respective obligations for the Offer to Purchase as specified in the Offer. Prior to the Purchase Date, the Company shall (i) accept for payment Securities or portions thereof tendered pursuant to the Offer, (ii) deposit with the Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) money sufficient to pay the purchase price of all Securities or portions thereof so accepted and (iii) deliver or cause to be delivered to the Trustee all Securities so accepted together with an Officers' Certificate stating the Securities or portions 67 thereof accepted for payment by the Company. The Paying Agent shall promptly mail or deliver to Holders of Securities so accepted payment in an amount equal to the Purchase Price, and the Trustee shall promptly authenticate and mail or deliver to such Holders a new Security or Securities equal in principal amount to any unpurchased portion of the Security surrendered as requested by the Holder. Any Security not accepted for payment shall be promptly mailed or delivered by the Company to the Holder thereof. (d) A "Change of Control" shall be deemed to have occurred at such time as (i) a Rating Decline shall have occurred and (ii) either (A) the sale, conveyance, transfer or lease of all or substantially all of the assets of the Company to any Person or any Persons acting together that would constitute a "group" (a "Group") for purposes of Section 13(d) of the Exchange Act, together with any Affiliates or Related Persons thereof, other than any Permitted Holder or any Restricted Subsidiary, shall have occurred; (B) any Person or Group, together with any Affiliates or Related Persons thereof, other than any Permitted Holder or any Restricted Subsidiary, shall beneficially own (within the meaning of Rule 13d-3 under the Exchange Act, except that a Person shall be deemed to have beneficial ownership of all shares that such Person has the right to acquire, whether such right is exercisable immediately or only after the passage of time) at least 50% of the aggregate voting power of all classes of Voting Stock of the Company at a time when Permitted Holders own less than or equal to 25% of the aggregate voting power of all classes of Voting Stock of the Company; or (C) during any period of two consecutive years, Continuing Directors cease for any reason to constitute a majority of the Board of Directors then in office. (e) In the event that the Company makes an Offer to Purchase the Securities, the Company shall comply with any applicable securities laws and regulations, including any applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange Act. SECTION 1011. Limitation on Consolidated Debt. ------------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary to, Incur any Debt, unless, after giving effect to the application of the proceeds thereof, no Default or Event of Default would occur as a consequence of such Incurrence or be continuing following such Incurrence and either (i) the ratio of (A) the aggregate consolidated principal amount of Debt of the Company outstanding as of the most recent available quarterly or annual balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred or repaid since such balance sheet date and the receipt and application of the proceeds thereof, to (B) Consolidated Cash Flow Available for Fixed Charges for the four full fiscal quarters next preceding the Incurrence of such Debt for which consolidated financial statements are available, determined on a pro forma basis as if any such Debt had been Incurred and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 5.5 to 1.0 for Debt Incurred on or prior to April 1, 2000 and 5.0 to 1.0 for Debt Incurred thereafter, or (ii) the Company's Consolidated Capital Ratio as of the most recent available quarterly or annual 68 balance sheet, after giving pro forma effect to the Incurrence of such Debt and any other Debt Incurred or repaid since such balance sheet date and the receipt and application of the proceeds thereof, is less than 2.0 to 1.0. (b) Notwithstanding the foregoing limitation, the Company and any Restricted Subsidiary may Incur any and all of the following (each of which shall be given independent effect): (i) Debt under the Securities, this Indenture and any Restricted Subsidiary Guarantee; (ii) (A) Debt Incurred subsequent to the date of execution of this Indenture under Credit Facilities in an aggregate principal amount at any time outstanding not to exceed $150 million plus (B) Debt Incurred subsequent to the date of execution of this Indenture under one or more Credit Facilities that are revolving credit facilities in an aggregate principal amount at any time outstanding not to exceed the greater of (x) $100 million or (y) 85% of Eligible Receivables; (iii) Purchase Money Debt, provided that the amount of such Purchase Money Debt does not exceed 100% of the cost of the construction, installation, acquisition or improvement of the applicable Telecommunications Assets; (iv) Debt owed by the Company to any Restricted Subsidiary of the Company or Debt owed by a Restricted Subsidiary of the Company to the Company or a Restricted Subsidiary of the Company; provided, however, that upon either (x) the transfer or other disposition by such Restricted Subsidiary or the Company of any Debt so permitted to a Person other than the Company or another Restricted Subsidiary of the Company or (y) the issuance (other than directors' qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of such Restricted Subsidiary to a Person other than the Company or another such Restricted Subsidiary, the provisions of this clause (iv) shall no longer be applicable to such Debt and such Debt shall be deemed to have been Incurred by the issuer thereof at the time of such transfer or other disposition; (v) Debt Incurred to renew, extend, refinance, defease or refund (each, a "refinancing") the Securities or Debt of the Company Incurred pursuant to clause (iii) of this paragraph (b), in an aggregate principal amount not to exceed the aggregate principal amount of and accrued interest on the Debt so refinanced plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt so refinanced or the amount of any premium reasonably determined by the Board of Directors as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the expenses of the Company Incurred in 69 connection with such refinancing; provided, however, that Debt the proceeds of which are used to refinance the Securities or Debt which is pari passu to the Securities or Debt which is subordinate in right of payment to the Securities shall only be permitted under this clause (v) if (A) in the case of any refinancing of the Securities or Debt which is pari passu to the Securities, the refinancing Debt is made pari passu to the Securities or constitutes Subordinated Debt, and, in the case of any refinancing of Subordinated Debt, the refinancing Debt constitutes Subordinated Debt, and (B) in any case, the refinancing Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at Stated Maturity or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Company (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of the acceleration of any payment with respect to such Debt upon any event of default thereunder), in each case prior to the time the same are required by the terms of the Debt being refinanced, and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company) of such Debt at the option of the holder thereof prior to the time the same are required by the terms of the Debt being refinanced, other than a redemption or other retirement at the option of the holder of such Debt (including pursuant to an offer to purchase made by the Company) which is conditioned upon a change of control pursuant to provisions substantially similar to those described under Section 1010; (vi) Debt consisting of Permitted Interest Rate and Currency Protection Agreements; (vii) Debt secured by Receivables originated by the Company or any Restricted Subsidiary and related assets, provided that such Debt is nonrecourse to the Company and any of its other Restricted Subsidiaries and provided further that Receivables shall not be available at any time to secure Debt of the Company under this clause (vii) to the extent that they are used at such time as the basis for the Incurrence of Debt in excess of $100 million pursuant to clause (ii)(B)(y) of this paragraph (b); and (viii) Debt not otherwise permitted to be Incurred pursuant to clauses (i) through (vii) above, which, together with any other outstanding Debt Incurred pursuant to this clause (viii), has an aggregate principal amount not in excess of $25 million at any time outstanding. 70 SECTION 1012. Limitation on Debt and Preferred Stock of Restricted ---------------------------------------------------- Subsidiaries. - ------------ The Company shall not permit any Restricted Subsidiary that is not a Guarantor to Incur any Debt or issue any Preferred Stock except any and all of the following (each of which shall be given independent effect): (i) Restricted Subsidiary Guarantees; (ii) Debt of Restricted Subsidiaries under Credit Facilities permitted to be Incurred pursuant to clause (ii) of paragraph (b) of Section 1011; (iii) Purchase Money Debt of Restricted Subsidiaries permitted to be Incurred pursuant to clause (iii) of paragraph (b) of Section 1011; (iv) Debt owed by a Restricted Subsidiary of the Company to the Company or a Restricted Subsidiary of the Company permitted to be Incurred pursuant to clause (iv) of paragraph (b) of Section 1011; (v) Debt of Restricted Subsidiaries consisting of Permitted Interest Rate and Currency Protection Agreements permitted to be Incurred pursuant to clause (vi) of paragraph (b) of Section 1011; (vi) Debt of Restricted Subsidiaries secured by Receivables originated by the Company or any Restricted Subsidiary and related assets permitted to be Incurred pursuant to clause (vii) of paragraph (b) of Section 1011; (vii) Debt of Restricted Subsidiaries permitted to be Incurred pursuant to clause (viii) of paragraph (b) of Section 1011; (viii) Preferred Stock issued to and held by the Company or a Restricted Subsidiary; (ix) Debt Incurred or Preferred Stock issued by a Person prior to the time (A) such Person became a Restricted Subsidiary, (B) such Person merges into or consolidates with a Restricted Subsidiary or (C) another Restricted Subsidiary merges into or consolidates with such Person (in a transaction in which such Person becomes a Restricted Subsidiary), which Debt or Preferred Stock was not Incurred or issued in anticipation of such transaction and was outstanding prior to such transaction; and (x) Debt or Preferred Stock which is exchanged for, or the proceeds of which are used to renew, extend, refinance, defease, refund or redeem, any Debt of a 71 Restricted Subsidiary permitted to be Incurred pursuant to clause (iii) of this Section 1012 or any Debt or Preferred Stock of a Restricted Subsidiary permitted to be Incurred pursuant to clause (ix) of this Section 1012 (or any extension or renewal thereof) (for purposes hereof, a "refinancing"), in an aggregate principal amount, in the case of Debt, or with an aggregate liquidation preference, in the case of Preferred Stock, not to exceed the aggregate principal amount of the Debt so refinanced or the aggregate liquidation preference of the Preferred Stock so refinanced, plus the amount of any premium required to be paid in connection with such refinancing pursuant to the terms of the Debt or Preferred Stock so refinanced or the amount of any premium reasonably determined by the Company as necessary to accomplish such refinancing by means of a tender offer or privately negotiated repurchase, plus the amount of expenses of the Company and the applicable Restricted Subsidiary Incurred in connection therewith, and provided the Debt or Preferred Stock Incurred or issued upon such refinancing, by its terms, or by the terms of any agreement or instrument pursuant to which such Debt or Preferred Stock is Incurred or issued, (x) does not provide for payments of principal or liquidation value at the Stated Maturity of such Debt or Preferred Stock or by way of a sinking fund applicable to such Debt or Preferred Stock or by way of any mandatory redemption, defeasance, retirement or repurchase of such Debt or Preferred Stock by the Company or any Restricted Subsidiary (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the time the same are required by the terms of the Debt or Preferred Stock being refinanced and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Company or a Restricted Subsidiary) of such Debt or Preferred Stock at the option of the holder thereof prior to the Stated Maturity of the Debt or Preferred Stock being refinanced, other than a redemption or other retirement at the option of the holder of such Debt or Preferred Stock (including pursuant to an Offer to Purchase made by the Company or a Restricted Subsidiary) which is conditioned upon the change of control of the Company pursuant to provisions substantially similar to those contained in Section 1010, and provided further that, in the case of any exchange or redemption of Preferred Stock of a Restricted Subsidiary, such Preferred Stock may only be exchanged for or redeemed with Preferred Stock of such Restricted Subsidiary. SECTION 1013. Limitation on Restricted Payments. --------------------------------- The Company (i) shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, declare or pay any dividend, or make any distribution, in respect of its Capital Stock or to the holders thereof, excluding any dividends or distributions which are made solely to the Company or a Restricted Subsidiary (and, if such Restricted Subsidiary is not a Wholly Owned Subsidiary, to the other stockholders of such Restricted Subsidiary on a pro rata basis) or any dividends or distributions payable solely in shares of its Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire its Capital Stock (other than 72 Disqualified Stock); (ii) shall not, and shall not permit any Restricted Subsidiary to, purchase, redeem or otherwise retire or acquire for value (x) any Capital Stock of the Company, any Restricted Subsidiary or any Related Person of the Company (other than a permitted refinancing) or (y) any options, warrants or rights to purchase or acquire shares of Capital Stock of the Company, any Restricted Subsidiary or any Related Person of the Company or any securities convertible or exchangeable into shares of Capital Stock of the Company, any Restricted Subsidiary or any Related Person of the Company (other than a permitted refinancing), except, in any such case, any such purchase, redemption or retirement or acquisition for value paid to the Company or a Restricted Subsidiary (or, in the event of any such purchase, redemption or other retirement or acquisition for value with respect to a Restricted Subsidiary that is not a Wholly Owned Subsidiary, paid to the Company or a Restricted Subsidiary, or to the other stockholders of such Restricted Subsidiary that is not a Wholly Owned Subsidiary, on a pro rata basis); (iii) shall not make, or permit any Restricted Subsidiary to make, any Investment in, or payment on a Guarantee of any obligation of, any Person, other than the Company or a Restricted Subsidiary; and (iv) shall not, and shall not permit any Restricted Subsidiary to, redeem, defease, repurchase, retire or otherwise acquire or retire for value, prior to any scheduled maturity, repayment or sinking fund payment, Debt of the Company which is subordinate in right of payment to the Securities (other than a permitted refinancing) (each of clauses (i) through (iv) being a "Restricted Payment") if: (1) an Event of Default, or an event that with the passing of time or the giving of notice, or both, would constitute an Event of Default, shall have occurred and be continuing, or (2) upon giving effect to such Restricted Payment, the Company could not Incur at least $1.00 of additional Debt pursuant to the terms of paragraph (a) of Section 1011, or (3) upon giving effect to such Restricted Payment, the aggregate of all Restricted Payments from the date of execution of this Indenture exceeds the sum of: (a) 50% of cumulative Consolidated Net Income (or, in the event that Consolidated Net Income shall be negative, 100% of such negative amount) since the end of the last full fiscal quarter prior to the date of execution of this Indenture through the last day of the last full fiscal quarter ending at least 45 days prior to the date of such Restricted Payment, (b) plus $5 million, (c) less, in the case of any Designation with respect to a Restricted Subsidiary that was made after the date of execution of this Indenture, an amount equal to the Designation Amount with respect to such Restricted Subsidiary, (d) plus, in the case of any Revocation made after the date of execution of this Indenture, an amount equal to the lesser of the Designation Amount with respect to the Subsidiary with respect to which such Designation was made or the Fair Market Value of the Investment of the Company and its Restricted Subsidiaries in such Subsidiary at the time of Revocation; provided, however, that the Company or a Restricted Subsidiary of the Company may make any Restricted Payment with the aggregate net cash proceeds received after the date of execution of this Indenture as capital contributions to the Company or from the issuance (other than to a Subsidiary) of Capital Stock (other than Disqualified Stock) of the Company and warrants, rights or options on Capital Stock (other than Disqualified Stock) of the Company and the principal amount of Debt of the Company that has been converted into Capital Stock (other than Disqualified Stock and other than by a Subsidiary) of the Company after the date of execution of this Indenture. 73 Notwithstanding the foregoing limitation, (i) the Company and any Restricted Subsidiary may make Permitted Investments; (ii) the Company may pay any dividend on Capital Stock of any class of the Company within 60 days after the declaration thereof if, on the date when the dividend was declared, the Company could have paid such dividend in accordance with the foregoing provisions; (iii) the Company may repurchase any shares of its Common Stock or options to acquire its Common Stock from Persons who were formerly directors, officers or employees of the Company or any of its Subsidiaries or Affiliates, provided that the aggregate amount of all such repurchases made pursuant to this clause (iii) shall not exceed $1 million in any twelve-month period; (iv) the Company and any Restricted Subsidiary may refinance any Debt otherwise permitted by clause (v) of paragraph (b) of Section 1011 or clause (x) of Section 1012; and (v) the Company and any Restricted Subsidiary may retire or repurchase any Capital Stock of the Company or of any Restricted Subsidiary in exchange for, or out of the proceeds of the substantially concurrent sale (other than to a Subsidiary of the Company) of, Capital Stock (other than Disqualified Stock) of the Company. SECTION 1014. Limitation on Dividend and Other Payment ---------------------------------------- Restrictions Affecting Restricted Subsidiaries. - ---------------------------------------------- (a) The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary (i) to pay dividends (in cash or otherwise) or make any other distributions in respect of its Capital Stock owned by the Company or any other Restricted Subsidiary or to pay any Debt or other obligation owed to the Company or any other Restricted Subsidiary; (ii) to make loans or advances to the Company or any other Restricted Subsidiary; or (iii) to transfer any of its property or assets to the Company or any other Restricted Subsidiary. (b) Notwithstanding the foregoing limitation, the Company may, and may permit any Restricted Subsidiary to, create or otherwise cause or suffer to exist any such encumbrance or restriction (i) pursuant to any agreement in effect on the date of execution of this Indenture; (ii) any customary encumbrance or restriction applicable to a Restricted Subsidiary that is contained in an agreement or instrument governing or relating to Debt contained in any Credit Facilities or Purchase Money Debt, provided that the provisions of such agreement permit the payment of interest and mandatory payment or prepayment of principal pursuant to the terms of this Indenture and the Securities and other Debt that is solely an obligation of the Company, but provided further that such agreement may nevertheless contain customary net worth, leverage, invested capital and other financial covenants, customary covenants regarding the merger of or sale of all or any substantial part of the assets of the Company or any Restricted Subsidiary, customary restrictions on transactions with Affiliates, and customary subordination provisions governing Debt owed to the Company or any Restricted Subsidiary; (iii) pursuant to an agreement relating to any Acquired Debt, which encumbrance or restriction is not applicable to any Person, or the properties or assets of any Person, other 74 than the Person so acquired; (iv) pursuant to an agreement effecting a renewal, refunding, permitted refinancing or extension of Debt Incurred pursuant to an agreement referred to in clause (i), (ii) or (iii) of this paragraph (b), provided, however, that the provisions contained in such renewal, refunding, permitted refinancing or extension agreement relating to such encumbrance or restriction are no more restrictive in any material respect than the provisions contained in the agreement the subject thereof; (v) in the case of clause (iii) of paragraph (a) of this Section 1014, restrictions contained in any security agreement (including a Capital Lease Obligation) securing Debt of the Company or a Restricted Subsidiary otherwise permitted under this Indenture, but only to the extent such restrictions restrict the transfer of the property subject to such security agreement; (vi) in the case of clause (iii) of paragraph (a) of this Section 1014, customary nonassignment provisions entered into in the ordinary course of business in leases and other agreements and customary restrictions contained in asset sale agreements limiting the transfer of such property or assets pending the closing of such sale; (vii) any restriction with respect to a Restricted Subsidiary imposed pursuant to an agreement which has been entered into for the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary, provided that the consummation of such transaction would not result in a Default or an Event of Default, that such restriction terminates if such transaction is not consummated and that the consummation or abandonment of such transaction occurs within one year of the date such agreement was entered into; (viii) pursuant to applicable law; and (ix) pursuant to this Indenture and the Securities. SECTION 1015. Limitation on Liens. ------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, Incur or suffer to exist any Lien on or with respect to any property or assets now owned or acquired after the date of execution of this Indenture to secure any Debt without making, or causing such Restricted Subsidiary to make, effective provision for securing the Securities (x) equally and ratably with such Debt as to such property for so long as such Debt will be so secured or (y) in the event such Debt is Debt of the Company which is subordinate in right of payment to the Securities, prior to such Debt as to such property for so long as such Debt will be so secured. The foregoing restrictions shall not apply to: (i) Liens existing on the date of execution of this Indenture and securing Debt outstanding on the date of execution of this Indenture; (ii) Liens in favor of the Company or any Restricted Subsidiary; (iii) Liens to secure the Securities; (iv) Liens to secure Restricted Subsidiary Guarantees; (v) Liens to secure Debt under Credit Facilities permitted to be Incurred pursuant to clause (ii) of paragraph (b) of Section 1011; (vi) Liens on real or personal property of the Company or a Restricted Subsidiary constructed, installed, acquired or constituting improvements made after the date of original issuance of the Securities to secure Purchase Money Debt permitted to be Incurred pursuant to clause (iii) of paragraph (b) of Section 1011, provided, however, that (a) the principal amount of any Debt secured by such a Lien does not exceed 100% of such purchase price or cost of construction, installation or improvement of the property subject to such Lien, (b) such Lien 75 attaches to such property prior to, at the time of or within 270 days after the acquisition, the completion of construction, installation or improvement or the commencement of operation of such property and (c) such Lien does not extend to or cover any property other than the specific item of property (or portion thereof) acquired, constructed, installed or constituting the improvements financed by the proceeds of such Purchase Money Debt; (vii) Liens to secure Acquired Debt, provided, however, that (a) such Lien attaches to the acquired asset prior to the time of the acquisition of such asset and (b) such Lien does not extend to or cover any other asset; (viii) Liens to secure Debt Incurred to extend, renew, refinance or refund (or successive extensions renewals, refinancings or refundings), in whole or in part, Debt secured by any Lien referred to in the foregoing clauses (i), (iii), (iv), (v), (vi) and (vii) of this Section 1015 so long as such Lien does not extend to any other property and the principal amount of Debt so secured is not increased except as otherwise permitted under clause (v) of paragraph (b) of Section 1011 or clause (x) of Section 1012; (ix) Liens to secure debt consisting of Permitted Interest Rate and Currency Protection Agreements permitted to be Incurred pursuant to clause (vi) of paragraph (b) of Section 1011; (x) Liens to secure Debt secured by Receivables permitted to be Incurred pursuant to clause (vii) of paragraph (b) of Section 1011; (xi) Liens to secure Debt of Restricted Subsidiaries permitted to be Incurred pursuant to clause (viii) of paragraph (b) of Section 1011; (xii) Liens not otherwise permitted by the foregoing clauses (i) through (xi) in an amount not to exceed 5% of the Company's Consolidated Tangible Assets; and (xiii) Permitted Liens. SECTION 1016. Limitation on Issuances of Certain Guarantees by, ------------------------------------------------- and Debt Securities of, Restricted Subsidiaries. - ----------------------------------------------- The Company shall not (i) permit any Restricted Subsidiary to, directly or indirectly, guarantee any Debt Securities of the Company or (ii) permit any Restricted Subsidiary to issue any Debt Securities unless, in either such case, such Restricted Subsidiary simultaneously executes and delivers a Restricted Subsidiary Guarantee providing for a Guarantee of payment of the Securities. SECTION 1017. Limitation on Sale and Leaseback Transactions. --------------------------------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, directly or indirectly, enter into, assume, Guarantee or otherwise become liable with respect to any Sale and Leaseback Transaction, other than a Sale and Leaseback Transaction between the Company or a Restricted Subsidiary on the one hand and a Restricted Subsidiary or the Company on the other hand, unless (i) the Company or such Restricted Subsidiary would be entitled to Incur a Lien to secure Debt by reason of the provisions of Section 1015, equal in amount to the Attributable Value of the Sale and Leaseback Transaction, without equally and ratably securing the Securities and (ii) the Sale and Leaseback Transaction is treated as an Asset Disposition and all of the conditions of Section 1018 (including the provisions concerning the application of Net Available Proceeds) are satisfied with respect to such Sale and Leaseback Transaction, treating 76 all of the consideration received in such Sale and Leaseback Transaction as Net Available Proceeds for purposes of such Section 1018. SECTION 1018. Limitation on Asset Dispositions. -------------------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, make any Asset Disposition unless: (i) the Company or the Restricted Subsidiary, as the case may be, receives consideration for such disposition at least equal to the Fair Market Value for the assets sold or disposed of as determined by the Board of Directors in good faith and evidenced by a Board Resolution; and (ii) at least 75% of the consideration for such disposition consists of cash or cash equivalents or the assumption of Debt of the Company (other than Debt that is subordinated to the Securities) or of the Restricted Subsidiary and release from all liability on the Debt assumed. If the aggregate of Net Available Proceeds within any twelve-month period exceeds $5 million, then all such Net Available Proceeds shall be applied within 360 days of the last such Asset Disposition (1) first, to the permanent repayment or reduction of Debt then outstanding under any Credit Facility, to the extent such agreements would require such application or prohibit payments pursuant to clause (2) following; (2) second, to the extent of remaining Net Available Proceeds, to make an Offer to Purchase Outstanding Securities at a price in cash equal to 100% of the principal amount of the Securities plus accrued and unpaid interest thereon and premium, if any, to the purchase date and, to the extent required by the terms thereof, any other Debt of the Company that is pari passu with the Securities at a price no greater than 100% of the principal amount thereof plus accrued and unpaid interest to the purchase date (or 100% of the accreted value plus accrued and unpaid interest and premium, if any, to the purchase date in the case of original issue discount Debt); (3) third, to the extent of any remaining Net Available Proceeds following the completion of the Offer to Purchase, to the repayment of other Debt of the Company or Debt of a Restricted Subsidiary, to the extent permitted under the terms thereof; and (4) fourth, to the extent of any remaining Net Available Proceeds, to any other use as determined by the Company which is not otherwise prohibited by this Indenture. SECTION 1019. Limitation on Issuances and Sales of Capital Stock -------------------------------------------------- of Restricted Subsidiaries. - -------------------------- The Company shall not, and shall not permit any Restricted Subsidiary to, issue, transfer, convey, sell or otherwise dispose of any shares of Capital Stock of a Restricted Subsidiary or securities convertible or exchangeable into, or options, warrants, rights or any other interest with respect to, Capital Stock of a Restricted Subsidiary to any Person other than the Company or a Restricted Subsidiary except: (i) a sale of all of the Capital Stock of such Restricted Subsidiary owned by the Company and any Restricted Subsidiary that complies with the provisions of Section 1018 to the extent such provisions apply; (ii) in a transaction that results in such Restricted Subsidiary becoming a Permitted Joint Venture, provided (x) such transaction complies with the provisions of Section 1018 to the extent such provisions apply and 77 (y) the Company's remaining Investment in such Permitted Joint Venture would have been permitted as a new Investment under the provisions of Section 1013; (iii) the transfer, conveyance, sale or other disposition of shares required by applicable law or regulation; (iv) if required, the issuance, transfer, conveyance, sale or other disposition of directors' qualifying shares; or (v) Disqualified Stock issued in exchange for, or upon conversion of, or the proceeds of the issuance of which are used to redeem, refinance, replace or refund, shares of Disqualified Stock of such Restricted Subsidiary, provided that the amounts of the redemption obligations of such Disqualified Stock shall not exceed the amounts of the redemption obligations of, and such Disqualified Stock shall have redemption obligations no earlier than those required by, the Disqualified Stock being exchanged, converted, redeemed, refinanced, replaced or refunded. SECTION 1020. Transactions with Affiliates and Related Persons. ------------------------------------------------ The Company shall not, and shall not permit any Restricted Subsidiary to, enter into any transaction (or series of related transactions) with an Affiliate or Related Person of the Company (other than the Company or a Restricted Subsidiary), including any Investment, unless such transaction is on terms no less favorable to the Company or such Restricted Subsidiary than those that could be obtained in a comparable arm's-length transaction with an entity that is not an Affiliate or Related Person and is in the best interests of the Company or such Restricted Subsidiary, provided that the Company or any Restricted Subsidiary may enter into: (i) transactions pursuant to the Company's tax sharing agreement entered into with Anschutz Company existing at the date of execution of this Indenture described under the caption "Certain Transactions" in the Offering Memorandum, provided that any amendment of, supplement to or substitute for such agreement is on terms that are no less favorable to the Company or such Restricted Subsidiary than such existing agreement; (ii) transactions pursuant to employee compensation arrangements approved by the Board of Directors, either directly or indirectly; and (iii) Receivables Sales between the Company or a Restricted Subsidiary and an Affiliate of the Company or such Restricted Subsidiary, provided that such Receivables Sales satisfy the provisions of clauses (i) and (ii) of Section 1018. For any transaction that involves in excess of $10 million but less than or equal to $15 million, the Company shall deliver to the Trustee an Officers' Certificate stating that the transaction satisfies the above criteria. For any transaction that involves in excess of $15 million, a majority of the disinterested members of the Board of Directors shall determine that the transaction satisfies the above criteria and shall evidence such a determination by a Board Resolution or, in the event that there shall not be disinterested members of the Board of Directors with respect to the transaction, the Company shall file with the Trustee a written opinion stating that the transaction satisfies the above criteria from an investment banking firm of national standing in the United States which, in the good faith judgment of the Board of Directors, is independent with respect to the Company and its Affiliates and qualified to perform such task. 78 SECTION 1021. Limitation on Designations of Unrestricted Subsidiaries. ------------------------------------------------------- The Company shall not designate any Subsidiary of the Company (other than a newly created Subsidiary in which no Investment has previously been made) as an Unrestricted Subsidiary (a "Designation") unless: (a) no Default or Event of Default shall have occurred and be continuing at the time of or after giving effect to such Designation; (b) immediately after giving effect to such Designation, the Company would be able to Incur $1.00 of Debt under paragraph (a) of Section 1011; and (c) the Company would not be prohibited under any provision of this Indenture from making an Investment at the time of Designation (assuming the effectiveness of such Designation) in an amount (the "Designation Amount") equal to the Fair Market Value of the net Investment of the Company or any other Restricted Subsidiary in such Restricted Subsidiary on such date. In the event of any such Designation, the Company shall be deemed to have made an Investment constituting a Restricted Payment pursuant to Section 1013 for all purposes of this Indenture in the Designation Amount. In addition, neither the Company nor any Restricted Subsidiary shall at any time (x) provide credit support for, or a guarantee of, any Debt of any Unrestricted Subsidiary (including any undertaking, agreement or instrument evidencing such Debt), provided that the Company or a Restricted Subsidiary may pledge Capital Stock or Debt of any Unrestricted Subsidiary on a nonrecourse basis such that the pledgee has no claim whatsoever against the Company other than to obtain such pledged property, (y) be directly or indirectly liable for any Debt of any Unrestricted Subsidiary or (z) be directly or indirectly liable for any Debt which provides that the holder thereof may (upon notice, lapse of time or both) declare a default thereon or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity upon the occurrence of a default with respect to any Debt of any Unrestricted Subsidiary (including any right to take enforcement action against such Unrestricted Subsidiary), except in the case of clause (x) or (y) to the extent permitted under Section 1013 or 1020. A Designation may be revoked (a "Revocation") by a Board Resolution, provided that the Company shall not make any Revocation unless: (a) no Default or Event of Default shall have occurred and be continuing at the time of and after giving effect to such Revocation; and 79 (b) all Liens and Debt of such Unrestricted Subsidiary outstanding immediately following such Revocation would, if Incurred at such time, have been permitted to be Incurred at such time for all purposes of this Indenture. All Designations and Revocations must be evidenced by Board Resolutions certifying compliance with the foregoing provisions. SECTION 1022. No Repayment of Existing Parent Company Advances with the --------------------------------------------------------- Proceeds of the Securities. - -------------------------- The Company shall not apply any portion of the proceeds of the offering of the Securities toward the repayment of advances made to the Company or any of its subsidiaries by any parent company of the Company outstanding at the date of execution of this Indenture. SECTION 1023. Waiver of Certain Covenants. --------------------------- The Company may omit in any particular instance to comply with any term, provision or condition set forth in Sections 1007 through 1022, inclusive, if before or after the time for such compliance the Holders of at least a majority in principal amount of the Outstanding Securities, by Act of such Holders, waive such compliance in such instance with such term, provision or condition, but no such waiver shall extend to or affect such term, provision or condition except to the extent so expressly waived, and, until such waiver shall become effective, the obligations of the Company and the duties of the Trustee in respect of any such term, provision or condition shall remain in full force and effect. SECTION 1024. Trustee Not to Monitor Performance. ---------------------------------- The Trustee shall have no duty to confirm or monitor the performance by the Company of its duties pursuant to the covenants set forth in this Article Ten. ARTICLE ELEVEN REDEMPTION OF SECURITIES SECTION 1101. Right of Redemption. ------------------- The Securities will be subject to redemption at the option of the Company, in whole or in part, at any time or from time to time on or after April 1, 2002, upon not less than 30 nor more than 60 days' prior notice, subject to the conditions and at the redemption prices (expressed as percentages of principal amount) set forth in the form of Security, plus accrued and unpaid interest thereon (if any) to the Redemption Date. 80 SECTION 1102. Applicability of Article. ------------------------ Redemption of Securities at the election of the Company or otherwise, as permitted or required by any provision of this Indenture, shall be made in accordance with such provision and this Article. SECTION 1103. Election to Redeem; Notice to Trustee. ------------------------------------- The election of the Company to redeem any Securities pursuant to Section 1101 shall be evidenced by a Board Resolution. In case of any redemption at the election of the Company, the Company shall, at least 60 days prior to the Redemption Date fixed by the Company (unless a shorter notice shall be satisfactory to the Trustee), notify the Trustee of such Redemption Date and of the principal amount of Securities to be redeemed and shall deliver to the Trustee such documentation and records as shall enable the Trustee to select the Securities to be redeemed pursuant to Section 1104. SECTION 1104. Selection by Trustee of Securities to Be Redeemed. ------------------------------------------------- If less than all the Securities are to be redeemed, the particular Securities to be redeemed shall be selected not more than 60 days prior to the Redemption Date by the Trustee, from the Outstanding Securities not previously called for redemption, by such method as the Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions of the principal of Securities; provided, however, that no such partial redemption shall reduce the portion of the principal amount of a Security not redeemed to less than $1,000. The Trustee shall promptly notify the Company in writing of the Securities selected for redemption and, in the case of any Securities selected for partial redemption, the principal amount thereof to be redeemed. For all purposes of this Indenture, unless the context otherwise requires, all provisions relating to redemption of Securities shall relate, in the case of any Security redeemed or to be redeemed only in part, to the portion of the principal amount of such Security which has been or is to be redeemed. SECTION 1105. Notice of Redemption. -------------------- Notice of redemption shall be given in the manner provided for in Section 106 not less than 30 nor more than 60 days prior to the Redemption Date, to each Holder of Securities to be redeemed. Each notice of redemption shall state: 81 (1) the Redemption Date, (2) the Redemption Price and the amount of accrued interest to the Redemption Date payable as provided in Section 1107, if any, (3) if less than all Outstanding Securities are to be redeemed, the identification (and, in the case of a partial redemption, the principal amounts) of the particular Securities to be redeemed, (4) in case any Security is to be redeemed in part only, that on and after the Redemption Date, upon surrender of such Security, the Holder will receive, without charge, a new Security or Securities of authorized denominations for the principal amount thereof remaining unredeemed, (5) that on the Redemption Date the Redemption Price (and accrued interest, if any, to the Redemption Date payable as provided in Section 1107) will become due and payable upon each such Security, or the portion thereof, to be redeemed, and that interest thereon will cease to accrue on and after said date, and (6) the place or places where such Securities are to be presented and surrendered for payment of the Redemption Price and accrued interest, if any. Notice of redemption of Securities to be redeemed at the election of the Company shall be given by the Company or, at the Company's request, by the Trustee in the name and at the expense of the Company. SECTION 1106. Deposit of Redemption Price. --------------------------- Prior to any Redemption Date, the Company shall deposit with the Trustee or with a Paying Agent (or, if the Company is acting as its own Paying Agent, segregate and hold in trust as provided in Section 1003) an amount of money sufficient to pay the Redemption Price of, and accrued interest on, all the Securities which are to be redeemed on that date. SECTION 1107. Securities Payable on Redemption Date. ------------------------------------- Notice of redemption having been given as aforesaid, the Securities so to be redeemed shall, on the Redemption Date, become due and payable at the Redemption Price therein specified (together with accrued interest, if any, to the Redemption Date), and from and after such date (unless the Company shall default in the payment of the Redemption Price and accrued interest) such Securities shall cease to bear interest. Upon surrender of any such Security for redemption in accordance with said notice, such Security shall be paid by the Company at the Redemption Price, together with accrued interest, if any, to the Redemption 82 Date; provided, however, that installments of interest whose Stated Maturity is on or prior to the Redemption Date shall be payable to the Holders of such Securities, or one or more Predecessor Securities, registered as such at the close of business on the relevant Record Dates according to their terms and the provisions of Section 307. If any Security called for redemption shall not be so paid upon surrender thereof for redemption, the principal (and premium, if any) shall, until paid, bear interest from the Redemption Date at the rate borne by the Securities. SECTION 1108. Securities Redeemed in Part. --------------------------- Any Security which is to be redeemed only in part shall be surrendered at the office or agency of the Company maintained for such purpose pursuant to Section 1002 (with, if the Company or the Trustee so requires, due endorsement by, or a written instrument of transfer in form satisfactory to the Company and the Trustee duly executed by, the Holder thereof or such Holder's attorney duly authorized in writing), and the Company shall execute, and the Trustee shall authenticate and deliver to the Holder of such Security without service charge, a new Security or Securities, of any authorized denomination as requested by such Holder, in aggregate principal amount equal to and in exchange for the unredeemed portion of the principal of the Security so surrendered. ARTICLE TWELVE DEFEASANCE AND COVENANT DEFEASANCE SECTION 1201. Company's Option to Effect Defeasance or Covenant ------------------------------------------------- Defeasance. - ---------- The Company may, at its option by Board Resolution, at any time, with respect to the Securities, elect to have either Section 1202 or Section 1203 be applied to all Outstanding Securities upon compliance with the conditions set forth below in this Article Twelve. SECTION 1202. Defeasance and Discharge. ------------------------ Upon the Company's exercise under Section 1201 of the option applicable to this Section 1202, the Company shall be deemed to have been discharged from its obligations with respect to all Outstanding Securities on the date the conditions set forth in Section 1204 are satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means that the Company shall be deemed to have paid and discharged the entire indebtedness represented by the Outstanding Securities, which shall thereafter be deemed to be "Outstanding" only for the purposes of Section 1205 and the other Sections of this Indenture referred to in clauses (A) and 83 (B) below, and to have satisfied all its other obligations under such Securities and this Indenture insofar as such Securities are concerned (and the Trustee, at the expense of the Company, shall execute proper instruments acknowledging the same), except for the following which shall survive until otherwise terminated or discharged hereunder: (A) the rights of Holders of Outstanding Securities to receive, solely from the trust fund described in Section 1204 and as more fully set forth in such Section, payments in respect of the principal of, premium, if any, and interest on such Securities when such payments are due, (B) the Company's obligations with respect to such Securities under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers, trusts, duties and immunities of the Trustee hereunder and (D) this Article Twelve. Subject to compliance with this Article Twelve, the Company may exercise its option under this Section 1202 notwithstanding the prior exercise of its option under Section 1203 with respect to the Securities. SECTION 1203. Covenant Defeasance. ------------------- Upon the Company's exercise under Section 1201 of the option applicable to this Section 1203, the Company shall be released from its obligations under any covenant contained in Section 801(4) and in Sections 1007 through 1021 with respect to the Outstanding Securities on and after the date the conditions set forth below are satisfied (hereinafter, "covenant defeasance"), and the Securities shall thereafter be deemed not to be "Outstanding" for the purposes of any direction, waiver, consent or declaration or Act of Holders (and the consequences of any thereof) in connection with such covenants, but shall continue to be deemed "Outstanding" for all other purposes hereunder. For this purpose, such covenant defeasance means that, with respect to the Outstanding Securities, the Company may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any such covenant, whether directly or indirectly, by reason of any reference elsewhere herein to any such covenant or by reason of any reference in any such covenant to any other provision herein or in any other document and such omission to comply shall not constitute a Default or an Event of Default under Section 501(3), 501(4) or 501(5), but, except as specified above, the remainder of this Indenture and such Securities shall be unaffected thereby. SECTION 1204. Conditions to Defeasance or Covenant Defeasance. ----------------------------------------------- The following shall be the conditions to application of either Section 1202 or Section 1203 to the Outstanding Securities: (1) The Company shall irrevocably have deposited or caused to be deposited with the Trustee (or another trustee satisfying the requirements of Section 608 who shall agree to comply with the provisions of this Article Twelve applicable to it) as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Securities: (A) money in an amount, or (B) Government Securities which through the scheduled 84 payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment in respect of the Securities, money in an amount, or (C) a combination thereof, sufficient, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee (or other qualifying trustee) to pay and discharge, the principal of (and premium, if any) and interest on the Outstanding Securities on the Stated Maturity (or Redemption Date, if applicable) of such principal (and premium, if any) or installment of interest; provided that the Trustee shall have been irrevocably instructed in writing to apply such money or the proceeds of such Government Securities to said payments with respect to the Securities. Before such a deposit, the Company may give to the Trustee, in accordance with Section 1103, a notice of its election to redeem all of the Outstanding Securities at a future date in accordance with Article Eleven, which notice shall be irrevocable. Such irrevocable redemption notice, if given, shall be given effect in applying the foregoing. (2) No Default or Event of Default with respect to the Securities shall have occurred and be continuing on the date of such deposit or, insofar as paragraphs (8) and (9) of Section 501 are concerned, at any time during the period ending on the 91st day after the date of such deposit (it being understood that this condition shall not be deemed satisfied until the expiration of such period). (3) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, this Indenture or any other material agreement or instrument to which the Company is a party or by which it is bound. (4) In the case of an election under Section 1202, the Company shall have delivered to the Trustee an Opinion of Counsel stating that (x) the Company has received from, or there has been published by, the Internal Revenue Service a ruling, or (y) since March 25, 1997 there has been a change in the applicable federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred. (5) In the case of an election under Section 1203, the Company shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Securities will not recognize income, gain or loss for federal income tax purposes as a result of such covenant defeasance and will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred. 85 (6) The Company shall have delivered to the Trustee an Officers' Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either the defeasance under Section 1202 or the covenant defeasance under Section 1203 (as the case may be) have been complied with. SECTION 1205. Deposited Money and Government Securities to Be Held in ------------------------------------------------------- Trust; Other Miscellaneous Provisions. - ------------------------------------- Subject to the provisions of the last paragraph of Section 1003, all money and Government Securities (including the proceeds thereof) deposited with the Trustee (or other qualifying trustee, collectively for purposes of this Section 1205, the "Trustee") pursuant to Section 1204 in respect of the Outstanding Securities shall be held in trust and applied by the Trustee, in accordance with the provisions of such Securities and this Indenture, to the payment, either directly or through any Paying Agent (including the Company acting as its own Paying Agent) as the Trustee may determine, to the Holders of such Securities of all sums due and to become due thereon in respect of principal, premium, if any, and interest, but such money need not be segregated from other funds except to the extent required by law. The Company shall pay and indemnify the Trustee and (if applicable) its officers, directors, employees and agents against any tax, fee or other charge imposed on or assessed against the Government Securities deposited pursuant to Section 1204 or the principal and interest received in respect thereof other than any such tax, fee or other charge which by law is for the account of the Holders of the Outstanding Securities. Anything in this Article Twelve to the contrary notwithstanding, the Trustee shall deliver or pay to the Company from time to time upon Company Request any money or Government Securities held by it as provided in Section 1204 which, in the opinion of a nationally recognized firm of independent public accountants expressed in a written certification thereof delivered to the Trustee, are in excess of the amount thereof which would then be required to be deposited to effect an equivalent defeasance or covenant defeasance, as applicable, in accordance with this Article Twelve. SECTION 1206. Reinstatement. ------------- If the Trustee or any Paying Agent is unable to apply any money in accordance with Section 1205 by reason of any order or judgment of any court or governmental authority enjoining, restraining or otherwise prohibiting such application, then the Company's obligations under this Indenture and the Securities shall be revived and reinstated as though no deposit had occurred pursuant to Section 1202 or 1203, as the case may be, until such time as the Trustee or Paying Agent is permitted to apply all such money in accordance with Section 1205; provided, however, that if the Company makes any payment of principal of, premium, if any, or interest on any Security following the reinstatement of its obligations, the Company shall be 86 subrogated to the rights of the Holders of such Securities to receive such payment from the money held by the Trustee or Paying Agent. IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be duly executed, and their respective corporate seals to be hereunto affixed and attested, all as of the day and year first above written. QWEST COMMUNICATIONS INTERNATIONAL INC. By: [SIGNATURE APPEARS HERE] -------------------------- Title: Attest: [SIGNATURE APPEARS HERE] -------------------------- Title: BANKERS TRUST COMPANY, as Trustee By: /s/ Kevin Weeks -------------------------- Title: Kevin Weeks Assistant Treasurer Attest: [SIGNATURE APPEARS HERE] -------------------------- Title: Vice President EXHIBIT A Form of Face of Security ------------------------ [If a Global Security, then insert:] THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITORY OR A NOMINEE OF A DEPOSITORY OR A SUCCESSOR DEPOSITORY. THIS SECURITY IS NOT EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY OR ITS NOMINEE EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE, AND NO TRANSFER OF THIS SECURITY (OTHER THAN A TRANSFER OF THIS SECURITY AS A WHOLE BY THE DEPOSITORY TO A NOMINEE OF THE DEPOSITORY OR BY A NOMINEE OF THE DEPOSITORY TO THE DEPOSITORY OR ANOTHER NOMINEE OF THE DEPOSITORY) MAY BE REGISTERED EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE. [If a Global Security, then insert:] UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. [If a Rule 144A Security, then insert:] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (2) IN AN OFFSHORE TRANSACTION MEETING THE REQUIREMENTS OF RULE 903 OR RULE 904 OF REGULATION S UNDER THE SECURITIES ACT, OR (3) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER (IF AVAILABLE) AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. [If a Regulation S Security, then insert:] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND, PRIOR TO THE EXPIRATION OF A RESTRICTED A-2 PERIOD (DEFINED AS 40 DAYS AFTER THE ISSUE DATE WITH RESPECT TO THE SECURITIES), MAY NOT BE: OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT (A)(1) IN AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 903 OR RULE 904 OF REGULATION S OR (2) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A UNDER THE SECURITIES ACT ("RULE 144A") IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, AND (B) IN ACCORDANCE WITH ALL APPLICABLE SECURITIES LAWS OF THE STATES OF THE UNITED STATES. [If a Security issued or transferred to a "Accredited Investor," then insert:] THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). FURTHER OFFERS OR SALES OF THIS SECURITY ARE SUBJECT TO CERTAIN RESTRICTIONS AS SET FORTH IN THE OFFERING MEMORANDUM DATED MARCH 25, 1997 RELATING TO THIS SECURITY. QWEST COMMUNICATIONS INTERNATIONAL INC. 10 7/8% Senior Note Due 2007 No. __________ $________ Qwest Communications International Inc., a Delaware corporation (herein called the "Company", which term includes any successor Person under the Indenture hereinafter referred to), for value received, hereby promises to pay to _________________, or registered assigns, the principal sum of ____________________ Dollars [if a Global Security, then insert: (which principal amount may from time to time be increased or decreased to such other principal amounts which, taken together with the principal amounts of all other Outstanding Securities, shall not exceed $200,000,000 in the aggregate at any time, by adjustments made on the records of the Trustee hereinafter referred to in accordance with the Indenture)] on April 1, 2007, at the office or agency of the Company referred to below, and to pay interest thereon, semiannually on April 1 and October 1 in each year, commencing on October 1, 1997, accruing from March 31, 1997 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, at the rate of 10% per annum, until the principal hereof is paid or duly provided for, and (to the extent lawful) to pay on demand interest on any overdue interest at the rate borne by the Securities from the date on which such overdue interest becomes payable to the date payment of such interest has been made or duly provided for; provided, however, that if (i) (a) Company has not filed a registration statement (the "Registration Statement") under the Securities Act of 1933, as amended (the "Securities Act") within 90 days after March 31, 1997, with respect to a registered offer (the "Exchange Offer") to exchange this Security for a security A-3 (an "Exchange Security") with terms identical in all material respects to this Security (except that such security will not contain terms with respect to registration rights or transfer restrictions, and provisions regarding interest and Liquidated Interest (described below) will be modified or eliminated, as appropriate), or (b) the Registration Statement has not been declared effective within 150 days after March 31, 1997, or (c) the Exchange Offer has not been consummated within 180 days after March 31, 1997; or (ii) in lieu thereof, the Company has not filed a shelf registration statement (the "Shelf Registration Statement") under the Securities Act within 210 days after March 31, 1997, covering resales of this Security and such Shelf Registration Statement has not been declared effective; or (iii) either the Registration Statement or, if applicable, the Shelf Registration Statement is filed and declared effective but shall thereafter cease to be effective or usable (subject to certain exceptions) in connection with resales of this Security or Exchange Securities in accordance with and during the periods specified in the Registration Agreement without being succeeded promptly by an additional registration statement filed and declared effective, in each case (i) through (iii) upon the terms and conditions set forth in the Registration Agreement (each such event referred to in clauses (i) through (iii), a "Registration Default"), then additional interest ("Liquidated Interest") will accrue (in addition to any stated interest on the Securities) from and including the date on which any such Registration Default shall occur to but excluding the date on which all Registration Defaults have been cured. Liquidated Interest will be payable at a rate per annum equal to 0.5% on the principal amount of the Securities during the 90-day period immediately following the occurrence of any Registration Default and shall increase by 0.25% per annum of the principal amount of the Securities at the end of each subsequent 90-day period, but in no event shall such rates exceed 2.00% per annum in the aggregate regardless of the number of Registration Defaults. Accrued Liquidated Interest, if any, shall be paid in cash semiannually on April 1 and October 1 in each year; and the amount of accrued Liquidated Interest shall be determined on the basis of the number of days actually elapsed. Any accrued and unpaid interest (including Liquidated Interest) on this Security upon the issuance of an Exchange Security in exchange for this Security shall cease to be payable to the Holder hereof but such accrued and unpaid interest (including Liquidated Interest) shall be payable on the next Interest Payment Date for such Exchange Security to the Holder thereof on the related Regular Record Date. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the March 15 or September 15 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for shall forthwith cease to be payable to the Holder on such Regular Record Date, and such defaulted interest, and (to the extent lawful) interest on such defaulted interest at the rate borne by the Securities, may be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities not less than 10 days prior A-4 to such Special Record Date, or may be paid at any time in any other lawful manner, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any, on) and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, or at such other office or agency of the Company as may be maintained for such purpose, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that payment of interest may be made at the option of the Company by check mailed to the address of the Person entitled thereto as such address shall appear on the Security Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been duly executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: QWEST COMMUNICATIONS ------------------------- INTERNATIONAL INC. By: -------------------------- Authorized Signatory Attest: ------------------------ A-5 Form of Reverse of Security --------------------------- This Security is one of a duly authorized issue of securities of the Company designated as its 10% Senior Notes Due 2007 (herein called the "Securities"), limited (except as otherwise provided in the Indenture referred to below) in aggregate principal amount to $250,000,000, which may be issued under an indenture (herein called the "Indenture") dated as of March 31, 1997 between the Company and Bankers Trust Company, trustee (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties, obligations and immunities thereunder of the Company, the Trustee and the Holders of the Securities, and of the terms upon which the Securities are, and are to be, authenticated and delivered. The Securities are subject to redemption at the option of the Company, in whole or in part, at any time or from time to time on or after April 1, 2002, upon not less than 30 nor more than 60 days' prior notice, at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest thereon (if any) to the redemption date, if redeemed during the twelve months beginning April 1 of the years indicated below:
Year Redemption Price ---- ---------------- 2002.............................. 105.438% 2003.............................. 103.625% 2004.............................. 101.813% 2005 and thereafter............... 100.000%
In addition, prior to April 1, 2000, the Company may redeem up to 35% of the originally issued principal amount of Securities at a redemption price equal to 110.875% of the principal amount of the Securities so redeemed, plus accrued and unpaid interest thereon (if any) to the redemption date, with the net proceeds of one or more Public Equity Offerings resulting in gross proceeds of at least $100 million in the aggregate; provided that at least 65% of the originally issued principal amount of the Securities would remain outstanding immediately after giving effect to such redemption. Upon the occurrence of a Change of Control, the Holder of this Security may require the Company, subject to certain limitations provided in the Indenture, to repurchase this Security at a purchase price in cash in an amount equal to 101% of the principal amount thereof plus accrued and unpaid interest. In the case of any redemption of Securities, interest installments whose Stated Maturity is on or prior to the Redemption Date will be payable to the Holders of such Securities, or one or more Predecessor Securities, of record at the close of business on the relevant Record Date referred to on the face hereof. Securities (or portions thereof) for whose redemption and A-6 payment provision is made in accordance with the Indenture shall cease to bear interest from and after the Redemption Date. In the event of redemption of this Security in part only, a new Security or Securities for the unredeemed portion hereof shall be issued in the name of the Holder hereof upon the cancellation hereof. If an Event of Default shall occur and be continuing, the principal of all the Securities may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture contains provisions for defeasance at any time of (a) the entire indebtedness of the Company on this Security and (b) certain restrictive covenants and the related Defaults and Events of Default, upon compliance by the Company with certain conditions set forth therein, which provisions apply to this Security. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in aggregate principal amount of the Securities at the time Outstanding. The Indenture also contains provisions permitting the Holders of specified percentages in aggregate principal amount of the Securities at the time Outstanding, on behalf of the Holders of all the Securities, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by or on behalf of the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place, and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registerable on the Security Register of the Company, upon surrender of this Security for registration of transfer at the office or agency of the Company maintained for such purpose in The City of New York, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Security Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. A-7 The Securities are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, the Securities are exchangeable for a like aggregate principal amount of Securities of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any registration of transfer or exchange of Securities, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to the time of due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. A-8 Form of Trustee's Certificate of Authentication ----------------------------------------------- The Trustee's certificate of authentication shall be in substantially the following form: TRUSTEE'S CERTIFICATE OF AUTHENTICATION Dated: ----------------- This is one of the Securities referred to in the within-mentioned Indenture. [NAME OF TRUSTEE] as Trustee By: ------------------------------ Authorized Signatory A-9 Assignment Form --------------- If you, the holder, want to assign this Security, fill in the form below and have your signature guaranteed: I or we assign and transfer this Security to -------------------------------- - ----------------------------------------------------------------------------- (Insert assignee's social security or tax ID number) ---------------------- (Print or type assignee's name, address and zip code) ---------------------- ---------------------- ---------------------- and irrevocably appoint ----------------------------- of ------------------------------------ ------------------------------------ agent to transfer this Security on the books of the Company. The agent may substitute another to act for such agent. In connection with any transfer of this Security occurring prior to the date which is the earlier of (i) the date of the declaration by the Commission of the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), covering resales of this Security (which effectiveness shall not have been suspended or terminated at the date of the transfer) and (ii) the date three years (or such shorter period of time as may be permitted by Rule 144(k) under the Securities Act or any successor provision thereunder) after the later of the original issuance date appearing on the face of this Security (or any Predecessor Security) or the last date on which the Company or any Affiliate of the Company was the owner of this Security (or any Predecessor Security), the undersigned confirms that it has not utilized any general solicitation or general advertising in connection with the transfer and that: A-10 [Check One] [_] (a) this Security is being transferred in compliance with the exemption from registration under the Securities Act provided by Rule 144A thereunder. or -- [_] (b) this Security is being transferred other than in accordance with (a) above and documents, including a transferee certificate substantially in the form attached hereto, are being furnished which comply with the conditions of transfer set forth in this Security and the Indenture. If neither of the foregoing boxes is checked and, in the case of (b) above, if the appropriate document is not attached or otherwise furnished to the Trustee, the Trustee or Security Registrar shall not be obligated to register this Security in the name of any person other than the Holder hereof unless and until the conditions to any such transfer or registration set forth herein and in Section 313 of the Indenture shall have been satisfied. - ------------------------------------------------------------------------------- Dated: Your signature: ---------------------- ------------------------------- (Sign exactly as your name appears on the other side of this Security) By: -------------------------------------------- NOTICE: To be executed by an executive officer Signature Guarantee: ------------------------------ TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED: The undersigned represents and warrants that it is purchasing this Security for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Company as the undersigned has requested pursuant to Rule 144A (including the information specified in Rule 144A(d)(4)) or has determined not to request such information and that it is aware that the transferor is relying upon the undersigned's foregoing representations in order to claim the exemption from registration provided by Rule 144A. A-11 Dated: --------------------------- ----------------------------------- NOTICE: To be executed by an executive officer [The Transferee Certificates (Exhibits B and C to the Indenture) will be attached to the Security] A-12 Option of Holder to Elect Purchase ---------------------------------- If you wish to have this Security purchased by the Company pursuant to Section 1010 or 1018 of the Indenture, check the box: [_] If you wish to have a portion of this Security purchased by the Company pursuant to Section 1010 or 1018 of the Indenture, state the amount: $ ------------ Dated: Your Signature: ---------------------- ------------------------ (Sign exactly as your name appears on the other side of this Security) EXHIBIT B Form of Certificate to Be Delivered in Connection with Transfers to Non-QIB Accredited Investors ----------------------------------------- [Date] Bankers Trust Company Four Albany Street New York, NY 10006 Attention: Corporate Market Services Re: Qwest Communications International Inc. (the "Company") 10% Senior Notes Due 2007 (the "Securities") and the indenture related thereto (the "Indenture") ------------------------------------------------------------------------ Dear Sirs: In connection with our proposed purchase of Securities, we confirm that: (1) We have received such information as we deem necessary to make our investment decisions. (2) We understand that any subsequent transfer of the Securities is subject to certain restrictions and conditions set forth in the Indenture and the undersigned agrees to be bound by, and not to resell, pledge or otherwise transfer the Securities except in compliance with such restrictions and conditions and the Securities Act of 1933, as amended (the "Securities Act"). (3) We understand that the offer and sale of the Securities have not been registered under the Securities Act, and that the Securities may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as permitted in the following sentence. We agree, on our own behalf and on behalf of each account for which we acquire any Securities, that, prior to (x) the date which is three years after the later of the date of original issuance of the Securities (or such shorter period as may be prescribed by Rule 144(k) under the Securities Act or any successor provision) and (y) such later date, if any, may be required by applicable laws, the Securities may be offered, resold, pledged or otherwise transferred only (a) to the Company or any of its subsidiaries, (b) inside the United States to a person whom we reasonably believe to be a "qualified institutional buyer" (as defined in Rule 144A under the Securities Act) in compliance with Rule 144A under the Securities Act, (c) inside the United States to a person we reasonably believe to be an institutional "accredited investor" (as defined below) that, prior to such transfer, furnished to the Trustee a signed B-2 letter substantially in the form hereof, (d) outside the United States to persons other than U.S. persons in offshore transactions meeting the requirements of Rule 904 under Regulation S under the Securities Act, (e) pursuant to the exemption from registration provided by Rule 144 under the Securities Act (if available), (f) pursuant to an effective registration statement under the Securities Act or (g) pursuant to another available exemption from the registration requirements of the Securities Act, and, in each case, in accordance with any applicable securities laws of any state of the United States or any other applicable jurisdiction, and we further agree to provide to any person purchasing Securities from us a notice advising such purchaser that resales of the Securities are restricted as stated herein. (4) We understand that, on any proposed resale of any Securities, we will be required to furnish to you and the Company such certification, legal opinions and other information as you and the Company may reasonably require to confirm that the proposed sale complies with the foregoing restrictions. We further understand that the Securities purchased by us will bear a legend to the foregoing effect. (5) We are an institutional "accredited investor" (as defined in Rule 501(a)(1), (2), (3) or (7) under the Securities Act) and have such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of our investment in the Securities, and we and any accounts for which we are acting are each able to bear the economic risk of our or its investment, as the case may be. (6) We are acquiring the Securities purchased by us for our account or for one or more accounts (each of which is an institutional "accredited investor") as to each of which we exercise sole investment discretion. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Very truly yours, [Name of Transferee] By: -------------------------------------- Authorized Signatory EXHIBIT C Form of Certificate to Be Delivered in Connection with Transfers Pursuant to Regulation S --------------------------------------- [Date] Bankers Trust Company Four Albany Street New York, NY 10006 Attention: Corporate Market Services Re: Qwest Communications International Inc. (the "Company") 10% Senior Notes Due 2007 (the "Securities") ----------------------------------------------------------- Dear Sirs: In connection with our proposed sale of $___________ aggregate principal amount of the Securities, we confirm that such sale has been effected pursuant to and in accordance with Regulation S under the U.S. Securities Act of 1933, as amended (the "Securities Act"), and, accordingly, we represent that: (1) the offer of the Securities was not made to a person in the United States; (2) either (a) at the time the buy offer was originated, the transferee was outside the United States or we and any person acting on our behalf reasonably believed that the transferee was outside the United States, or (b) the transaction was executed in, on or through the facilities of a designated off-shore securities market and neither we nor any person acting on our behalf knows that the transaction has been pre-arranged with a buyer in the United States; (3) no directed selling efforts have been made in the United States in contravention of the requirements of Rule 903(b) or Rule 904(b) of Regulation S, as applicable; (4) the transaction is not part of a plan or scheme to evade the registration requirements of the Securities Act; (5) we have advised the transferee of the transfer restrictions applicable to the Securities; and C-2 (6) if the circumstances set forth in Rule 904(c) under the Securities Act are applicable, we have complied with the additional conditions therein, including (if applicable) sending a confirmation or other notice stating that the Securities may be offered and sold: during the restricted period specified in Rule 903(c)(2) or (3), as applicable; in accordance with the provisions of Regulation S; pursuant to registration of the Securities under the Securities Act; or pursuant to an available exemption from the registration requirements under the Securities Act. You and the Company are entitled to rely upon this letter and are irrevocably authorized to produce this letter or a copy hereof to any interested party in any administrative or legal proceedings or official inquiry with respect to the matters covered hereby. Terms used in this certificate have the meanings set forth in Regulation S. Very truly yours, [Name of Transferor] By: ------------------------------ Authorized Signatory EX-4.3 4 REGISTRATION AGREEMENT DATED MARCH 31, 1997 Exhibit 4.3 QWEST COMMUNICATIONS INTERNATIONAL INC. $250,000,000 10 % Senior Notes Due 2007 REGISTRATION AGREEMENT Dated: March 31, 1997 QWEST COMMUNICATIONS INTERNATIONAL INC. $250,000,000 10 % SENIOR NOTES DUE 2007 REGISTRATION AGREEMENT New York, New York March 31, 1997 Salomon Brothers Inc Seven World Trade Center New York, New York 10048 Dear Sirs: Qwest Communications International Inc., a Delaware corporation (the "Company"), proposes to issue and sell to certain initial purchasers (the "Initial Purchasers"), upon the terms set forth in a purchase agreement of even date herewith (the "Purchase Agreement"), its $250,000,000 10 % Senior Notes Due 2007 (the "Securities") (the "Initial Placement"). As an inducement to the Initial Purchasers to enter into the Purchase Agreement, the Company agrees with you, (i) for your benefit and the benefit of the other Initial Purchasers and (ii) for the benefit of the holders from time to time of the Securities (including you and the other Initial Purchasers), as follows: 1. Definitions. Capitalized terms used herein without definition shall have their respective meanings set forth in the Purchase Agreement. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Act" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission promulgated thereunder. "Affiliate" of any specified person means any other person which, directly or indirectly, is in control of, is controlled by, or is under common control with, such specified person. For purposes of this definition, control of a person means the power, direct or indirect, to direct or cause the direction of the management and policies of such person whether by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Closing Date" has the meaning set forth in the Purchase Agreement. "Commission" means the Securities and Exchange Commission. "Exchange Act" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission promulgated thereunder. "Exchange Offer Registration Period" means the 1-year period following the consummation of the Registered Exchange Offer, exclusive of any period during which any stop order shall be in effect suspending the effectiveness of the Exchange Offer Registration Statement. "Exchange Offer Registration Statement" means a registration statement of the Company on an appropriate form under the Act with respect to the Registered Exchange Offer, all amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Exchanging Dealer" means any Holder (which may include the Initial Purchasers) that is a broker-dealer, electing to exchange Securities acquired for its own account as a result of market-making activities or other trading activities, for New Securities. "Expiration Date" means the date of consummation of the Registered Exchange Offer which shall be not less than 30 days and not more than 50 days after the date on which notice of the Registered Exchange Offer is mailed to the Holders pursuant to clause 2(c)(ii) of this Agreement. "Final Memorandum" has the meaning set forth in the Purchase Agreement. "Holder" means a holder from time to time of Securities (including the Initial Purchasers) or of New Securities. "Indenture" means the Indenture relating to the Securities dated as of March 31, 1997, between the Company and Bankers Trust Company, as trustee, as the same may be amended from time to time in accordance with the terms thereof. "Initial Placement" has the meaning set forth in the preamble hereto. "Majority Holders" means the Holders of a majority of the aggregate principal amount of securities registered under a Registration Statement. "Managing Underwriters" means the investment banker or investment bankers and manager or managers that shall administer an underwritten offering. "New Securities" means debt securities of the Company identical in all material respects to the Securities (except that the New Securities will not contain terms with respect to registration rights or transfer restrictions, and interest rate and interest rate step-up provisions will be modified or eliminated, as appropriate), to be issued under the Indenture or the New Securities Indenture. "New Securities Indenture" means an indenture between the Company and the New Securities Trustee, identical in all material respects with the Indenture (except that the interest rate and interest rate step-up provisions and the transfer restrictions will be modified or eliminated, as appropriate). "New Securities Trustee" means the Trustee or a bank or trust company reasonably satisfactory to the Initial Purchasers, as trustee with respect to the New Securities under the New Securities Indenture. "Prospectus" means the prospectus included in any Registration Statement (including, without limitation, a prospectus that discloses information previously omitted from a prospectus filed as part of an effective registration statement in reliance upon Rule 430A under the Act), as amended or supplemented by any prospectus supplement, with respect to the terms of the offering of any portion of the Securities or the New Securities, covered by such Registration Statement, and all amendments and supplements to the Prospectus, including post-effective amendments. "Registered Exchange Offer" means the proposed offer to the Holders to issue and deliver to such Holders, in exchange for the Securities, a like principal amount of the New Securities. "Registration Statement" means any Exchange Offer Registration Statement or Shelf Registration Statement that covers any of the Securities or the New Securities pursuant to the provisions of this Agreement, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Securities" has the meaning set forth in the preamble hereto. "Shelf Registration" means a registration effected pursuant to Section 3 hereof. "Shelf Registration Period" has the meaning set forth in Section 3(b) hereof. "Shelf Registration Statement" means a "shelf" registration statement of the Company pursuant to the provisions of Section 3 hereof which covers some or all of the Securities or New Securities, as applicable, on an appropriate form under Rule 415 under the Act, or any similar rule that may be adopted by the Commission, amendments and supplements to such registration statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all material incorporated by reference therein. "Trustee" means the trustee with respect to the Securities under the Indenture. "Underwriter" means any underwriter of securities in connection with an offering thereof under an Exchange Offer Registration Statement or a Shelf Registration Statement. 2. Registered Exchange Offer; Resales of New Securities by Exchanging Dealers; Private Exchange. (a) The Company shall prepare and, within 90 days following the Closing Date, shall file with the Commission the Exchange Offer Registration Statement with respect to the Registered Exchange Offer. The Company shall use its best efforts to cause the Exchange Offer Registration Statement to become effective under the Act within 150 days of the Closing Date. (b) Upon the effectiveness of the Exchange Offer Registration Statement, the Company shall promptly commence the Registered Exchange Offer, it being the objective of such Registered Exchange Offer to enable each Holder electing to exchange Securities for New Securities (assuming (i) that such Holder is not an affiliate, as defined in Rule 405 of the Act, of the Company, (ii) that such Holder is acquiring the New Securities in the ordinary course of such Holder's business and (iii) that such Holder has no arrangement or undertaking with any person to participate in the distribution (within the meaning of the Act) of the New Securities) to trade such New Securities from and after their receipt without any limitations or restrictions under the Act and without material restrictions under the securities laws of a substantial proportion of the several states of the United States. (c) In connection with the Registered Exchange Offer, the Company shall: (i) mail to each Holder a copy of the Prospectus forming part of the Exchange Offer Registration Statement, together with an appropriate letter of transmittal (which shall include deemed representations by the Holders to the effect set forth under (i), (ii) and (iii) in paragraph (b) above) and related documents; (ii) keep the Registered Exchange Offer open for not less than 30 days and not more than 50 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law); (iii) utilize the services of a depositary for the Registered Exchange Offer with an address in the Borough of Manhattan, The City of New York; and (iv) comply in all respects with all applicable laws. (d) As soon as practicable after the close of the Registered Exchange Offer, the Company shall: (i) accept for exchange all Securities tendered and not validly withdrawn pursuant to the Registered Exchange Offer; (ii) deliver to the Trustee for cancellation all Securities so accepted for exchange; and (iii) cause the Trustee or the New Securities Trustee, as the case may be, promptly to authenticate and deliver to each Holder of Securities a principal amount of New Securities equal in principal amount to the Securities of such Holder so accepted for exchange. (e) The Initial Purchasers and the Company acknowledge that, pursuant to interpretations by the Commission's staff of Section 5 of the Act, and in the absence of an applicable exemption therefrom, each Exchanging Dealer is required to deliver a Prospectus in connection with a sale of any New Securities received by such Exchanging Dealer pursuant to the Registered Exchange Offer in exchange for Securities acquired for its own account as a result of market-making activities or other trading activities. Accordingly, the Company shall: (i) include the information set forth in Annex A hereto on the cover of the Exchange Offer Registration Statement, in Annex B hereto in the forepart of the Exchange Offer Registration Statement in a section setting forth details of the Exchange Offer, and in Annex C hereto in the "Underwriting" or "Plan of Distribution" section of the Prospectus forming a part of the Exchange Offer Registration Statement, and include the information set forth in Annex D hereto in the letter of transmittal delivered pursuant to the Registered Exchange Offer; and (ii) keep the Exchange Offer Registration Statement continuously effective under the Act during the Exchange Offer Registration Period for delivery by Exchanging Dealers in connection with sales of New Securities received pursuant to the Registered Exchange Offer, as contemplated by Section 4(h) below. (f) In the event that any Initial Purchaser determines that it is not eligible to participate in the Registered Exchange Offer with respect to the exchange of Securities constituting any portion of an unsold allotment, at the request of such Initial Purchaser, the Company shall issue and deliver to such Initial Purchaser or the party purchasing New Securities registered under a Shelf Registration Statement as contemplated by Section 3 hereof from such Initial Purchaser, in exchange for such Securities, a like principal amount of New Securities. The Company shall seek to cause the CUSIP Service Bureau to issue the same CUSIP number for such New Securities as for New Securities issued pursuant to the Registered Exchange Offer. 3. Shelf Registration. If, (i) because of any change in law or applicable interpretations thereof by the Commission's staff, the Company determines upon advice of its outside counsel that it is not permitted to effect the Registered Exchange Offer as contemplated by Section 2 hereof, or (ii) for any other reason the Registered Exchange Offer is not consummated within 180 days of the date hereof, or (iii) any Initial Purchaser so requests with respect to Securities held by it following consummation of the Registered Exchange Offer, or (iv) any Holder (other than an Initial Purchaser) is not eligible to participate in the Registered Exchange Offer and so notifies the Company as soon as practicable, but in any event not later than 30 days following consummation of the Registered Exchange Offer, or (v) in the case of any Initial Purchaser that participates in the Registered Exchange Offer or acquires New Securities pursuant to Section 2(f) hereof, such Initial Purchaser does not receive freely tradeable New Securities in exchange for Securities constituting any portion of an unsold allotment (it being understood that, for purposes of this Section 3, (x) the requirement that an Initial Purchaser deliver a Prospectus containing the information required by Items 507 and/or 508 of Regulation S-K under the Act in connection with sales of New Securities acquired in exchange for such Securities shall result in such New Securities being not "freely tradeable" but (y) the requirement that an Exchanging Dealer deliver a Prospectus in connection with sales of New Securities acquired in the Registered Exchange Offer in exchange for Securities acquired as a result of market-making activities or other trading activities shall not result in such New Securities being not "freely tradeable"), the following provisions shall apply: (a) The Company shall, as promptly as practicable (but in no event more than 30 days after so required or requested pursuant to this Section 3), file with the Commission, and thereafter shall cause to be declared effective under the Act, a Shelf Registration Statement relating to the offer and sale of the Securities or the New Securities, as applicable, by the Holders from time to time in accordance with the methods of distribution elected by such Holders and set forth in such Shelf Registration Statement; provided that, with respect to New Securities received by an Initial Purchaser in exchange for Securities constituting any portion of an unsold allotment, the Company may, if permitted by current interpretations by the Commission's staff, file a post-effective amendment to the Exchange Offer Registration Statement containing the information required by Regulation S-K Items 507 and/or 508, as applicable, in satisfaction of its obligations under this paragraph (a) with respect thereto, and any such Exchange Offer Registration Statement, as so amended, shall be referred to herein as, and governed by the provisions herein applicable to, a Shelf Registration Statement. (b) The Company shall use its best efforts to keep the Shelf Registration Statement continuously effective in order to permit the Prospectus forming part thereof to be usable by Holders for a period of three years from the date the Shelf Registration Statement is declared effective by the Commission or such shorter period that will terminate when all the Securities or New Securities, as applicable, covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement (in any such case, such period being called the "Shelf Registration Period"). The Company shall be deemed not to have used its best efforts to keep the Shelf Registration Statement effective during the requisite period if it voluntarily takes any action that would result in Holders of securities covered thereby not being able to offer and sell such securities during that period, unless (i) such action is required by applicable law, or (ii) such action is taken by the Company in good faith and for valid business reasons (not including avoidance of the Company's obligations hereunder), including the acquisition or divestiture of assets, so long as the Company as promptly as practicable thereafter complies with the requirements of Section 4(k) hereof, if applicable. 4. Registration Procedures. In connection with any Shelf Registration Statement and, to the extent applicable, any Exchange Offer Registration Statement, the following provisions shall apply: (a) The Company shall furnish to you, prior to the filing thereof with the Commission, a copy of any Shelf Registration Statement and any Exchange Offer Registration Statement, and each amendment thereof and each amendment or supplement, if any, to the Prospectus included therein, and shall reflect in each such document, when so filed with the Commission, such comments as you reasonably may propose. (b) The Company shall ensure that (i) any Registration Statement and any amendment thereto and any Prospectus forming part thereof and any amendment or supplement thereto complies in all material respects with the Act and the rules and regulations thereunder, (ii) any Registration Statement and any amendment thereto does not, when it becomes effective, contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (iii) any Prospectus forming part of any Registration Statement, and any amendment or supplement to such Prospectus, does not include an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements, in the light of the circumstances under which they were made, not misleading. (c) (1) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, if requested by you or any such Holder, confirm such advice in writing: (i) when a Registration Statement and any amendment thereto has been filed with the Commission and when the Registration Statement or any post-effective amendment thereto has become effective; and (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus included therein or for additional information. (2) The Company shall advise you and, in the case of a Shelf Registration Statement, the Holders of securities covered thereby, and, in the case of an Exchange Offer Registration Statement, any Exchanging Dealer which has provided in writing to the Company a telephone or facsimile number and address for notices, and, if requested by you or any such Holder or Exchanging Dealer, confirm such advice in writing: (i) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose; (ii) of the receipt by the Company of any notification with respect to the suspension of the qualification of the securities included therein for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; and (iii) of the happening of any event that requires the making of any changes in the Registration Statement or the Prospectus so that, as of such date, the statements therein are not misleading and do not omit to state a material fact required to be stated therein or necessary to make the statements therein (in the case of the Prospectus, in light of the circumstances under which they were made) not misleading (which advice shall be accompanied by an instruction to suspend the use of the Prospectus until the requisite changes have been made). (d) The Company shall obtain the withdrawal of any order suspending the effectiveness of any Registration Statement at the earliest possible time. (e) The Company shall furnish to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, at least one copy of such Shelf Registration Statement and any post-effective amendment thereto, including financial statements and schedules, and, if the Holder so requests in writing, all exhibits (including those incorporated by reference). (f) The Company shall, during the Shelf Registration Period, deliver to each Holder of securities included within the coverage of any Shelf Registration Statement, without charge, as many copies of the Prospectus (including each preliminary Prospectus) included in such Shelf Registration Statement and any amendment or supplement thereto as such Holder may reasonably request; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of securities in connection with the offering and sale of the securities covered by the Prospectus or any amendment or supplement thereto. (g) The Company shall furnish to each Exchanging Dealer which so requests, without charge, at least one copy of the Exchange Offer Registration Statement and any post-effective amendment thereto, including financial statements and schedules, any documents incorporated by reference therein, and, if the Exchanging Dealer so requests in writing, all exhibits (including those incorporated by reference). (h) The Company shall, during the Exchange Offer Registration Period, promptly deliver to each Exchanging Dealer, without charge, as many copies of the Prospectus included in such Exchange Offer Registration Statement and any amendment or supplement thereto as such Exchanging Dealer may reasonably request for delivery by such Exchanging Dealer in connection with a sale of New Securities received by it pursuant to the Registered Exchange Offer; and the Company consents to the use of the Prospectus or any amendment or supplement thereto by any such Exchanging Dealer, as aforesaid. (i) Prior to the Registered Exchange Offer or any other offering of securities pursuant to any Registration Statement, the Company shall use its best efforts to register or qualify or cooperate with the Holders of securities included therein and their respective counsel in connection with the registration or qualification of such securities for offer and sale under the securities or blue sky laws of such jurisdictions as any such Holders reasonably request in writing and do any and all other acts or things necessary or advisable to enable the offer and sale in such jurisdictions of the securities covered by such Registration Statement; provided, however, that the Company will not be required to qualify generally to do business in any jurisdiction where it is not then so qualified or to take any action which would subject it to general service of process or to taxation in any such jurisdiction where it is not then so subject. (j) The Company shall cooperate with the Holders of securities to facilitate the timely preparation and delivery of certificates representing securities to be sold pursuant to any Registration Statement free of any restrictive legends and in such denominations and registered in such names as Holders may request prior to sales of securities pursuant to such Registration Statement. (k) Upon the occurrence of any event contemplated by paragraph (c)(2)(iii) above, the Company shall as promptly as practicable prepare a post-effective amendment to any Registration Statement or an amendment or supplement to the related Prospectus or file any other required document so that, as thereafter delivered to purchasers of the securities included therein, the Prospectus will not include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. (l) Not later than the effective date of any such Registration Statement hereunder, the Company shall provide a CUSIP number for the Securities or New Securities, as the case may be, registered under such Registration Statement, and provide the trustee with printed certificates for such Securities or New Securities, in a form eligible for deposit with The Depository Trust Company. (m) The Company shall comply with all applicable rules and regulations of the Commission and shall make generally available to its security holders as soon as practicable after the effective date of the applicable Registration Statement an earnings statement satisfying the provisions of Section 11(a) of the Act. (n) The Company shall cause the Indenture or the New Securities Indenture, as the case may be, to be qualified under the Trust Indenture Act in a timely manner. (o) The Company may require each Holder of securities to be sold pursuant to any Shelf Registration Statement to furnish to the Company such information regarding the Holder and the distribution of such securities as the Company may from time to time reasonably require for inclusion in such Registration Statement. (p) The Company shall, if requested, as promptly as practicable incorporate in a Prospectus supplement or post-effective amendment to a Shelf Registration Statement, such information as the Managing Underwriters and Majority Holders reasonably determine and agree should be included therein and shall make all required filings of such Prospectus supplement or post-effective amendment as soon as notified of the matters to be incorporated in such Prospectus supplement or post-effective amendment. (q) In the case of any Shelf Registration Statement, the Company shall enter into such agreements (including underwriting agreements) and take all other appropriate actions in order to expedite or facilitate the registration or the disposition of the Securities, and in connection therewith, if an underwriting agreement is entered into, cause the same to contain indemnification provisions and procedures no less favorable than those set forth in Section 6 (or such other provisions and procedures acceptable to the Majority Holders and the Managing Underwriters, if any), with respect to all parties to be indemnified pursuant to Section 6 from Holders of Securities to the Company. (r) In the case of any Shelf Registration Statement, the Company shall (i) make reasonably available for inspection by the Holders of securities to be registered thereunder, any Underwriter participating in any disposition pursuant to such Registration Statement, and any attorney, accountant or other agent retained by the Holders or any such Underwriter all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by the Holders or any such Underwriter, attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by the Holders or any such Underwriter, attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to the Holders of securities registered thereunder and the Underwriters, if any, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to the Managing Underwriters, if any) addressed to each selling Holder and the Underwriters, if any, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Holders and Underwriters; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each selling Holder of securities registered thereunder and the Underwriters, if any, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings; and (vi) deliver such documents and certificates as may be reasonably requested by the Majority Holders and the Managing Underwriters, if any, including those to evidence compliance with Section 4(k) and with any customary conditions contained in the underwriting agreement or other agreement entered into by the Company. The foregoing actions set forth in clauses (iii), (iv), (v) and (vi) of this Section 4(r) shall be performed at (A) the effectiveness of such Registration Statement and each post- effective amendment thereto and (B) each closing under any underwriting or similar agreement as and to the extent required thereunder. (s) In the case of any Exchange Offer Registration Statement, the Company shall (i) make reasonably available for inspection by such Initial Purchaser, and any attorney, accountant or other agent retained by such Initial Purchaser, all relevant financial and other records, pertinent corporate documents and properties of the Company and its subsidiaries; (ii) cause the Company's officers, directors and employees to supply all relevant information reasonably requested by such Initial Purchaser or any such attorney, accountant or agent in connection with any such Registration Statement as is customary for similar due diligence examinations; provided, however, that any information that is designated in writing by the Company, in good faith, as confidential at the time of delivery of such information shall be kept confidential by such Initial Purchaser or any such attorney, accountant or agent, unless such disclosure is made in connection with a court proceeding or required by law, or such information becomes available to the public generally or through a third party without an accompanying obligation of confidentiality; (iii) make such representations and warranties to such Initial Purchaser, in form, substance and scope as are customarily made by issuers to underwriters in primary underwritten offerings and covering matters including, but not limited to, those set forth in the Purchase Agreement; (iv) obtain opinions of counsel to the Company and updates thereof (which counsel and opinions (in form, scope and substance) shall be reasonably satisfactory to such Initial Purchaser and its counsel), addressed to such Initial Purchaser, covering such matters as are customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such Initial Purchaser or its counsel; (v) obtain "cold comfort" letters and updates thereof from the independent certified public accountants of the Company (and, if necessary, any other independent certified public accountants of any subsidiary of the Company or of any business acquired by the Company for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to such Initial Purchaser, in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with primary underwritten offerings, or if requested by such Initial Purchaser or its counsel in lieu of a "cold comfort" letter, an agreed-upon procedures letter under Statement on Auditing Standards No. 35, covering matters requested by such Initial Purchaser or its counsel; and (vi) deliver such documents and certificates as may be reasonably requested by such Initial Purchaser or its counsel, including those to evidence compliance with Section 4(k) and with conditions customarily contained in underwriting agreements. The foregoing actions set forth in clauses (iii), (iv), (v), and (vi) of this Section 4(s) shall be performed at the close of the Registered Exchange Offer and the effective date of any post- effective amendment to the Exchange Offer Registration Statement. 5. Registration Expenses. The Company shall bear all expenses incurred in connection with the performance of its obligations under Sections 2, 3 and 4 hereof and, in the event of any Shelf Registration Statement, will reimburse the Holders for the reasonable fees and disbursements of one firm or counsel designated by the Majority Holders to act as counsel for the Holders in connection therewith, and, in the case of any Exchange Offer Registration Statement, will reimburse the Initial Purchasers for the reasonable fees and disbursements of counsel acting in connection therewith. 6. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company agrees to indemnify and hold harmless each Holder of securities covered thereby (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer), the directors, officers, employees and agents of each such Holder and each person who controls any such Holder within the meaning of either the Act or the Exchange Act against any and all losses, claims, damages or liabilities, joint or several, to which they or any of them may become subject under the Act, the Exchange Act or other Federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement as originally filed or in any amendment thereof, or in any preliminary Prospectus or Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and agrees to reimburse each such indemnified party, as incurred, for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any case to the extent that any such loss, claim, damage or liability arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any such Holder specifically for inclusion therein. This indemnity agreement will be in addition to any liability which the Company may otherwise have. The Company also agrees to indemnify or contribute to Losses of, as provided in Section 6(d), any Underwriters of Securities registered under a Shelf Registration Statement, their officers and directors and each person who controls such Underwriters on substantially the same basis as that of the indemnification of the Initial Purchaser and the selling Holders provided in this Section 6(a) and shall, if requested by any Holder, enter into an underwriting agreement reflecting such agreement, as provided in Section 4(q) hereof. (b) Each Holder of securities covered by a Registration Statement (including each Initial Purchaser and, with respect to any Prospectus delivery as contemplated in Section 4(h) hereof, each Exchanging Dealer) severally agrees to indemnify and hold harmless (i) the Company, (ii) each of its directors, (iii) each of its officers who signs such Registration Statement and (iv) each person who controls the Company within the meaning of either the Act or the Exchange Act to the same extent as the foregoing indemnity from the Company to each such Holder, but only with reference to written information relating to such Holder furnished to the Company by or on behalf of such Holder specifically for inclusion in the documents referred to in the foregoing indemnity. This indemnity agreement will be in addition to any liability which any such Holder may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 6 or notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this Section 6, notify the indemnifying party in writing of the commencement thereof; but the failure so to notify the indemnifying party (i) will not relieve it from liability under paragraph (a) or (b) above unless and to the extent it did not otherwise learn of such action and such failure results in the forfeiture by the indemnifying party of substantial rights and defenses and (ii) will not, in any event, relieve the indemnifying party from any obligations to any indemnified party other than the indemnification obligation provided in paragraph (a) or (b) above. The indemnifying party shall be entitled to appoint counsel of the indemnifying party's choice at the indemnifying party's expense to represent the indemnified party in any action for which indemnification is sought (in which case the indemnifying party shall not thereafter be responsible for the fees and expenses of any separate counsel retained by the indemnified party or parties except as set forth below); provided, however, that such counsel shall be satisfactory to the indemnified party. Notwithstanding the indemnifying party's election to appoint counsel to represent the indemnified party in an action, the indemnified party shall have the right to employ separate counsel (including local counsel), and the indemnifying party shall bear the reasonable fees, costs and expenses of such separate counsel (and local counsel) if (i) the use of counsel chosen by the indemnifying party to represent the indemnified party would present such counsel with a conflict of interest, (ii) the actual or potential defendants in, or targets of, any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, (iii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of the institution of such action or (iv) the indemnifying party shall authorize the indemnified party to employ separate counsel at the expense of the indemnifying party. An indemnifying party will not, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any pending or threatened claim, action, suit or proceeding in respect of which indemnification or contribution may be sought hereunder (whether or not the indemnified parties are actual or potential parties to such claim or action) unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising out of such claim, action, suit or proceeding. (d) In the event that the indemnity provided in paragraph (a) or (b) of this Section 6 is unavailable to or insufficient to hold harmless an indemnified party for any reason, then each applicable indemnifying party, in lieu of indemnifying such indemnified party, shall have a joint and several obligation to contribute to the aggregate losses, claims, damages and liabilities (including legal or other expenses reasonably incurred in connection with investigating or defending same) (collectively "Losses") to which such indemnified party may be subject in such proportion as is appropriate to reflect the relative benefits received by such indemnifying party, on the one hand, and such indemnified party, on the other hand, from the Initial Placement and the Registration Statement which resulted in such Losses; provided, however, that in no case shall any Initial Purchaser or any subsequent Holder of any Security or New Security be responsible, in the aggregate, for any amount in excess of the purchase discount or commission applicable to such Security, or in the case of a New Security, applicable to the Security which was exchangeable into such New Security, as set forth on the cover page of the Final Memorandum, nor shall any Underwriter be responsible for any amount in excess of the underwriting discount or commission applicable to the securities purchased by such Underwriter under the Registration Statement which resulted in such Losses. If the allocation provided by the immediately preceding sentence is unavailable for any reason, the indemnifying party and the indemnified party shall contribute in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of such indemnifying party, on the one hand, and such indemnified party, on the other hand, in connection with the statements or omissions which resulted in such Losses as well as any other relevant equitable considerations. Benefits received by the Company shall be deemed to be equal to the sum of (x) the total net proceeds from the Initial Placement (before deducting expenses) as set forth on the cover page of the Final Memorandum and (y) the total amount of additional interest which the Company was not required to pay as a result of registering the securities covered by the Registration Statement which resulted in such Losses. Benefits received by the Initial Purchasers shall be deemed to be equal to the total purchase discounts and commissions as set forth on the cover page of the Final Memorandum, and benefits received by any other Holders shall be deemed to be equal to the value of receiving Securities or New Securities, as applicable, registered under the Act. Benefits received by any Underwriter shall be deemed to be equal to the total underwriting discounts and commissions, as set forth on the cover page of the Prospectus forming a part of the Registration Statement which resulted in such Losses. Relative fault shall be determined by reference to whether any alleged untrue statement or omission relates to information provided by the indemnifying party, on the one hand, or by the indemnified party, on the other hand. The parties agree that it would not be just and equitable if contribution were determined by pro rata allocation or any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this paragraph (d), no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. For purposes of this Section 6, each person who controls a Holder within the meaning of either the Act or the Exchange Act and each director, officer, employee and agent of such Holder shall have the same rights to contribution as such Holder, and each person who controls the Company within the meaning of either the Act or the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to contribution as the Company, subject in each case to the applicable terms and conditions of this paragraph (d). (e) The provisions of this Section 6 will remain in full force and effect, regardless of any investigation made by or on behalf of any Holder or the Company or any of the officers, directors or controlling persons referred to in Section 6 hereof, and will survive the sale by a Holder of securities covered by a Registration Statement. 7. Miscellaneous. (a) No Inconsistent Agreements. The Company has not, as of the date hereof, entered into, nor shall it, on or after the date hereof, enter into, any agreement with respect to its securities that is inconsistent with the rights granted to the Holders herein or otherwise conflicts with the provisions hereof. (b) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, qualified, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company has obtained the written consent of the Holders of at least a majority of the then outstanding aggregate principal amount of Securities (or, after the consummation of any Exchange Offer in accordance with Section 2 hereof, of New Securities); provided that, with respect to any matter that directly or indirectly affects the rights of any Initial Purchaser hereunder, the Company shall obtain the written consent of each such Initial Purchaser against which such amendment, qualification, supplement, waiver or consent is to be effective. Notwithstanding the foregoing (except the foregoing proviso), a waiver or consent to departure from the provisions hereof with respect to a matter that relates exclusively to the rights of Holders whose securities are being sold pursuant to a Registration Statement and that does not directly or indirectly affect the rights of other Holders may be given by the Majority Holders, determined on the basis of securities being sold rather than registered under such Registration Statement. (c) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail, telex, telecopier, or air courier guaranteeing overnight delivery: (1) if to a Holder, at the most current address given by such Holder to the Company in accordance with the provisions of this Section 7(c), which address initially is, with respect to each Holder, the address of such Holder maintained by the Registrar under the Indenture, with a copy in like manner to Salomon Brothers Inc; (2) if to you, initially at the respective addresses set forth in the Purchase Agreement; and (3) if to the Company, initially at its address set forth in the Purchase Agreement. All such notices and communications shall be deemed to have been duly given when received. The Initial Purchasers or the Company by notice to the other may designate additional or different addresses for subsequent notices or communications. (d) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including, without the need for an express assignment or any consent by the Company thereto, subsequent Holders of Securities and/or New Securities. The Company hereby agrees to extend the benefits of this Agreement to any Holder of Securities and/or New Securities and any such Holder may specifically enforce the provisions of this Agreement as if an original party hereto. (e) Counterparts. This agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. (f) Headings. The headings in this agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (g) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the State of New York applicable to agreements made and to be performed in said State. (h) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired or affected thereby, it being intended that all of the rights and privileges of the parties shall be enforceable to the fullest extent permitted by law. (i) Securities Held by the Company, Etc. Whenever the consent or approval of Holders of a specified percentage of principal amount of Securities or New Securities is required hereunder, Securities or New Securities, as applicable, held by the Company or its Affiliates (other than subsequent Holders of Securities or New Securities if such subsequent Holders are deemed to be Affiliates solely by reason of their holdings of such Securities or New Securities) shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, QWEST COMMUNICATIONS INTERNATIONAL INC. By: Name: Title: Accepted in New York, New York March 31, 1997 SALOMON BROTHERS INC By: Name: Title: ANNEX A Annex A Each broker-dealer that receives New Securities for its own account pursuant to the Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. The Letter of Transmittal states that by so acknowledging and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Securities where such New Securities were acquired by such broker-dealer as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date (as defined herein) and ending on the close of business on the first anniversary of the Expiration Date, it will make this Prospectus available to any broker- dealer for use in connection with any such resale. See "Plan of Distribution" in the Exchange Offer Registration Statement. ANNEX B Annex B Each broker-dealer who holds Securities for its own account acquired as a result of marketmaking activities or other trading activities and who receives New Securities pursuant to a Registered Exchange Offer may be deemed to be an "underwriter" within the meaning of he Securities Act of 1933, as amended, and must acknowledge that it will deliver a Prospectus meeting the requirements of the Securities Act in connection with any sale or transfer of the New Securities covered by the Prospectus or any amendment or supplement thereto. See "Plan of Distribution" in the Exchange Offer Registration Statement. ANNEX C PLAN OF DISTRIBUTION Each broker-dealer that receives New Securities for its own account pursuant to the Registered Exchange Offer must acknowledge that it will deliver a prospectus in connection with any resale of such New Securities. This Prospectus, as it may be amended or supplemented from time to time, may be used by a broker-dealer in connection with resales of New Securities received in exchange for Securities where such Securities were acquired as a result of market-making activities or other trading activities. The Company has agreed that, starting on the Expiration Date and ending on the close of business on the first anniversary of the Expiration Date, it will make this Prospectus, as amended or supplemented, available to any broker-dealer for use in connection with any such resale. In addition, until ______, 1997, all dealers effecting transactions in the New Securities may be required to deliver a prospectus. The Company will not receive any proceeds from any sale of New Securities by broker-dealers. New Securities received by broker-dealers for their own account pursuant to the Exchange Offer may be sold from time to time in one or more transactions in the over-the-counter market, in negotiated transactions, through the writing of options on the New Securities or a combination of such methods of resale, at market prices prevailing at the time of resale, at prices related to such prevailing market prices or negotiated prices. Any such resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any such broker-dealer and/or the purchasers of any such New Securities. Any broker-dealer that resells New Securities that were received by it for its own account pursuant to the Exchange Offer and any broker or dealer that participates in a distribution of such New Securities may be deemed to be an "underwriter" within the meaning of the Securities Act and any profit of any such resale of New Securities and any commissions or concessions received by any such persons may be deemed to be underwriting compensation under the Securities Act. The Letter of Transmittal states that by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. For a period of 1 year after the Expiration Date, the Company will promptly send additional copies of this Prospectus and any amendment or supplement to this Prospectus to any broker-dealer that requests such documents in the letter of transmittal. The Company has agreed to pay all expenses incident to the Exchange Offer (including the expenses of one counsel for the holders of the Securities) other than commissions or concessions of any brokers or dealers and will indemnify the Holders of the Securities (including any broker-dealers) against certain liabilities, including liabilities under the Securities Act. The Company has not entered into any arrangements or understandings with any person to distribute the New Securities to be received in the Exchange Offer. ANNEX D Rider A CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE ADDITIONAL COPIES OF THE PROSPECTUS AND COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO. Name: Address: Number of copies: - ----------------------------------------------------- Rider B If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to engage in, a distribution of New Securities. If the undersigned is a broker-dealer that will receive New Securities for its own account in exchange for Securities, it represents that the Securities to be exchanged for New Securities were acquired by it as a result of market-making activities or other trading activities and acknowledges that it will deliver a Prospectus meeting the requirements of the Securities Act in connection with any resale of such New Securities; however, by so acknowledging and by delivering a Prospectus, the undersigned will not be deemed to admit that it is an "underwriter" within the meaning of the Securities Act. EX-10.1 5 GROWTH SHARE PLAN, AS AMENDED EXHIBIT 10.1 ================================================================================ QWEST HOLDING CORPORATION GROWTH SHARE PLAN (As Amended Effective October 1, 1996) ================================================================================ TABLE OF CONTENTS -----------------
Page ---- Section 1 - Introduction.........................................................................................1 1.1 Establishment.....................................................................................1 1.2 Purposes..........................................................................................1 1.3 General Plan Description..........................................................................1 Section 2 - Definitions...........................................................................................1 2.1 Definitions.......................................................................................1 2.2 Gender and Number.................................................................................6 Section 3 - Plan Administration...................................................................................6 3.1 Administration by the Board.......................................................................6 3.2 Adoption of Rules.................................................................................6 Section 4 - Participation in the Plan.............................................................................6 4.1 Eligibility for Participation.....................................................................6 4.2 Plan Agreement....................................................................................7 Section 5 - Performance Cycle.....................................................................................7 5.1 Determination of Performance Cycle................................................................7 5.2 Normal Performance Cycle..........................................................................7 Section 6 - Growth Share Grants...................................................................................7 6.1 Grants............................................................................................7 6.2 Maximum Number of Growth Shares...................................................................7 6.3 Establishment of Individual Growth Share Accounts.................................................8 Section 7 - Vesting of Growth Shares..............................................................................8 7.1 Normal Vesting Schedule...........................................................................8 7.2 Vesting in Other Circumstances....................................................................8 7.3 Termination for Cause.............................................................................8 7.4 Voluntary Termination of Employment...............................................................8 Section 8 - Payments to Participants..............................................................................9 8.1 Value of Growth Shares............................................................................9 8.2 Payments to Participants - In General.............................................................9 8.3 Form of Payment...................................................................................9 8.4 Use of Common Stock for Payment..................................................................10 8.5 Exceptional Payments.............................................................................10 Section 9 - Rights of Employees..................................................................................11 Section 10 - Designation of Beneficiaries........................................................................11
i Section 11 - Changes in Accounting Rules.........................................................................11 Section 12 - Other Employee Benefits.............................................................................12 Section 13 - Plan Amendment, Modification and Termination........................................................12 Section 14 - Setoff..............................................................................................12 Section 15 - Plan Funding........................................................................................12 Section 16 - Non-Assignability of Rights.........................................................................12 Section 17 - Withholding Taxes...................................................................................13 Section 18 - Requirements of Law.................................................................................13 18.1 Requirements of Law..............................................................................13 18.2 Governing Law....................................................................................13 Section 19 - Severability........................................................................................13
ii QWEST HOLDING CORPORATION GROWTH SHARE PLAN (As Amended Effective October 1, 1996) Section 1 Introduction ------------ 1.1 Establishment. Qwest Holding Corporation (as defined in subsection ------------- 2.1(i), the "Company") previously adopted the Qwest Holding Corporation Growth Share Plan (the "Plan"). The Plan permits the grant of Growth Shares (as defined in subsection 2.1(n)) to certain key employees of the Company. In accordance with the powers reserved under Section 13 of the Plan, the Plan is hereby amended and restated in its entirety in this document, effective as of October 1, 1996. The provisions of the Plan, as so amended and restated, shall apply to Growth Shares granted under the Plan on and after October 1, 1996. Growth Shares granted under the provisions of the Plan prior to October 1, 1996 shall continue to be governed by the provisions of the Plan in effect at the time of the grant of such Growth Shares unless otherwise agreed in writing by a Participant and the Company. 1.2 Purposes. The purposes of the Plan are to provide the key employees -------- selected for participation in the Plan with added incentives to continue in the service of the Company and to create in such employees a more direct interest in the future success of the operations of the Company by relating incentive compensation to the achievement of long-term growth and financial performance. The Plan is also designed to attract key employees and to retain and motivate participating employees by providing an opportunity for such employees to participate in the long-term growth, profitability and performance of the Company, thus enhancing the value of the Company. 1.3 General Plan Description. Participants in the Plan will receive ------------------------ Growth Shares (as defined herein) in the Company. The Growth Shares will entitle the holders to a portion of the gain in economic value of the Company, if any, as described in Section 8. Except as otherwise provided in Sections 8.3 and 8.4, the Growth Shares will not, however, entitle the holders to acquire actual securities of the Company, nor shall the holders of the Growth Shares have actual ownership rights, such as voting rights, in the Company. Section 2 Definitions ----------- 2.1 Definitions. The following terms shall have the meanings set forth ----------- below: (a) "Affiliated Corporation" means any corporation which is ---------------------- affiliated with the Company through stock ownership or otherwise and is treated as a common employer under the provisions of Sections 414(b) and (c) of the Internal Revenue Code. 1 (b) "Agreement" or "Plan Agreement" means the written agreement --------- -------------- entered into between the Company and the Participant to carry out the provisions of the Plan with respect to the Participant and in accordance with the Plan's terms and conditions. (c) "Appraised Value" means the fair market value of the Company --------------- (including its subsidiaries), which shall be the cash price that would be paid for all of the outstanding equity securities of the Company by an arm's length purchaser, determined by appraisal in accordance with the following provisions. When Appraised Value is to be used to determine the Ending Company Value, the Appraised Value shall be initially determined by an independent investment banking firm nationally recognized in the telecommunications industry selected by the Board (the "First Appraisal"). For purposes of this subsection 2.1(c), an investment banking firm shall be considered to be "independent" regardless of whether the investment banking firm has previously been retained by the Company or by an Affiliated Corporation to provide investment banking or other financial services. The Company shall furnish the investment banking firm, and any additional investment banking firm engaged in accordance with the provisions of this subsection 2.1(c), with access to all financial records of the Company reasonably necessary for purposes of conducting the appraisal. The costs and expenses of the First Appraisal shall be borne by the Company. The First Appraisal shall be completed and delivered to the Board and all Participants within forty-five (45) days following the applicable Triggering Event. If any Participant or group of Participants does not agree with the Appraised Value of the Company as so determined, the Participant or Participants may engage an independent investment banking firm nationally recognized in the telecommunications industry to conduct a second appraisal of the Company (the "Second Appraisal"). The costs and expenses of the Second Appraisal shall be borne pro rata by the Participant or Participants who elect to have the Second Appraisal. The Participant or Participants desiring a Second Appraisal must notify the Board, in writing, of their election within forty-five (45) days following receipt of the First Appraisal by the Participants. Within twenty (20) business days after the Board receives written notice from a Participant or Participants requesting a Second Appraisal, the Board shall notify all Participants in writing that a Second Appraisal has been requested and any other Participants may, within twenty (20) business days following the receipt of notice from the Board, elect to participate in the Second Appraisal by delivering a written election to the Board. Any Participant who does not elect to conduct a Second Appraisal shall have the Appraised Value determined pursuant to the First Appraisal used to determine the Ending Company Value with respect to his or her Growth Shares. The Second Appraisal must be completed and delivered to the Board and the Participants within forty-five (45) days following the notification to the Board of an election by Participants to conduct the Second Appraisal. If the Second Appraisal produces an Appraised Value of the Company that is not more than 15 percent higher than the First Appraisal, the First Appraisal determination of Appraised Value shall be used for purposes of determining the Ending Company Value. If the Second Appraisal produces an Appraised Value for the Company that is more than 15 percent higher than the First Appraisal, then a third appraiser that is an independent investment banking firm nationally recognized in the telecommunications industry shall be selected by the first appraiser and the second appraiser to determine the Appraised Value of the Company (the "Third Appraisal"). The third appraiser shall be selected by the first appraiser and the second appraiser within ten (10) days after the completion of the Second Appraisal and shall complete the Third Appraisal and deliver it to the Board and the Participants within forty- five (45) days following the date of its appointment. The Appraised Value that shall 2 be used to determine the Ending Company Value with respect to the Participants who requested the Second Appraisal shall be the average of the two Appraised Values of the Company, as determined pursuant to the First Appraisal, the Second Appraisal and the Third Appraisal, that are closest in value. The costs and expenses of the third appraiser shall be borne 50 percent by the Company and 50 percent by the Participants, pro rata, who elected to have the Second Appraisal. (d) "Award" means the amount payable to the Participant in accordance with ----- the terms and provisions of the Plan. (e) "Beginning Company Value" means such value as shall be specified by the ----------------------- Board for any grant of Growth Shares. The Beginning Company Value with respect to a grant of Growth Shares shall be specified in the Plan Agreement with each Eligible Employee. (f) "Board" means the Board of Directors of the Company. ----- (g) "Cause" means willful misconduct, a willful failure to perform the ----- Eligible Employee's duties, insubordination, theft, dishonesty, conviction of a felony or any other willful conduct that is materially detrimental to the Eligible Employee's performance of his or her duties or is materially detrimental to the Company or an Affiliated Corporation or such other cause as the Board in good faith reasonably determines provides cause for the discharge of an Eligible Employee. (h) "Change of Control" shall be deemed to have occurred if either (A) any ----------------- individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than Anschutz Company, The Anschutz Corporation, or any entity or organization controlled by Philip F. Anschutz (collectively, the "Anschutz Entities"), acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent (20%) or more of either (i) the then- outstanding shares of common stock of the Company ("Outstanding Shares") or (ii) the combined voting power of the then-outstanding voting securities of the Company entitled to vote generally in the election of directors ("Voting Power") and such beneficial ownership (as so defined) by such individual, entity or group of twenty percent (20%) or more of the Outstanding Shares or the Voting Power, as the case may be, shall then exceed the beneficial ownership (as so defined) by the Anschutz Entities of the Outstanding Shares or the Voting Power, respectively, or (B) the Anschutz Entities no longer have beneficial ownership (as so defined) of twenty percent (20%) or more of either the Outstanding Shares or the Voting Power. (i) "Company" means Qwest Holding Corporation, a Colorado corporation, or ------- any company which is a successor thereto as a result of merger, consolidation, liquidation or other reorganization. (j) "Effective Date" means the effective date of the Plan, November 1, -------------- 1993. (k) [Intentionally omitted.] 3 (l) "Eligible Employees" means those key employees (including, without ------------------ limitation, officers and directors who are also employees) of the Company or an Affiliated Corporation, together with non-employee members of the board of directors of the Company or an Affiliated Corporation, who are designated for participation in the Plan pursuant to Section 4. (m) "Ending Company Value" means the value of the Company used to determine -------------------- the amount, if any, of an Award payable to a Participant, which will be determined based on the Triggering Event for the redemption of the Growth Shares in question, as follows: (i) If a Triggering Event is the end of the Performance Cycle, the Ending Company Value will be the Appraised Value of the Company at the end of the Performance Cycle. (ii) If the Triggering Event is the termination of the Plan before the end of the Performance Cycle, the Ending Company Value will be the Appraised Value as of the last day of the month coincident with or immediately following the date as of which the termination of the Plan occurs. (iii) If the Triggering Event is a Change of Control of the Company, the Ending Company Value will be the Appraised Value immediately after the date of the Change of Control. Notwithstanding the foregoing, if all classes of the Company's outstanding common equity securities are traded on an established securities market as of the time Ending Company Value is to be determined and the Company is subject to the reporting and disclosure requirements of the Exchange Act, the Ending Company Value will be determined by multiplying the per share Market Value of such outstanding equity securities on the date of the Triggering Event by the total number of such securities outstanding at the time of the Triggering Event. (n) "Growth Share" means a unit of value as determined under the ------------ provisions of Section 8 of the Plan. (o) "Internal Revenue Code" means the Internal Revenue Code of 1986, --------------------- as it may be amended from time to time. (p) "Market Value" means the average of the mean between the bid and ------------ the asked prices of the Company's equity security(ies), or the closing price, as applicable, on the principal stock exchange, NASDAQ or other market on which such equity security is traded, over the 20 consecutive trading days ending on the date specified by the relevant provision of the Plan as of which Market Value is to be determined. (q) "Measuring Period" means the time period between the date as of ---------------- which Beginning Company Value is determined with respect to the grant of a Growth Share to a Participant and the date as of which Ending Company Value is determined. 4 (r) "Participant" means an Eligible Employee who has been selected for ----------- participation under the Plan pursuant to Section 4, who has executed a Plan Agreement and who has outstanding grants of Growth Shares under the Plan. (s) "Performance Cycle" means the period established by the Board at ----------------- the time of each grant of Growth Shares at the end of which Ending Company Value is determined (unless another Triggering Event has occurred prior to the end of the Performance Cycle) for purposes of calculating the value of such Growth Shares under the Plan. The Performance Cycle with respect to each grant of Growth Shares shall be determined by the Board at the time of grant and shall be specified in the Plan Agreement with respect to such grant of Growth Shares. (t) "Permanent Disability" means any physical or mental condition -------------------- which permanently prevents a Participant from performing the material duties of his or her current employment. If a Participant makes application for disability benefits under the Company's long-term disability program, as now in effect or as hereafter amended, and qualifies for such benefits, the Participant shall be presumed to qualify as permanently disabled under this Plan. (u) "Plan" means the Qwest Holding Corporation Growth Share Plan as ---- set forth in this document. (v) "Retirement" means termination of employment with the Company and ---------- all Affiliated Corporations on or after reaching the normal retirement age of sixty-five. (w) "Termination Date" means the date of a Participant's severance ---------------- from employment with the Company and all Affiliated Corporations for any reason, including but not limited to, death, Permanent Disability, Retirement, resignation, voluntary or involuntarily termination or otherwise. (x) "Triggering Event" means any event that triggers the redemption of ---------------- and payment for the Growth Shares and the determination of Ending Company Value, as follows: (i) end of the Performance Cycle; (ii) termination of the Plan; or (iii) Change of Control. (y) "Vested" or "Vesting" means the portion of a Participant's Award ------ ------- payable to the Participant in the case of termination of employment with the Company and all Affiliated Corporations for reasons other than Cause as provided in Section 7. A Participant shall be subject to separate Vesting with respect to each grant of Growth Shares under the Plan. A Participant shall forfeit any unvested Growth Shares on the date of termination of employment with the Company and all Affiliated Corporations and the Participant shall not become entitled to payment with respect to such forfeited Growth Shares as a result of any subsequent Triggering Event, or otherwise. 5 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. Section 3 Plan Administration ------------------- 3.1 Administration by the Board. The Plan shall be administered by the --------------------------- Board. The Board shall have exclusive and final authority, without modifying or changing the Plan, to interpret the Plan consistent with the intent of the Plan, to prescribe, amend, and rescind rules and regulations relating to the Plan, to delegate such responsibilities or duties as are allowable under the Plan or by law and as it deems desirable, and if it so determines, to cause an audit of the Plan's operations to be conducted by an independent certified public accounting firm selected by the Board, and to make all other determinations necessary or advisable for the administration of the Plan. In exercising its authority and discretion under the Plan, unless the context clearly provides otherwise, all decisions of the Board shall be made in the sole and absolute discretion of the Board. If a Compensation Committee is established by the Board, the Board may, if it so determines, delegate all or any portion of its authority under the Plan to the Compensation Committee. 3.2 Adoption of Rules. The Board 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 Board 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. The determinations, interpretations and other actions of the Board pursuant to the provisions of the Plan shall be binding and conclusive for all purposes and on all persons. Section 4 Participation in the Plan ------------------------- 4.1 Eligibility for Participation. The Board shall establish the criteria ----------------------------- for participation of Eligible Employees in the Plan, select the Participants, determine the number of Growth Shares to be granted to each Participant, and the provisions applicable to such Growth Shares, which may include provisions in addition to or different than the provisions of the Plan. The Board may delegate the authority and responsibility to select Participants and determine the number of Growth Shares to the Compensation Committee or to the Chairman of the Board. As a general matter, Plan participation shall be extended those Eligible Employees of the Company and Affiliated Corporations who, in the opinion of the Board, have the opportunity to significantly impact the long-term financial success of the Company. An Eligible Employee shall become a Participant in the Plan upon designation as an Eligible Employee by the Board, and the execution by the Participant and the Company of a Plan Agreement. 6 4.2 Plan Agreement. The Plan Agreement will specify the terms and -------------- conditions of a grant of Growth Shares to a Participant, including the number of Growth Shares granted, the date as of which Beginning Company Value shall be calculated, and the amount of Beginning Company Value, for purposes of calculating the value of the Growth Shares, the Performance Cycle associated with the Growth Shares, the beginning date for the Measuring Period with respect to the Growth Shares, the Vesting arrangement that shall apply to the Participant's Growth Shares, and any other provisions that shall apply to the Participant's Growth Shares, which may include provisions in addition to or different than the provisions of the Plan. The Plan Agreement must be signed by the Participant and by an authorized officer of the Company (other than the Participant). Section 5 Performance Cycle ----------------- 5.1 Determination of Performance Cycle. The Board shall determine at the ---------------------------------- time of each grant of Growth Shares hereunder when the Performance Cycle with respect to the grant of such Growth Shares shall begin and end. 5.2 Normal Performance Cycle. The normal Performance Cycle shall be a five ------------------------ (5) year period, but the Board may specify shorter or longer Performance Cycles with respect to any specific grant of Growth Shares. The beginning and ending of the Performance Cycle will be specified for each grant of Growth Shares in the Plan Agreement with each Participant. Section 6 Growth Share Grants ------------------- 6.1 Grants. Growth Shares shall be granted to a Participant based upon the ------ Board's assessment of the anticipated role and contribution of the Participant over the applicable Performance Cycle. Growth Shares will ordinarily be granted to Participants only at the beginning of a Performance Cycle, provided, however, that the Board in its sole discretion may grant additional Growth Shares with respect to a Performance Cycle at any time during the Performance Cycle. The Beginning Company Value of the Growth Shares as determined by the Board for each grant will be specified in the Participant's Plan Agreement for purposes of calculating the value of the Growth Shares. 6.2 Maximum Number of Growth Shares. The total number of Growth Shares in ------------------------------- the Company is set at ten million. The maximum number of Growth Shares available for grant under the Plan is 850,000 or 8.5 percent of the total Growth Shares. The Board shall retain sole discretion to determine the total number of Growth Shares to be granted at the beginning of any Performance Cycle and the number of Growth Shares to be awarded to any specific Participant. The Company anticipates that only a portion of the total Growth Shares allocated to the Plan will be granted initially, so that a number of Growth Shares will be reserved for grants to new Participants and for grants pursuant to new Performance Cycles. If a Growth Share has been redeemed and an Award made to a Participant in accordance with the provisions of Section 8, or 7 if a Growth Share has been forfeited or canceled for any other reason, the Growth Share shall again be available for grant under the Plan. 6.3 Establishment of Individual Growth Share Accounts. The Company shall ------------------------------------------------- establish, or shall cause to be established, individual accounts for each Participant which will be unsecured and unfunded and will be maintained for each grant of Growth Shares to a Participant under the Plan. The account for each Participant shall reflect the number of Growth Shares granted and held by such Participant and the Beginning Company Value of each such Growth Share. Section 7 Vesting of Growth Shares ------------------------ 7.1 Normal Vesting Schedule. Growth Shares granted under the Plan shall ----------------------- Vest at the rate of 20 percent for each full year of employment with the Company or an Affiliated Corporation (or as specified in the Plan Agreement for a particular Participant) completed after the effective date of the grant of the Growth Shares unless the Board specifies a different Vesting arrangement with respect to the grant of Growth Shares to a particular Participant. The manner in which each Participant's Growth Shares shall Vest shall be set forth in the Plan Agreement with the Participant. Different Vesting arrangements may apply with respect to the grant of Growth Shares to different Participants. 7.2 Vesting in Other Circumstances. Except as provided in Section 7.4, a ------------------------------ Participant shall become 100 percent Vested in all his or her Growth Shares in the event of the Participant's death, Permanent Disability or Retirement. A Participant shall also become 100 percent Vested in all of his or her Growth Shares upon the occurrence of a Triggering Event described in subsection 2.1(x)(ii) or (iii). The end of a Performance Cycle shall not cause any acceleration of Vesting for any Participant. 7.3 Termination for Cause. If a Participant's employment is terminated for --------------------- Cause, he shall forfeit all of his or her Vested Growth Shares and shall not be entitled to any Award or payment under this Plan with respect to any Growth Shares previously granted to such Participant. 7.4 Voluntary Termination of Employment. Notwithstanding the foregoing ----------------------------------- provisions of this Section 7, if a Participant voluntarily terminates his employment with the Company and all Affiliated Corporations, twenty-five (25) percent of the Vested Growth Shares then held by the Participant shall be forfeited and the Participant shall not be entitled to any Award or payment under this Plan with respect to any Growth Shares so forfeited. 8 Section 8 Payments to Participants ------------------------ 8.1 Value of Growth Shares. The value of a Participant's Growth ---------------------- Shares will be calculated according to the following formula: (A - B - C + D) / E x F, as follows: (A) Ending Company Value, less (B) Beginning Company Value, less (C) the amount of new capital contributions (either cash or the fair market value of assets at the date of contribution) or other additions to the capital of the Company, including but not limited to proceeds received by the Company from the issuance of stock or from the conversion of debt to equity, made over the Measuring Period, together with an amount equal to 9% of the capital contributions or additions to the capital of the Company made by the Anschutz Entities, compounded annually for the period beginning on the date of each such capital contribution or other addition to the capital of the Company through the end of the Measuring Period, reduced appropriately for any returns of capital, plus (D) dividends paid on the common stock and any withdrawal of capital or redemptions of stock by the parent or shareholder(s) of the Company over the Measuring Period, divided by (E) the total number of Growth Shares (ten million), and multiplied by (F) the number of Growth Shares granted to the Participant for which value is being determined. For purposes of clause (C) above, a merger where the Company is the surviving entity shall be treated as the acquisition of assets for Company stock. The value of each Participant's Growth Shares shall be determined as soon as practicable before or after the applicable Triggering Event, but in no event later than ninety (90) days after the Triggering Event. 8.2 Payments to Participants - In General. Except as otherwise ------------------------------------- provided in this Section, a Participant in the Plan shall receive payment for his or her Vested Growth Shares that are affected by the applicable Triggering Event within thirty (30) days following the final determination of value referenced in Section 8.1 above. If a Participant is not 100% Vested at the time of, or because of, a Triggering Event, the Participant shall receive payment for his or her Vested Growth Shares covered by such Triggering Event in accordance with the provisions of this Section 8.2 and shall receive payment with respect to the unvested Growth Shares at such time as such Growth Shares become Vested in accordance with the provisions of the Plan. If payment is made to a Participant who is still employed by the Company at a time when the Participant is less than 100% Vested, an amount equal to 25% of the amount otherwise payable to the Participant at such time shall be withheld by the Company and shall be subject to forfeiture in accordance with the provisions of Section 7.4. The amount of any payment that is delayed in accordance with the foregoing provisions shall be equal to the payment that would have been made to the Participant if the Vested Growth Shares with respect to which the Participant becomes entitled to payment had, in fact, been Vested at the time of the Triggering Event and the delayed payment shall be made in the same medium (cash or common stock of the Company) used for the payment to Participants at the time of the Triggering Event. If a Participant does not become Vested with respect to any Growth Shares that are unvested at the time of a Triggering Event, the Participant shall not be entitled to any payment with respect to such Growth Shares. 8.3 Form of Payment. Except as provided below, payment shall be --------------- made to the Participant either in a cash lump sum or in shares of the Company's common stock, as determined by the Board, subject to applicable withholding of income tax and other amounts, no later than thirty (30) days after the final determination of the value of the Growth Shares. 9 Notwithstanding the foregoing, if at the time of the Triggering Event the shares of the Company's common stock satisfy the requirements of Section 8.4(b), payment shall be made in shares of the Company's common stock with a Market Value as of the date of the Triggering Event equal to the value of the Participant's Growth Shares determined under Section 8.1. A participant who is not 100% Vested at the time of a Triggering Event for which payment is made in shares of the Company's common stock shall receive payment for his Vested Growth Shares, at the time specified in Section 8.2, of the same number of shares of the Company's common stock that would have been issued to him at the time of the Triggering Event with respect to such number of Vested Growth Shares. 8.4 Use of Common Stock for Payment. (a) If the Board elects to ------------------------------- make payment of amounts due under this Plan in shares of the Company's common stock at a time when such common stock is not actively traded on an established securities market and the Company is not subject to the reporting and disclosure requirements of the Exchange Act, the Company will take such actions as it may determine to be necessary to comply with applicable federal and state securities laws with respect to such participant. If the shares of the Company's common stock to be received by a Participant hereunder may not be immediately sold by the Participant because of restrictions imposed by federal or state securities laws, the Board shall permit the Participant to elect to pay the applicable income and other taxes required to be withheld by causing the Company to withhold from the shares otherwise issuable to the Participant sufficient shares to satisfy the withholding obligation. The value of the Company's common stock for purposes of determining the number of shares of such common stock to be issued to Participants in payment for their Growth Shares for purposes of this Section 8.4(a) shall be determined by appraisal in accordance with the provisions of Section 2.1(c) as of the last day of the Measuring Period. (b) Shares of the Company's common stock shall be used in payment of amounts due under this Plan if such common stock is actively traded on an established securities market and the Company is subject to the reporting and disclosure requirements of the Exchange Act. Prior to the issuance of shares of the Company's common stock as payment hereunder, the Company shall file a registration statement (on Form S-8 or other form selected by the Company) and take such other actions as may be reasonably required to permit the Participants to sell immediately such shares. If the shares of the Company's common stock to be received by a Participant hereunder may not be immediately sold by the Participant because of restrictions imposed by federal or state securities laws, the Board shall permit the Participant to elect to pay the applicable income and other taxes required to be withheld by causing the Company to withhold from the shares otherwise issuable to the Participant sufficient shares to satisfy the withholding obligation. 8.5 Exceptional Payments. Notwithstanding the foregoing provisions -------------------- of this Section 8, the Board may cause any payments due hereunder to be made in two equal annual installments. As provided in Section 8.2 above, the first such payment shall be made within thirty (30) days after the final determination of the value of the Growth Shares payable to the Participant and the subsequent annual payment shall be made on the anniversary of such date, together with interest thereon at the consolidated prime rate, as published in the Wall Street Journal, in effect on the date of the payment of the first annual installment, plus one percentage point. Notwithstanding the foregoing, payment of amounts required as a result of a sale of the 10 Company (or its assets) that constitutes a Change of Control and a Triggering Event shall be made immediately prior to the effective time of the applicable Triggering Event. Such payment may be made by the Company or by the principal shareholder of the Company, as determined in the sole discretion of such shareholder. Section 9 Rights of Employees ------------------- Nothing contained in the Plan or in any Growth Share granted under the Plan shall confer upon any Participant any right with respect to the continuation of his or her employment by the Company or Affiliated Corporation, or interfere in any way with the right of the Company or Affiliated Corporation, subject to the terms of any separate employment agreement to the contrary, at any time to terminate such employment or to increase or decrease the compensation of the Participant. Whether an authorized leave of absence, or absence in military or government service, shall constitute a termination of employment for any purpose of this Plan shall be determined by the Board, subject to the requirements of applicable law, if any. Section 10 Designation of Beneficiaries ---------------------------- A Participant may designate a beneficiary or beneficiaries to receive all or part of the amounts earned by the Participant under the Plan in case of death. A designation of beneficiary may be replaced by a new designation or may be revoked by the Participant at any time. A designation or revocation shall be on a form to be provided by the Company for this purpose and shall be signed by the Participant and delivered to the Company prior to the Participant's death. In the case of the Participant's death, the amounts to be distributed to the Participant under the Plan with respect to which a designation of beneficiary has been made (to the extent it is valid and enforceable under applicable law) shall be distributed in accordance with the Plan to the designated beneficiary or beneficiaries. The amount distributable to a Participant upon death and not subject to a valid beneficiary designation shall be distributed to the Participant's estate. If there shall be any question as to the legal right of any beneficiary to receive a distribution under the Plan, the amount in question may be paid to the estate of the Participant, in which event the Company shall have no further liability with respect to such amount. Section 11 Changes in Accounting Rules --------------------------- 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 Growth Shares shall occur which, in the sole judgment of the Board, may have a material adverse effect on the reported earnings, assets or liabilities of the Company, the Board shall have the right and power to modify as necessary any then outstanding Growth Shares, provided, however, that no such modification shall in any manner adversely affect any Growth Shares theretofore granted under the Plan without the consent of the Participant holding such Growth Shares. 11 Section 12 Other Employee Benefits ----------------------- The amount of any compensation deemed to be received by a Participant as a result of the receipt of Growth Shares or cash payments for such Growth Shares shall not constitute "earnings" 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. Section 13 Plan Amendment, Modification and Termination -------------------------------------------- The Board may at any time terminate, and from time to time may amend or modify the Plan. The Plan shall terminate upon the sale of all or substantially all of the assets of the Company, a distribution of all or substantially all of the assets of the Company to its shareholders, or the merger or reorganization of the Company if the Company is not the surviving entity. Upon termination of the Plan, no further Growth Shares shall be issued, but the provisions of the Plan shall remain applicable to all Growth Shares then outstanding at the time of Plan termination. No amendment, modification or termination of the Plan shall in any manner adversely affect any Growth Shares theretofore granted under the Plan, without the consent of the Participant holding such Growth Shares. Section 14 Setoff ------ All or part of any amount otherwise due and payable to a Participant under the Plan may be setoff or applied by the Company against any liability or reimbursement then due and payable by the Participant to the Company. Section 15 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, shall have no interest or right as a shareholder in the Company and shall be only general creditors of the Company. Section 16 Non-Assignability of Rights --------------------------- Except as provided in the Plan, no grant, right, benefit or account of a Participant under this Plan shall be subject to anticipation, alienation, sale, assignment, pledge, encumbrance, or charge, and any attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge the same 12 shall be void. No right or benefit under the Plan shall in any manner be liable for or subject to the debts, contracts, liabilities, or torts of the person entitled to such benefits except as expressly provided herein. If any Participant should become bankrupt or attempt to anticipate, alienate, sell, assign, pledge, encumber, or charge any right or benefit hereunder, then such right or benefit shall, in the discretion of the Company, cease, and in such event, the Company may hold or apply the Participant's Growth Shares or any part thereof for the benefit of the Participant or the Participant's spouse, children, or other dependents, or any of them in such manner and in such proportions as the Board shall deem proper. Section 17 Withholding Taxes ----------------- The Company shall have the right to deduct from all amounts payable to a Participant any taxes or other impositions required by law to be withheld upon such payment. Section 18 Requirements of Law ------------------- 18.1 Requirements of Law. The issuance of Growth Shares and the ------------------- payment of cash pursuant to the Plan shall be subject to all applicable laws, rules and regulations. 18.2 Governing Law. The Plan and all agreements hereunder shall be ------------- construed in accordance with and governed by the laws of the State of Colorado. Section 19 Severability ------------ In the event that any provision of the Plan is held invalid, void or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of the Plan. QWEST HOLDING CORPORATION ATTEST: ______________________________ By:____________________________________ Dated: ________________________ 13 QWEST HOLDING CORPORATION GROWTH SHARE PLAN AGREEMENT THIS AGREEMENT is made and entered into as of _________________, 19___, by and between Qwest Holding Corporation (the "Company") and ___________________________ (the "Participant"). WHEREAS, the Company has adopted the Qwest Holding Corporation Growth Share Plan as amended effective October 1, 1996 (the "Plan"), and WHEREAS, the Plan requires that an Agreement be entered into between the Company and the Participant setting out certain terms and benefits of the Plan as they apply to the Participant; NOW, THEREFORE, the Company and the Participant hereby agree as follows: 1. The Plan is hereby incorporated into and made a part of this Agreement as though set forth in full herein. Capitalized terms that are used herein shall have the meanings assigned to such terms by the Plan, unless another definition is specified in this Agreement. The parties shall be bound by, and have the benefit of, each and every provision of the Plan, including but not limited to the provisions relating to amendment and termination of the Plan which are set forth in the Plan. 2. The beginning of the Performance Cycle for Growth Shares granted under this Agreement will be ______________________. 3. The end of the Performance Cycle for Growth Shares granted under this Agreement will be ____________________. 4. The Participant is hereby granted _____________ Growth Shares under this Agreement. 5. The Beginning Company Value for the purpose of determining the value of the grant is [$____________]. 6. The Measuring Period with respect to the Growth Shares granted under this Agreement will begin on _________________. 7. Growth Shares granted under this Agreement will vest according to the following schedule: 14 Period of Time Since [Effective Date of Grant] (Years) Annual Vesting Cumulative Vesting ---------------------- -------------- ------------------ 8. This Agreement shall inure to the benefit of, and be binding upon, the Company, its successors and assigns, and the Participant and his Beneficiaries. 9. This Agreement may be modified or amended only by means of a written instrument executed by the parties hereto. IN WITNESS WHEREOF, the parties hereto have entered into this Agreement on the date first above written. QWEST HOLDING CORPORATION By:_____________________________ PARTICIPANT ________________________________ 15 DESIGNATION OF BENEFICIARY FOR PAYMENTS DUE UNDER QWEST HOLDING CORPORATION GROWTH SHARE PLAN The undersigned is a Participant in the Qwest Holding Corporation Growth Share Plan as amended effective October 1, 1996 (the "Plan") established by Qwest Holding Corporation (the "Company"). Pursuant to Section 10 of the Plan, the undersigned hereby designates the following persons or entities as primary and secondary beneficiaries and primary and secondary appointees as my legal representative of any amount due to me under the Plan with respect to the grant of Growth Shares effective as of _________________ and payable by reason of my death or disability, respectively:
DEATH ----- Primary Beneficiary: - -------------------- Name: Address: Relationship: - ------------------------------- ------------------ ------------------- ------------------ Secondary (Contingent) Beneficiary: - ----------------------------------- Name: Address: Relationship: - ------------------------------- ------------------ ------------------- ------------------ DISABILITY ---------- Primary Appointee: - ----------------- Name: Address: Relationship: - ------------------------------- ------------------ ------------------- ------------------ Secondary (Contingent) Appointee: - ----------------------------------- Name: Address: Relationship: - ------------------------------- ------------------ ------------------- ------------------
16 THE RIGHT TO REVOKE OR CHANGE ANY BENEFICIARY OR APPOINTEE DESIGNATION IS HEREBY RESERVED. ALL PRIOR DESIGNATIONS (IF ANY) OF BENEFICIARIES AND APPOINTEES, OF ANY KIND, ARE HEREBY REVOKED. The Company shall pay all sums payable under the Plan by reason of my death to the Primary Beneficiary, if he or she survives me, and if no Primary Beneficiary shall survive me, then to the Secondary Beneficiary, and if no named beneficiary survives me, then the Company shall pay all amounts in accordance with Section 10 of the Plan. In the event that a named beneficiary survives me and dies prior to receiving the entire amount payable under the Plan, then and in that event, the remaining unpaid amount, payable according to the terms of the Plan, shall be payable to the personal representative of the estate of said deceased beneficiary, who survives me, but dies prior to receiving the total amount due under the Plan. This same payment scheme shall apply to Primary and Secondary Appointees except that no amount payable under the Plan shall be paid to the estate of a Primary or Secondary Appointee. Should the Secondary Appointee not survive me and not receive the full amount payable under the Plan, then such remaining amount shall be payable to my guardian or conservator as appointed by a court of competent jurisdiction. IN WITNESS WHEREOF, the undersigned has executed this document on the day and year hereinafter indicated, in the presence of the witnesses indicated below who each signed as witnesses in the presence of the undersigned and each other. ---------------------------------- Name ---------------------------------- Signature ---------------------------------- Date WITNESSES: - ------------------------------ Name - ------------------------------ Signature - ------------------------------ Name - ------------------------------ Signature NOTE: In preparing this Designation of Beneficiary, you should consult with - ---- your attorney to determine the appropriate method of designation consistent with your personal estate plan. 17 EX-21.1 6 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 Subsidiaries of the Registrant
Name of Subsidiary State or Other Jurisdiction Other Names Under Which - ------------------ --------------------------- ----------------------- of Incorporation or Organization Subsidiary Does Business -------------------------------- ------------------------ Qwest Communications Corporation/1/ Delaware a) Qwest Communications Corporation d/b/a Qwest Communications The Power of Connections b) Qwest Communications Corporation of Delaware c) Qwest Communications Corporation d/b/a The Power of Connections d) Qwest Communications The Power of Connections, Inc. Qwest Corporation Colorado None Qwest Transmission Inc. Delaware None
- ------------------------------- /1/ Qwest Communications Corporation also uses the trade name "SP Construction Services." EX-23.1 7 CONSENT OF KPMG PEAT MARWICK LLP CONSENT OF INDEPENDENT AUDITORS The Board of Directors Qwest Communications International Inc.: We consent to the use of our reports dated February 19, 1997 included herein and to the reference to our firm under the headings "Summary Consolidated Financial and Operating Data," "Selected Consolidated Financial Data" and "Experts" in the prospectus. KPMG Peat Marwick LLP Denver, Colorado April 16, 1997 EX-27 8 FINANCIAL DATA SCHEDULE
5 1,000 YEAR YEAR DEC-31-1996 DEC-31-1995 JAN-01-1996 JAN-01-1995 DEC-31-1996 DEC-31-1995 6,905 1,484 0 0 32,917 17,492 3,669 2,621 0 0 62,705 52,387 212,451 126,940 25,916 12,192 264,259 184,178 132,143 54,970 0 0 0 0 0 0 0 0 9,442 26,475 264,259 184,178 230,996 125,102 230,996 125,102 0 0 243,010 161,158 (8,640) (1,837) 0 0 6,827 4,248 (10,201) (38,467) (3,234) (13,336) (6,967) (25,131) 0 0 0 0 0 0 (6,967) (25,131) (696.70) (2,513.10) (696.70) (2,513.10)
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