-----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, P356ysFWbUWT0E+vOK3BoJe7v3CsOiVipViP+EUnENjlD1DD35ZzdtYH2qIoFtSz NAMMC2M4HLRMeKAze8bO5A== 0001035704-01-000204.txt : 20010319 0001035704-01-000204.hdr.sgml : 20010319 ACCESSION NUMBER: 0001035704-01-000204 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010316 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841339282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15577 FILM NUMBER: 1570470 BUSINESS ADDRESS: STREET 1: 1801 CALIFORNIA ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3032911400 MAIL ADDRESS: STREET 1: 1801 CALIFORNIA ST CITY: DENVER STATE: CO ZIP: 80202 FORMER COMPANY: FORMER CONFORMED NAME: QUEST COMMUNICATIONS INTERNATIONAL INC DATE OF NAME CHANGE: 19970416 10-K 1 d84707e10-k.txt FORM 10-K 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NO. 000-22609 QWEST COMMUNICATIONS INTERNATIONAL INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1339282 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
1801 CALIFORNIA STREET, DENVER, COLORADO 80202 TELEPHONE NUMBER (303) 992-1400 Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - --------------------------------------------- --------------------------------------------- Qwest Common Stock New York Stock Exchange ($0.01 per share, par value) Qwest Capital Funding, Inc. New York Stock Exchange ($500,000,000 6.125% Notes due July 15, 2002)
Securities registered Pursuant to Section 12(g) of the Act: NONE At March 5, 2001, 1,649,490,762 shares of Qwest common stock were outstanding. At March 5, 2001, the aggregate market value of the Qwest voting stock held by non-affiliates was approximately $45,900,367,222. INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]. This document contains statements about expected future events and financial results that are forward-looking and subject to risks and uncertainties. Please refer to page 3 of Form 10-K for a discussion of factors that could cause actual results to differ from expectations. DOCUMENTS INCORPORATED BY REFERENCE
DOCUMENT WHERE INCORPORATED -------- ------------------ Annual Report for the year ended December 31, 2000 Part II, Items 5, 6, 7, 7A, and 8 Proxy Statement for Qwest's 2001 Annual Meeting Part III, Items 10, 11, 12 and 13 of Stockholders
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ITEM DESCRIPTION PAGE - ---- ----------- ---- PART I 1. Business.................................................... 2 2. Properties.................................................. 6 3. Legal Proceedings........................................... 6 4. Submission of Matters to a Vote of Security Holders......... 7 PART II 5. Market for Registrant's Common Equity and Related Stockholder Matters......................................... 8 6. Selected Financial Data..................................... 8 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 8 7A. Quantitative and Qualitative Disclosures About Market Risk........................................................ 8 8. Consolidated Financial Statements and Supplementary Data.... 8 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure.................................... 8 PART III 10. Directors and Executive Officers of the Registrant.......... 8 11. Executive Compensation...................................... 8 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 8 13. Certain Relationships and Related Transactions.............. 8 PART IV 14. Financial Statement Schedules, Reports on Form 8-K and Exhibits.................................................... 9 Signature Page.............................................. 14
3 FORM 10-K QWEST COMMUNICATIONS INTERNATIONAL INC. SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-K contains or incorporates by reference "forward-looking statements," as that term is used in federal securities laws, about Qwest Communications International Inc.'s ("Qwest" or "us" or "we" or "our") financial condition, results of operations and business. These statements include, among others: - statements concerning the benefits that we expect will result from our business activities and certain transactions we have completed, such as increased revenues, decreased expenses and avoided expenses and expenditures, and - statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this document or may be incorporated by reference to other documents we will file with the Securities and Exchange Commission ("SEC"). You can find many of these statements by looking for words such as "believes," "expects," "anticipates," "estimates," or similar expressions used in this report or incorporated by reference in this report. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important factors that could prevent us from achieving our stated goals include, but are not limited to, the following: - intense competition in the markets in which we conduct our business; - changes in demand for our products and services; - dependence on new product development and acceleration of the deployment of advanced new services, such as broadband data, wireless and video services, which could require substantial expenditure of financial and other resources in excess of contemplated levels; - rapid and significant changes in technology and markets; - higher than anticipated employee levels, capital expenditures and operating expenses; - adverse changes in the regulatory or legislative environment impacting the competitive environment and service pricing in the local exchange market and affecting our business, and delays in the ability to begin interLATA (local access transport area) long-distance services in our 14-state region; - failure to maintain the necessary rights-of-way; - failure to achieve the projected synergies and financial results expected to result from the merger of U S WEST, Inc. ("U S WEST"), with and into Qwest on June 30, 2000 (the "Merger"), and difficulties in combining the operations of Qwest and U S WEST, which could affect our revenues, levels of expenses and operating results. Because these statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this report. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that Qwest or persons acting on its behalf may issue. We do not undertake any obligation to review or confirm analyst's expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. 1 4 PART I ITEM 1. BUSINESS We are a leading broadband Internet communications company that provides advanced communication services, data, multimedia and Internet-based services on a national and global basis; and wireless services, local telecommunications and related services and directory services in the 14-state local service area. A Fortune 100 company, we principally serve large and mid-size business and government customers on a national and international basis, as well as residential and small business customers primarily in the 14-state local service area. We are incorporated under the laws of the State of Delaware and have our principal executive offices at 1801 California Street, Denver, Colorado 80202, telephone number (303) 992-1400. OPERATIONS We are organized on the basis of our products and services and operate in four segments: (1) retail services, (2) wholesale services, (3) network services and (4) directory services. For further financial information on our segments, you should refer to Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 10 to the consolidated financial statements. Retail Services The principal types of retail services we offer are: (1) advanced communication services and data, multimedia and Internet-based services; (2) wireless services; (3) interLATA (local access transport area) long-distance services; (4) intraLATA long-distance services within our 14-state local service area and (5) local exchange telephone services. Advanced Communication Services and Data, Multimedia and Internet-based Services. Advanced communication services, data, multimedia and Internet-based services include Internet Protocol ("IP")-enabled services such as dedicated and dial-up Internet access, Web hosting, co-location access, voice over IP, application hosting, mass storage services, and broadband local access, including digital subscriber line ("DSL"). We also provide high-speed data communications and network services, including Internet access, hosting, DSL, virtual private networks, frame relay service, transparent local area network ("LAN") service, asynchronous transfer mode ("ATM") service, network integration solutions, application services and other data-related services to business customers. During 2000, we opened seven more CyberCenters, bringing the total number of centers to 14 by the end of the year. These centers offer business customers a variety of Web hosting and application services including our e-solutions, a suite of Web hosting, application service provider and professional consulting services. The buildings are directly connected to our network and each is equipped with a maximum-security environment to safeguard the customers' hosting operations. We plan to construct and operate another 10 centers within the United States in 2001. Wireless Services. We hold 10 MHz licenses to provide digital personal communications services in most markets in our 14-state local service area. Wireless services are being offered in 20 of these markets, and enable customers to use the same telephone number for their wireless phone as for their home or business phone. We also serve five markets in our 14-state local service area through a joint venture with Touch America, Inc. InterLATA Long-Distance Services. We provide interLATA long-distance voice and data services to business and residential customers outside of our 14-state local service area. We intend to begin offering interLATA long-distance services within our 14-state local service area pursuant to the Telecommunications Act of 1996 (the "Telecommunications Act" or the "Act") upon satisfaction of certain regulatory conditions primarily related to local exchange telephone competition. IntraLATA Long-Distance Services Within our Region. We provide intraLATA long-distance services within our 14-state local service area. These services include intraLATA service beyond the local calling area, wide area telecommunications service or "800" services for customers with highly concentrated demand, and special services, such as transport of data, radio and video. Local Exchange Telephone Services. Local exchange telephone services provide lines from telephone exchange offices to customers' premises in order to originate and terminate voice and data telecommunications. 2 5 These services include basic local exchange services provided through our switched network, dedicated private line facilities for voice and special services as well as data transport services. Other local exchange revenue is derived from directory assistance and public telephone service. We also provide other products and services, such as customer premises equipment and enhanced services, (including voice mail) to residents, business customers and governmental agencies. For the year ended December 31, 2000, revenue from retail services accounted for approximately 70% of our total revenue. Wholesale Services We provide network transport services nationally, on a wholesale basis, primarily to telecommunications companies and Internet service providers ("ISPs"). We also provide network transport, switching and billing services to competitive local exchange carriers ("CLECs"), interexchange carriers ("IXCs") and wireless carriers in our 14-state local service area. CLECs are communications companies, certified by a state Public Utility Commission ("PUC"), that provide local exchange service within a Qwest-associated local calling area. IXCs provide transitional long-distance services to end-users by handling calls that are made from a phone exchange in one LATA to an exchange in another LATA. We also provide wholesale products such as optical broadband capacity, conventional private line services to other communications providers, as well as to ISPs and other data service companies, and high-volume voice services. For the year ended December 31, 2000, revenue from wholesale services accounted for approximately 19% of our total revenue. Network Services Our network services segment provides access to our telecommunications network, including our information technologies supporting the network, primarily to customers of our retail services and wholesale services segments. For the year ended December 31, 2000, revenue from network services accounted for approximately 2% of our total revenue. Directory Services Through Qwest Dex, Inc. ("Qwest Dex"), we publish White and Yellow Pages directories in the 14-state local service area. Qwest Dex's business includes all facets of directory-related publishing. Qwest Dex's customers include businesses that purchase advertising in its directories and other related products. Qwest Dex also provides directory publishing services to other telephone companies on a contract basis and electronic directory services. Qwest Dex has expanded its directories business onto the Internet. For the year ended December 31, 2000, the revenue from directory services accounted for approximately 9% of our total revenue in 2000. OUR NETWORK Our principal asset is our telecommunications network, which uses both traditional telephone communications technology and Internet communications technology. In addition to the traditional telephone network in the 14-state local service area, we continue to expand our high-capacity fiber optic network. The network reaches over 25,500 miles in North America, and is designed to allow customers to seamlessly exchange multimedia content-images, data and voice over the public circuit-switched telephone network. The technologically advanced fiber optic network is designed to instantaneously re-route traffic in the event of a fiber cut to prevent interruption in service to our customers. This is accomplished by automatically re-routing traffic in the opposite direction around the SONET ring. The network is equipped with state-of-the-art transmission electronics. Our network is designed to support IP, traditional circuit-switched services and alternative information transfer standards used for data transmission. Our network connects approximately 150 metropolitan areas coast to coast. We were the first network service provider to complete a transcontinental fiber network when we activated our network from Los Angeles to San Francisco to New York in April 1998. We are expanding our worldwide broadband services portfolio to 3 6 include end-to-end connectivity for our local Internet services to large and multi-location enterprises and carriers in key United States metropolitan markets. We are leveraging the many completed metropolitan area fiber rings and right-of-ways that were built as part of the nationwide backbone construction. We completed construction of extensive fiber and DSL networks in 12 major cities in 2000 and we expect to complete 14 additional major cities by the end of 2001. We have also built a 1,400 route-mile network in Mexico, and are part of a consortium of communications companies that is building a 13,125-mile underwater cable network connecting the United States to Japan. KPNQwest, N.V. ("KPNQwest"), a European communications company in which we and KPN, the Dutch telephone company, each own a 44% equity interest, is building and operating a high-capacity, pan-European fiber optic, Internet-based network that is currently expected to connect over 50 cities throughout Europe when it is completed by the end of 2001. In June 1999, our subsidiary, Qwest Corporation, entered into a series of definitive agreements to sell local exchange telephone properties serving approximately 570,000 access lines in nine states for approximately $1.8 billion in cash, subject to adjustment. The pending sales are subject to regulatory approvals and other customary closing conditions. The transfer of ownership, which will occur on a state-by-state basis, is expected to be completed by the end of the first quarter in 2002. In addition, on February 26, 2001, we announced that we do not have plans to sell a significant number of additional access lines at the present time. STRATEGIC RELATIONSHIPS We are developing Internet and multimedia services in alignment with existing and anticipated market demand in partnership with leading information technology companies, including the following: - Microsoft Corporation for business applications and service; - IBM Corporation for the construction and management of CyberCenters; - SAP America, Inc., Oracle Corporation and Siebel Systems, Inc. for application hosting services; - Hewlett-Packard Company for high-end data storage, hosting and systems management services; and - BellSouth Corporation for coordinated marketing and product development in the southeastern United States. We also continue to evaluate opportunities to enter into other relationships with leading information technology companies that would allow us to improve and expand services, compete more effectively and create new opportunities for growth. COMPETITION During 2000, we faced a constantly changing competitive environment. The early part of the year saw significant consolidation in the telecommunications industry followed later in the year by a number of companies experiencing financial difficulties. We expect that rapid restructuring in the telecommunications industry will continue in the future. We still face intense competition in almost every area of our business, primarily from other communications companies. Some of our existing and potential competitors, particularly in the communications services markets, have more financial, personnel, marketing resources as well as certain competitive advantages. As a result of these competitors' efforts, we continue to experience an erosion of our market share in certain markets, as well as pressure on profit margins, particularly in the intraLATA long-distance market and business portion of the local service market. We have taken several steps to combat the impacts of competition on our operating results. First, we continue to expand and upgrade our network facilities and CyberCenters to accommodate the increasing customer demands for faster and greater amounts of data, as well as Internet based services. Our national fiber optic network provides us with the ability to meet many of these demands today and into the immediate future. 4 7 This network also lowers our cost structure, allowing us to maintain profit margins relative to our competitors. Second, we have successfully deployed bundled products and service offerings to our customers in response to competition in the small business and residential sectors. This allows us to provide a comprehensive package at a competitive price. Third, we are committed to significantly improving the service provided to our customers. Substantial amounts of time, effort and financial resources have been, and will continue to be, focused on this area. Fourth, we are diligently working with various state PUCs and the Federal Communications Commission ("FCC") to meet the requirements necessary for us to be able to enter the interLATA long-distance market within our Region. We continue to work with the appropriate regulatory bodies to achieve increased pricing flexibility for products and services. We have been successful in gaining price cap regulation in several jurisdictions. Finally, we remain focused on providing new and improved products and services in the data, IP, and wireless arenas where demand continues to accelerate. Based upon these factors, we believe we are well positioned to compete with other companies in providing products and services to current and potential customers. REGULATION As a general matter, we are subject to substantial regulation, including requirements and restrictions arising under the Telecommunications Act and state utility laws, and the rules and policies of the FCC, state PUCs and other governmental entities. This regulation, among other matters, currently prohibits us (with certain exceptions) from providing retail or wholesale interLATA telecommunications services within the Region, and governs the terms and conditions under which we provide services to our customers (including competing CLECs and IXCs in our Region). Interconnection. The FCC is continuing to interpret the obligations of incumbent local exchange carriers ("ILECs") under the Telecommunications Act to interconnect their networks with, and make unbundled network elements available to, CLECs. These decisions establish our obligations in the Region, and our rights when we compete for certain services outside of our Region. In addition, the United States Supreme Court is now considering an appeal from a ruling of the Eighth Circuit Court of Appeals that the FCC's rules for the pricing of interconnection and unbundled network elements by ILECs unlawfully preclude ILECs from recovering their actual costs as required by the Act. Access Pricing. The FCC has initiated a number of proceeding which directly affect the rates and charges for access services sold or purchased by Qwest. It is expected that these proceedings and related implementation of resulting FCC decisions will continue through 2002. On May 31, 2000, the FCC adopted the access reform and universal service plan developed by the Coalition for Affordable Local and Long-Distance Service ("CALLS"). The adoption of the CALLS proposal resolved many outstanding issues before the FCC including: the court remand of the 6.5% productivity factor, the treatment of implicit universal service support; the treatment of low-volume long-distance users and the next scheduled price cap review. The CALLS plan has a five-year life and provides for the following: elimination of the residential presubscribed interexchange carrier charge ("PICC"); increases in subscriber line charges; reductions in switched access usage rates; the removal of certain implicit universal service support from access charges and direct recovery from end-users; and commitments from participating IXCs to pass through access charge reductions to end-users. We have opted into the five-year CALLS plan. Advanced Telecommunications Services. On two separate occasions, the FCC has ruled that advanced services provided by an ILEC are covered by those provisions of the Act that govern telephone exchange and exchange access services. We have challenged this finding, contending that advanced services fit within neither category and are not properly treated as exchange services. This case is now before the Court of Appeals. InterLATA Long-Distance Entry. Several Regional Bell Operating Companies ("RBOC") have filed for entry into the interLATA long-distance business. Although many of these applications have been supported by state PUCs, the FCC had rejected all applications until December 1999. As of this date, long-distance authority has been granted in the states of New York, Kansas, Oklahoma, and Texas. We filed applications with all in-region state PUCs for support of our planned applications to the FCC for authority to enter the interLATA long-distance business. Workshops and related proceedings are underway at the 5 8 state level to evaluate the Company's satisfaction of requirements under the Telecommunications Act that must be met in order for an RBOC to obtain long-distance authority. We have agreed to test operational support systems on a regional basis in 13 states, and testing of those systems is scheduled to begin in March 2001. Testing in Arizona is being conducted separately, and began in February 2001. We expect to file FCC applications in many of our states by the end of 2001. Long-Term Number Portability Tariffs. In July 1999, the FCC issued an order on our local number portability ("LNP") tariff that was originally effective in February 1999. The FCC's order approved a monthly cost recovery surcharge of $0.43 per access line. We estimate the surcharge will facilitate the recovery of approximately $407 million of LNP implementation costs over five years. We have successfully defended our tariffs against AT&T's objections. EMPLOYEES As of December 31, 2000, we employed approximately 67,000 employees. Approximately 38,000 were represented by collective bargaining agreements. We believe that our relations with our employees are good. ITEM 2. PROPERTIES Our network and its component assets are the principal properties we own. Our installed fiber optic cable is laid under the various rights of way held by us. Other fixed assets are located at various locations in geographic areas that we serve. Our tangible assets include a significant investment in telecommunications equipment. We own substantially all of our telecommunications equipment required for our business. Total investment in plant, property and equipment was approximately $48.3 billion and $38.1 billion at December 31, 2000 and 1999, respectively, including the effect of retirements, but before deducting accumulated depreciation. We lease sales offices for our communications services business unit in major metropolitan locations both in the United States and internationally. Our network management centers are located primarily in owned buildings situated on land owned in fee at various locations in geographic areas that we serve. Our local services network is predominately located within the Region, which includes Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Our network provides the capabilities to furnish advanced data transmission and information management services. ITEM 3. LEGAL PROCEEDINGS In January 2001, an amended purported class action complaint was filed against Qwest and certain current and former officers and directors on behalf of stockholders of U S WEST. The complaint alleges that Qwest has a duty to pay a quarterly dividend to U S WEST stockholders of record as of June 30, 2000. Plaintiffs further claim that the defendants' efforts to close the Merger in advance of the record date and the defendants' failure to pay the dividend breaches fiduciary duties owed to stockholders of U S WEST. Qwest has filed a motion to dismiss the complaint, which is pending. Through December 2000, seven purported class action complaints have been filed in various state courts against Qwest and U S WEST on behalf of customers in the states of Arizona, Colorado, Minnesota, New Mexico, Oregon, Utah and Washington. The complaints allege, among other things, that from 1993 to the present, U S WEST, in violation of alleged statutory and common law obligations, willfully delayed the provision of local telephone service to the purported class members. In addition, the complaints allege that U S WEST misrepresented the date on which such local telephone service was to be provided to the purported class members. The complaints seek compensatory damages for purported class members, disgorgement of profits and punitive damages. As of November 11, 2000, the parties have signed agreements to settle the complaints. The agreements are subject to a variety of conditions, including court approval. 6 9 In April 1999, CSX Transportation, Inc. filed a complaint in federal district court in Jacksonville, Florida against Qwest claiming breach of a 1995 contract. Discovery in the case is ongoing and the trial is scheduled to commence in October 2001. Through December 2000, several purported class actions have been filed in various state courts against Qwest on behalf of landowners in Georgia, Indiana, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas. The complaints challenge Qwest's right to install its fiber optic cable network in railroad rights-of-way. The complaints allege that the railroads own a limited property right-of-way that did not include the right to permit Qwest to install its fiber optic cable network on the plaintiffs' property. The Indiana action purports to be on behalf of a national class of landowners adjacent to railroad rights-of-way over which the Qwest network passes; the Georgia, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas actions purport to be on behalf of a class of such landowners in Georgia, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas, respectively. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. The Company received, and may in the future receive, additional claims and demands that may be based on similar or different legal theories. From March 2, 2000 to March 9, 2000, five purported class action complaints were filed against Qwest in state court in Delaware on behalf of Qwest stockholders. The complaints allege that Qwest and its directors breached their fiduciary duty by entering into the Merger and by agreeing not to solicit alternative transactions. Since the filing of the complaints, there has been no discovery or other activity in the cases. On March 17, 2000, and March 20, 2000, two class action complaints were filed in federal district court in Delaware against Qwest and Joseph Nacchio on behalf of U S WEST stockholders. The complaints allege, among other things, that Qwest and Mr. Nacchio made material false statements regarding Qwest's intent to solicit an alternative transaction to the Merger. Since the filing of the complaints, there has been no discovery or other activity in the cases. In 1999, twelve purported class action complaints were filed against U S WEST and its directors on behalf of U S WEST stockholders. Each of the complaints allege that the defendants breached their fiduciary duties to the class members by refusing to seek all bona fide offers for U S WEST and refusing to consider the Qwest proposal. Since the filing of the complaints, there has been no discovery or other activity in the cases. Various other litigation matters have been filed against us. We intend to vigorously defend these outstanding claims. We have provided for these matters in our financial statements as of December 31, 2000. We do not expect any material adverse impacts in excess of these reserves as a result of the ultimate resolution of these matters. From time to time, we receive complaints and become subject to investigations regarding tariffs, "slamming" (the practice of changing long-distance carriers without the customer's consent) and other matters. In 2000, the California Public Utilities Commission opened an investigation relating to certain slamming complaints. A purported class action complaint was filed in federal court in Connecticut containing slamming allegations. The Attorney General of Connecticut has also filed a similar complaint in state court in Connecticut. We may receive complaints or become subject to investigations in the future. Such complaints or investigations could result in the imposition of certain fines and other penalties. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 2000. 7 10 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information under the caption "Market for the Registrant's Common Equity and Related Stockholder Matters" on page 68 of Qwest's 2000 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The financial information in the table under the caption "Selected Financial Data" on page 26 of Qwest's 2000 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" on page 27 of Qwest's 2000 Annual Report is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information under the caption "Quantitative and Qualitative Disclosures About Market Risk" on page 38 of Qwest's 2000 Annual Report is incorporated herein by reference. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Qwest's Consolidated Financial Statements and related Notes thereto and the Independent Auditors' Report on pages 42-68 of Qwest's 2000 Annual Report, as well as the unaudited information set forth in Note 11 -- Selected Consolidated Quarterly Financial Data on page 67 of Qwest's 2000 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE We have nothing to report under this item. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Items 10, 11, 12 and 13 of Part III of this annual report on Form 10-K is incorporated by reference from and will be contained in Qwest's definitive proxy statement for its annual meeting of stockholders to be filed with the SEC by April 30, 2001. 8 11 PART IV ITEM 14. FINANCIAL STATEMENT SCHEDULES, REPORTS ON FORM 8-K AND EXHIBITS (a) Documents filed as part of the report:
PAGE ---- (1) Report of Independent Auditors.......................... * Financial Statements covered by Report of Independent Auditors: Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998....................... * Consolidated Balance Sheets as of December 31, 2000 and 1999................................................... * Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998....................... * Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998........... * Notes to the Consolidated Financial Statements............ *
* Incorporated herein by reference to the appropriate portions of the registrant's annual report to shareowners for the fiscal year ended December 31, 2000. (See Part II.) (b) Reports on Form 8-K: Qwest filed the following reports on Form 8-K during the fourth quarter of 2000: (1) On September 8, 2000, Qwest filed a report on Form 8-K regarding certain expected financial results for 2000 and 2001. (2) On September 13, 2000, Qwest filed a report on Form 8-K regarding capital projects provided at an analyst conference on September 11, 2000. (3) On October 25, 2000, Qwest filed a report on Form 8-K regarding its third quarter 2000 results of operations. (4) On November 3, 2000, Qwest filed a report on Form 8-K regarding an analyst meeting held October 31, 2000 in New York. (5) On December 21, 2000, Qwest filed a report on Form 8-K regarding a conference call with investors. (c) Exhibits: Exhibits identified in parentheses below are on file with the Commission and are incorporated herein by reference. All other exhibits are provided as part of this electronic submission.
EXHIBIT NUMBER DESCRIPTION ------- ----------- (2.1) -- Separation Agreement, dated June 5, 1998, between U S WEST, Inc. (renamed "MediaOne Group, Inc.") ("MediaOne Group") and USW-C, Inc (renamed U S WEST, Inc.) ("U S WEST"), (incorporated by reference to U S WEST's Current Report on Form 8-K/A dated June 26, 1998, File No. 1-14087). (2.2) -- Amendment to the Separation Agreement between MediaOne Group and U S WEST dated June 12, 1998 (incorporated by reference to U S WEST's Annual Report on Form 10-K/A for the year ended December 31, 1998, File No. 1-14087). (3.1) -- Amended and Restated Certificate of Incorporation of Qwest (incorporated by reference to Qwest's Registration Statement on Form S-4/A, File No. 333-81149, filed September 17, 1999).
9 12
EXHIBIT NUMBER DESCRIPTION ------- ----------- 3.2 -- Amended and Restated Bylaws of Qwest. (4.1)*** -- Indenture, dated as of October 15, 1997, with Bankers Trust Company (including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47% Series B Senior Discount Notes due 2007 as an exhibit thereto). (4.2)**** -- Indenture, dated as of August 28, 1997, with Bankers Trust Company (including form of Qwest's 10 7/8% Series B Senior Discount Notes due 2007 as an exhibit thereto). (4.3)**** -- Indenture dated as of January 29, 1998 with Bankers Trust Company (including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29% Series B Senior Discount Notes due 2008 as an exhibit thereto). (4.4) -- Indenture, dated as of November 4, 1998, with Bankers Trust Company (including form of Qwest's 7.50% Senior Discount Notes due 2008 and 7.50% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4 , File No. 333-71603, filed February 2, 1999). (4.5) -- Indenture, dated as of November 27, 1998, with Bankers Trust Company (including form of Qwest's 7.25% Senior Discount Notes due 2008 and 7.25% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4, File No. 333-71603, filed February 2, 1999). (4.6) -- Registration Agreement, dated November 27, 1998, with Salomon Brothers Inc. relating to Qwest's 7.25% Senior Discount Notes due 2008 (incorporated by reference to Qwest's Registration Statement on Form S-4, File No. 333-71603, filed February 2, 1999). (4.7) -- Indenture, dated as of June 23, 1997, between LCI International, Inc. and First Trust National Association, as trustee, providing for the issuance of Senior Debt Securities, including Resolutions of the Pricing Committee of the Board of Directors establishing the terms of the 7.25% Senior Notes due June 15, 2007 (incorporated by reference to Exhibit 4(c) in LCI's Current Report on Form 8-K, dated June 23, 1997). (4.8) -- Registration Rights Agreement, dated August 20, 1999, between U S WEST Capital Funding, Inc., U S WEST, Inc., J.P. Morgan Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to U S WEST's Form S-4 Registration Statement, File No. 333-92523, filed December 10, 1999). (4.9) -- Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., and The First National Bank of Chicago (now known as Bank One Trust Company, National Association), as Trustee (incorporated by reference to U S WEST's Current Report on Form 8-K, dated November 18, 1998, File No. 1-14087). (4.10) -- First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest Communications International Inc., and Bank One Trust Company, as Trustee (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000). (10.1)** -- Growth Share Plan, as amended, effective October 1, 1996.*
10 13
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.2) -- Equity Incentive Plan, as amended (incorporated by reference from Exhibit A to Qwest's definitive proxy statement on Schedule 14A, filed March 17, 2000).* (10.3) -- Qwest Communications International Inc. Employee Stock Purchase Plan (incorporated by reference to Qwest's Preliminary Proxy Statement for the Annual Meeting of Stockholders filed February 26, 1999).* (10.4) -- Qwest Communications International Inc. Deferred Compensation Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* (10.5)**** -- Equity Compensation Plan for Non-Employee Directors.* (10.6) -- Qwest Communications International Inc. 401-K Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* (10.7)** -- Employment Agreement dated December 21, 1996 with Joseph P. Nacchio.* (10.8)**** -- Growth Share Plan Agreement with Joseph P. Nacchio, effective January 1, 1997, and Amendment thereto.* (10.9)**** -- Non-Qualified Stock Option Agreement with Joseph P. Nacchio, effective June 23, 1997.* 10.11 -- Employment Agreement dated October 6, 1998 with Drake S. Tempest.* 10.12 -- Employment Agreement dated October 18, 2000 with Stephen M. Jacobsen.* 10.13 -- Employment Agreement dated May 20, 1999 with Afshin Mohebbi.* (10.14)**** -- Employment Agreement dated October 8, 1997 with Lewis O. Wilks.* (10.15)**# -- IRU Agreement dated as of October 18, 1996 with Frontier Communications International Inc. (10.16)**# -- IRU Agreement dated as of February 26, 1996 with WorldCom Network Services, Inc. (10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE. (10.18) -- Common Stock Purchase Agreement, dated as of December 13, 1998, with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K, filed December 16, 1998). (10.19) -- Registration Rights Agreement, dated as of December 14, 1998, with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K, filed December 16, 1998). (10.20) -- Registration Rights Agreement, dated as of April 18, 1999, with Anschutz Company and Anschutz Family Investment Company LLC (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). (10.21) -- Common Stock Purchase Agreement, dated as of April 19, 1999, with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). (10.22) -- Registration Rights Agreement, dated as of April 19, 1999, with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). 10.23 -- Securities Purchase Agreement dated January 16, 2001 with BellSouth Corporation.
11 14
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.24) -- Purchase Agreement by and among Qwest, Slingshot Networks, LLC and Anschutz Digital Media, Inc., dated September 26, 1999 (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 1999). (10.25) -- Unit Purchase Agreement, dated June 21, 2000, by and among U.S. Telesource, Inc. and Anschutz Digital Media, Inc. (incorporated by reference to Qwest's quarterly report on form 10-Q for the quarter ended June 30, 2000). (10.26) -- Second Amended and Restated Operating Agreement of Slingshot Networks, LLC entered into as of June 21, 2000 between Anschutz Digital Media, Inc. and U.S. Telesource, Inc. (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000) (10.27) -- Employee Matters Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 1-14087). (10.28) -- Tax Sharing Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 1-14087). (10.29) -- 360-Day $4.0 billion Credit Agreement, dated as of May 5, 2000, among U S WEST, Inc., U S WEST Capital Funding, Inc., U S WEST Communications, Inc., the banks listed therein, and Morgan Guaranty Trust Company of New York, as administrative agent (incorporated by reference to U S WEST's quarterly report on Form 10-Q for the quarter ended March 31, 2000). (10.30) -- Purchase Agreement, dated July 3, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc. and Salomon Smith Barney Inc. (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000). (10.31) -- Purchase Agreement, dated August 16, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc. as Representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 2000). (10.32) -- Registration Rights Agreement, dated August 16, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc. as Representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 2000). 10.33 -- Purchase Agreement, dated February 7, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Banc of America Securities LLC and Chase Securities Inc. as Representatives of the several initial purchasers listed therein. 10.34 -- Registration Rights Agreement, dated February 14, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Banc of America Securities LLC and Chase Securities Inc. as Representatives of the several initial purchasers listed therein.
12 15
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.35) -- Form of Agreement for Purchase and Sale of Telephone Exchanges, dated as of June 16, 1999, between Citizens Utilities Company and U S WEST Communications, Inc. (incorporated by reference to U S WEST's Current Report on Form 8-K, dated June 17, 1999). 10.36 -- Qwest Communications International Inc., Deferred Compensation Plan for Nonemployee Directors, effective as of July 1, 2000.* 10.37 -- Amended and Restated Qwest Digital Media, LLC Growth Share Plan (as of June 1, 2000).* 12 -- Computation of Ratio of Earnings to Fixed Charges. 13 -- Portions of Qwest's Annual Report to shareowners for the fiscal year ended December 31, 2000. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Arthur Andersen LLP. (99) -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1999 (incorporated by reference to U S WEST's Annual Report on Form 10-K, File No. 1-14087, Paper Copy (P)).
- --------------- ( ) Previously filed. * Executive Compensation Plans and Arrangements. ** Incorporated by reference in Form S-1 as declared effective on June 23, 1997 (File No. 333-25391). *** Incorporated by reference to exhibit 4.1 in Form S-4 as declared effective on January 5, 1998 (File No. 333-42847). **** Incorporated by reference in Qwest's Form 10-K for the year ended December 31, 1997. # Portions have been omitted pursuant to a request for confidential treatment. 13 16 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Denver, State of Colorado, on March 15, 2001. Qwest Communications International Inc., a Delaware corporation By: /s/ ROBIN R. SZELIGA ---------------------------------- Robin R. Szeliga Senior Vice President -- Finance and Interim Chief Financial Officer (Principal Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLES DATE --------- ------ ---- /s/ PHILIP F. ANSCHUTZ Director, Chairman of the Board March 15, 2001 - ----------------------------------------------------- Philip F. Anschutz /s/ JOSEPH P. NACCHIO Director, Chairman and Chief March 15, 2001 - ----------------------------------------------------- Executive Officer Joseph P. Nacchio /s/ LINDA G. ALVARADO Director March 15, 2001 - ----------------------------------------------------- Linda G. Alvarado /s/ CRAIG R. BARRETT Director March 15, 2001 - ----------------------------------------------------- Craig R. Barrett /s/ HANK BROWN Director March 15, 2001 - ----------------------------------------------------- Hank Brown /s/ THOMAS J. DONOHUE Director March 15, 2001 - ----------------------------------------------------- Thomas J. Donohue /s/ JORDAN L. HAINES Director March 15, 2001 - ----------------------------------------------------- Jordan L. Haines /s/ CANNON Y. HARVEY Director March 15, 2001 - ----------------------------------------------------- Cannon Y. Harvey /s/ PETER S. HELLMAN Director March 15, 2001 - ----------------------------------------------------- Peter S. Hellman /s/ VINOD KHOSLA Director March 15, 2001 - ----------------------------------------------------- Vinod Khosla
14 17
SIGNATURE TITLES DATE --------- ------ ---- /s/ MARILYN C. NELSON Director March 15, 2001 - ----------------------------------------------------- Marilyn C. Nelson /s/ FRANK POPOFF Director March 15, 2001 - ----------------------------------------------------- Frank Popoff /s/ CRAIG D. SLATER Director March 15, 2001 - ----------------------------------------------------- Craig D. Slater /s/ W. THOMAS STEPHENS Director March 15, 2001 - ----------------------------------------------------- W. Thomas Stephens
15 18 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION ------- ----------- (2.1) -- Separation Agreement, dated June 5, 1998, between U S WEST, Inc. (renamed "MediaOne Group, Inc.") ("MediaOne Group") and USW-C, Inc (renamed U S WEST, Inc.) ("U S WEST"), (incorporated by reference to U S WEST's Current Report on Form 8-K/A dated June 26, 1998, File No. 1-14087). (2.2) -- Amendment to the Separation Agreement between MediaOne Group and U S WEST dated June 12, 1998 (incorporated by reference to U S WEST's Annual Report on Form 10-K/A for the year ended December 31, 1998, File No. 1-14087). (3.1) -- Amended and Restated Certificate of Incorporation of Qwest (incorporated by reference to Qwest's Registration Statement on Form S-4/A, File No. 333-81149, filed September 17, 1999). 3.2 -- Amended and Restated Bylaws of Qwest. (4.1)*** -- Indenture, dated as of October 15, 1997, with Bankers Trust Company (including form of Qwest's 9.47% Senior Discount Notes due 2007 and 9.47% Series B Senior Discount Notes due 2007 as an exhibit thereto). (4.2)**** -- Indenture, dated as of August 28, 1997, with Bankers Trust Company (including form of Qwest's 10 7/8% Series B Senior Discount Notes due 2007 as an exhibit thereto). (4.3)**** -- Indenture dated as of January 29, 1998 with Bankers Trust Company (including form of Qwest's 8.29% Senior Discount Notes due 2008 and 8.29% Series B Senior Discount Notes due 2008 as an exhibit thereto). (4.4) -- Indenture, dated as of November 4, 1998, with Bankers Trust Company (including form of Qwest's 7.50% Senior Discount Notes due 2008 and 7.50% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4 , File No. 333-71603, filed February 2, 1999). (4.5) -- Indenture, dated as of November 27, 1998, with Bankers Trust Company (including form of Qwest's 7.25% Senior Discount Notes due 2008 and 7.25% Series B Senior Discount Notes due 2008 as an exhibit thereto) (incorporated by reference to Qwest's Registration Statement on Form S-4, File No. 333-71603, filed February 2, 1999). (4.6) -- Registration Agreement, dated November 27, 1998, with Salomon Brothers Inc. relating to Qwest's 7.25% Senior Discount Notes due 2008 (incorporated by reference to Qwest's Registration Statement on Form S-4, File No. 333-71603, filed February 2, 1999). (4.7) -- Indenture, dated as of June 23, 1997, between LCI International, Inc. and First Trust National Association, as trustee, providing for the issuance of Senior Debt Securities, including Resolutions of the Pricing Committee of the Board of Directors establishing the terms of the 7.25% Senior Notes due June 15, 2007 (incorporated by reference to Exhibit 4(c) in LCI's Current Report on Form 8-K, dated June 23, 1997).
19
EXHIBIT NUMBER DESCRIPTION ------- ----------- (4.8) -- Registration Rights Agreement, dated August 20, 1999, between U S WEST Capital Funding, Inc., U S WEST, Inc., J.P. Morgan Securities, Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated (incorporated by reference to U S WEST's Form S-4 Registration Statement, File No. 333-92523, filed December 10, 1999). (4.9) -- Indenture, dated as of June 29, 1998, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., and The First National Bank of Chicago (now known as Bank One Trust Company, National Association), as Trustee (incorporated by reference to U S WEST's Current Report on Form 8-K, dated November 18, 1998, File No. 1-14087). (4.10) -- First Supplemental Indenture, dated as of June 30, 2000, by and among U S WEST Capital Funding, Inc., U S WEST, Inc., Qwest Communications International Inc., and Bank One Trust Company, as Trustee (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000). (10.1)** -- Growth Share Plan, as amended, effective October 1, 1996.* (10.2) -- Equity Incentive Plan, as amended (incorporated by reference from Exhibit A to Qwest's definitive proxy statement on Schedule 14A, filed March 17, 2000).* (10.3) -- Qwest Communications International Inc. Employee Stock Purchase Plan (incorporated by reference to Qwest's Preliminary Proxy Statement for the Annual Meeting of Stockholders filed February 26, 1999).* (10.4) -- Qwest Communications International Inc. Deferred Compensation Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* (10.5)**** -- Equity Compensation Plan for Non-Employee Directors.* (10.6) -- Qwest Communications International Inc. 401-K Plan (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 1998).* (10.7)** -- Employment Agreement dated December 21, 1996 with Joseph P. Nacchio.* (10.8)**** -- Growth Share Plan Agreement with Joseph P. Nacchio, effective January 1, 1997, and Amendment thereto.* (10.9)**** -- Non-Qualified Stock Option Agreement with Joseph P. Nacchio, effective June 23, 1997.* 10.11 -- Employment Agreement dated October 6, 1998 with Drake S. Tempest.* 10.12 -- Employment Agreement dated October 18, 2000 with Stephen M. Jacobsen.* 10.13 -- Employment Agreement dated May 20, 1999 with Afshin Mohebbi.* (10.14)**** -- Employment Agreement dated October 8, 1997 with Lewis O. Wilks.* (10.15)**# -- IRU Agreement dated as of October 18, 1996 with Frontier Communications International Inc. (10.16)**# -- IRU Agreement dated as of February 26, 1996 with WorldCom Network Services, Inc. (10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE. (10.18) -- Common Stock Purchase Agreement, dated as of December 13, 1998, with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K, filed December 16, 1998).
20
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.19) -- Registration Rights Agreement, dated as of December 14, 1998, with Microsoft Corporation (incorporated by reference to Qwest's Current Report on Form 8-K, filed December 16, 1998). (10.20) -- Registration Rights Agreement, dated as of April 18, 1999, with Anschutz Company and Anschutz Family Investment Company LLC (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). (10.21) -- Common Stock Purchase Agreement, dated as of April 19, 1999, with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). (10.22) -- Registration Rights Agreement, dated as of April 19, 1999, with BellSouth Enterprises, Inc. (incorporated by reference to Qwest's Current Report on Form 8-K/A, filed April 28, 1999). 10.23 -- Securities Purchase Agreement dated January 16, 2001 with BellSouth Corporation. (10.24) -- Purchase Agreement by and among Qwest, Slingshot Networks, LLC and Anschutz Digital Media, Inc., dated September 26, 1999 (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 1999). (10.25) -- Unit Purchase Agreement, dated June 21, 2000, by and among U.S. Telesource, Inc. and Anschutz Digital Media, Inc. (incorporated by reference to Qwest's quarterly report on form 10-Q for the quarter ended June 30, 2000). (10.26) -- Second Amended and Restated Operating Agreement of Slingshot Networks, LLC entered into as of June 21, 2000 between Anschutz Digital Media, Inc. and U.S. Telesource, Inc. (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000) (10.27) -- Employee Matters Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 1-14087). (10.28) -- Tax Sharing Agreement between MediaOne Group and U S WEST, dated June 5, 1998 (incorporated by reference to U S WEST's Current Report on Form 8-K/A, dated June 26, 1998, File No. 1-14087). (10.29) -- 360-Day $4.0 billion Credit Agreement, dated as of May 5, 2000, among U S WEST, Inc., U S WEST Capital Funding, Inc., U S WEST Communications, Inc., the banks listed therein, and Morgan Guaranty Trust Company of New York, as administrative agent (incorporated by reference to U S WEST's quarterly report on Form 10-Q for the quarter ended March 31, 2000). (10.30) -- Purchase Agreement, dated July 3, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc. and Salomon Smith Barney Inc. (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended June 30, 2000). (10.31) -- Purchase Agreement, dated August 16, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc. as Representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 2000).
21
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.32) -- Registration Rights Agreement, dated August 16, 2000, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Salomon Smith Barney Inc. and Lehman Brothers Inc. as Representatives of the several initial purchasers listed therein (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended September 30, 2000). 10.33 -- Purchase Agreement, dated February 7, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Banc of America Securities LLC and Chase Securities Inc. as Representatives of the several initial purchasers listed therein. 10.34 -- Registration Rights Agreement, dated February 14, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Banc of America Securities LLC and Chase Securities Inc. as Representatives of the several initial purchasers listed therein. (10.35) -- Form of Agreement for Purchase and Sale of Telephone Exchanges, dated as of June 16, 1999, between Citizens Utilities Company and U S WEST Communications, Inc. (incorporated by reference to U S WEST's Current Report on Form 8-K, dated June 17, 1999). 10.36 -- Qwest Communications International Inc., Deferred Compensation Plan for Nonemployee Directors, effective as of July 1, 2000.* 10.37 -- Amended and Restated Qwest Digital Media, LLC Growth Share Plan (as of June 1, 2000).* 12 -- Computation of Ratio of Earnings to Fixed Charges. 13 -- Portions of Qwest's Annual Report to shareowners for the fiscal year ended December 31, 2000. Only the information incorporated by reference into this Form 10-K is included in the exhibit. 21 -- Subsidiaries of the Registrant. 23 -- Consent of Arthur Andersen LLP. (99) -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 1999 (incorporated by reference to U S WEST's Annual Report on Form 10-K, File No. 1-14087, Paper Copy (P)).
- --------------- ( ) Previously filed. * Executive Compensation Plans and Arrangements. ** Incorporated by reference in Form S-1 as declared effective on June 23, 1997 (File No. 333-25391). *** Incorporated by reference to exhibit 4.1 in Form S-4 as declared effective on January 5, 1998 (File No. 333-42847). **** Incorporated by reference in Qwest's Form 10-K for the year ended December 31, 1997. # Portions have been omitted pursuant to a request for confidential treatment. EX-3.2 2 d84707ex3-2.txt AMENDED & RESTATED BYLAWS 1 EXHIBIT 3.2 BYLAWS OF QWEST COMMUNICATIONS INTERNATIONAL INC. ARTICLE 1 OFFICES SECTION 1.01. Registered Office. The registered office of Qwest Communications International Inc. (the "Corporation") in the State of Delaware shall be at 1209 Orange Street, in the City of Wilmington, County of New Castle, 19801 and its registered agent at such address shall be The Corporation Trust Company, or such other office or agent as the Board of Directors of the Corporation (the "Board") shall from time to time select. SECTION 1.02. Other Offices. The Corporation may also have an office or offices, and keep the books and records of the Corporation, except as may otherwise be required by law, at such other place or places, either within or without the State of Delaware, as the Board may from time to time determine or the business of the Corporation may require. ARTICLE 2 MEETINGS OF STOCKHOLDERS SECTION 2.01. Place of Meeting. All meetings of the stockholders of the Corporation shall be held at the office of the Corporation or at such other places, within or without the State of Delaware, as may from time to time be fixed by the Board. SECTION 2.02. Annual Meetings. An annual meeting of the stockholders shall be held on such date and at such time as the Board shall fix in the notice of meeting 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 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 or officers of the Corporation. 1 2 SECTION 2.03. Special Meetings. Except as otherwise required by law or the Certificate of Incorporation of the Corporation (the "Certificate"), special meetings of the stockholders for any purpose or purposes may be called by any Chairman (as defined below), the Chief Executive Officer or a majority of the entire Board. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. SECTION 2.04. Notice of Meetings. Except as otherwise provided by law, written notice of each meeting of the stockholders, whether annual or special, shall be given, either by personal delivery or by mail, not less than 10 nor more than 60 days before the date of the meeting to each stockholder of record entitled to notice of the meeting. If mailed, such notice shall be deemed given when deposited in the United States mail, postage prepaid, directed to the stockholder at such stockholder's address as it appears on the records of the Corporation. Each such notice shall state the place, date and hour of the meeting, and the purpose or purposes for which the meeting is called. Notice of any meeting of stockholders shall not be required to be given to any stockholder who shall attend such meeting in person or by proxy without protesting, prior to or at the commencement of the meeting, the lack of proper notice to such stockholder, or who shall sign a written waiver of notice thereof, whether before or after such meeting. Notice of adjournment of a meeting of stockholders need not be given if the time and place to which it is adjourned are announced at such meeting, unless the adjournment is for more than 30 days or, after adjournment, a new record date is fixed for the adjourned meeting. SECTION 2.05. Quorum. Except as otherwise provided by law or by the Certificate, the holders of a majority of the votes entitled to be cast by the stockholders entitled to vote generally, present in person or by proxy, shall constitute a quorum for the transaction of business at any meeting of the stockholders; provided, however, that in the case of any vote to be taken by classes, the holders of a majority of the votes entitled to be cast by the stockholders of a particular class shall constitute a quorum for the transaction of business by such class. SECTION 2.06. Adjournments. The chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders who are present in person or by proxy may adjourn the meeting from time to time whether or not a quorum is present. In the event that a quorum does not exist with respect to any vote to be taken by a particular class, the chairman of the meeting or the holders of a majority of the votes entitled to be cast by the stockholders of such class who are present in person or by proxy may adjourn the meeting with respect to the vote(s) to be taken by such class. At such adjourned meeting at which a quorum may be present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 2.07. Order of Business. (a) At each meeting of the stockholders, any Chairman or, in the absence of all three members of the Office of the Chairman, the Chief Executive Officer or, in the absence of the Chief Executive Officer, such person as shall be selected by the Board shall act as chairman of the meeting. The order of business at 2 3 each such meeting shall be as determined by the chairman of the meeting. The chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Corporation, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the voting polls. (b) At any annual meeting of stockholders, only such business shall be conducted as shall have been brought before the annual meeting (i) by or at the direction of the chairman of the meeting, (ii) pursuant to the notice provided for in Section 2.04 or (iii) by any stockholder who is a holder of record at the time of the giving of such notice provided for in this Section 2.07, who is entitled to vote at the meeting and who complies with the procedures set forth in this Section 2.07. (c) For business properly to be brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation (the "Secretary"). 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 anniversary 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. To be in proper written form, a stockholder's notice to the Secretary shall set forth in writing as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address of the stockholder proposing such business and all persons or entities acting in concert with the stockholder; (iii) the class and number of shares of the Corporation which are beneficially owned by the stockholder and all persons or entities acting in concert with such stockholder; (iv) any material interest of the stockholder in such business; and (v) any additional information as the Board or the Chief Executive Officer of the Corporation shall deem necessary or desirable. The foregoing notice requirements shall be deemed satisfied by a stockholder if the stockholder has notified the Corporation of his or her intention to present a proposal at an annual meeting and such stockholder's proposal has been included in a proxy statement that has been prepared by management of the Corporation to solicit proxies for such annual meeting; provided, however, that if such stockholder does not appear or send a qualified representative to present such proposal at such annual meeting, the Corporation need not present such proposal for a vote at such meeting, notwithstanding that proxies in respect of such vote may have been received by the Corporation. Notwithstanding anything in the bylaws to the contrary, no business shall be conducted at 3 4 any annual meeting except in accordance with the procedures set forth in this Section 2.07. The chairman of an annual meeting shall, if the facts warrant, determine that business was not properly brought before the annual meeting in accordance with the provisions of this Section 2.07 and, if the chairman should so determine, the chairman shall so declare to the annual meeting and any such business not properly brought before the annual meeting shall not be transacted. SECTION 2.08. List of Stockholders. It shall be the duty of the Secretary or other officer who has charge of the stock ledger to prepare and make, at least 10 days before each meeting of the stockholders, a complete list of the stockholders entitled to vote thereat, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in such stockholder's name. Such list shall be produced and kept available at the times and places required by law. SECTION 2.09. Voting. (a) Except as otherwise provided by law or by the Certificate, each stockholder of record of any class or series of capital stock of the Corporation shall be entitled at each meeting of stockholders to such number of votes for each share of such stock as may be fixed in the Certificate or in the resolution or resolutions adopted by the Board providing for the issuance of such stock, registered in such stockholder's name on the books of the Corporation: (1) on the date fixed pursuant to Section 7.06 as the record date for the determination of stockholders entitled to notice of and to vote at such meeting; or (2) if no such record date shall have been so fixed, then at the close of business on the day next preceding the day on which notice of such meeting is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (b) Each stockholder entitled to vote at any meeting of stockholders may authorize not in excess of three persons to act for such stockholder by proxy. Any such proxy shall be delivered to the secretary of such meeting at or prior to the time designated for holding such meeting. No such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. (c) At each meeting of the stockholders, all corporate actions to be taken by vote of the stockholders (except as otherwise required by law and except as otherwise provided in the Certificate or these bylaws) shall be authorized by a majority of the votes cast by the stockholders entitled to vote thereon who are present in person or represented by proxy, and where a separate vote by class is required, a majority of the votes cast by the stockholders of such class who are present in person or represented by proxy shall be the act of such class. 4 5 (d) Unless required by law or determined by the chairman of the meeting to be advisable, the vote on any matter, including the election of directors, need not be by written ballot. In the case of a vote by written ballot, each ballot shall be signed by the stockholder voting, or by such stockholder's proxy. SECTION 2.10. Inspectors. The chairman of the meeting shall appoint one or more inspectors to act at any meeting of stockholders. Such inspectors shall perform such duties as shall be specified by the chairman of the meeting. Inspectors need not be stockholders. No director or nominee for the office of director shall be appointed such inspector. ARTICLE 3 BOARD OF DIRECTORS SECTION 3.01. General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or by the Certificate directed or required to be exercised or done by the stockholders. SECTION 3.02. Number, Qualification and Election. (a) Until June 30, 2003, except as otherwise provided in the Certificate, the total number of directors constituting the whole Board shall be fourteen. After June 30, 2003, the total number of directors constituting the whole Board initially shall be fourteen and thereafter shall be as determined from time to time by the Board, provided, however, that any reduction in the total number of directors constituting the whole Board shall not terminate the term of any director then in office. Initially, U S WEST, Inc. ("U S WEST") shall have designated seven members of the Board (the "U S WEST Designees") and the Corporation shall have designated seven members of the Board (the "Corporation Designees"). Until June 30, 2003, the U S WEST Designees shall have the right to nominate seven members of the Board and Corporation Designees shall have the right to nominate seven members of the Board; any vacancy created on the Board as a result of any such nominee leaving the Board shall be filled by the remaining U S WEST Designees or Corporation Designees, as applicable, on the Board who nominated such person leaving the Board; and to the extent the Corporation has a classified Board, each class of directors shall contain as even a number of U S WEST Designees and Corporation Designees as possible. (b) The directors, other than those who may be elected by the holders of shares of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation pursuant to the terms of Article 5 of the Certificate or any resolution or resolutions providing for the issuance of such stock adopted by the Board, shall be classified, with respect to the time for which they severally hold office, into three classes as nearly equal in number as possible, with each class to hold office until its successors are elected and qualified. Subject to the rights of the 5 6 holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, at each such annual meeting of the stockholders, the successors of the class of directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election. (c) Each director shall be at least 21 years of age. Directors need not be stockholders of the Corporation. (d) In any election of directors held at a meeting of stockholders, the persons receiving a plurality of the votes cast by the stockholders entitled to vote thereon at such meeting who are present or represented by proxy, up to the number of directors to be elected in such election, shall be deemed elected. SECTION 3.03. Notification of Nomination. Subject to Section 3.02(a), and subject to the rights of the holders of any class or series of stock having a preference over the common stock as to dividends or upon liquidation, nominations for the election of directors may be made by the Board or by any stockholder who is a stockholder of record at the time of giving of the notice of nomination provided for in this Section 3.03 and who is entitled to vote for the election of directors. Any stockholder of record entitled to vote for the election of directors at a meeting may nominate persons for election as directors only if timely written notice of such stockholder's intent to make such nomination is given, either by personal delivery or by United States mail, postage prepaid, to the Secretary in accordance with Section 2.07(c). Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination, of all persons or entities acting in concert with the stockholder, and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or entities acting in concert with the stockholder (naming such person or entities) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by the stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (e) the class and number of shares of the Corporation that are beneficially owned by the stockholder and all persons or entities acting in concert with the stockholder; and (f) the consent of each nominee to being named in a proxy statement as nominee and to serve as a director of the Corporation if so elected. The chairman of the meeting may refuse to acknowledge the nomination of any person not made after compliance with the foregoing procedure. Only such persons who are nominated in accordance with the procedures set forth in this Section 3.03 (or in accordance with Section 3.02(a)) shall be eligible to serve as directors of the Corporation. 6 7 SECTION 3.04. Quorum and Manner of Acting. Except as otherwise provided by law, the Certificate or these bylaws, a majority of the entire Board shall constitute a quorum for the transaction of business at any meeting of the Board, and, except as so provided, the vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board. The chairman of the meeting or a majority of the directors present may adjourn the meeting to another time and place whether or not a quorum is present. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called. SECTION 3.05. Place of Meeting. The Board may hold its meetings at such place or places within or without the State of Delaware as the Board may from time to time determine or as shall be specified or fixed in the respective notice or waivers of notice thereof. SECTION 3.06. Regular Meetings. Regular meetings of the Board shall be held at such times and places as the Office of the Chairman or the Board shall from time to time by resolution determine. If any day fixed for a regular meeting shall be a legal holiday under the laws of the place where the meeting is to be held, the meeting which would otherwise be held on that day shall be held at the same hour on the next succeeding business day. SECTION 3.07. Special Meetings. Special meetings of the Board shall be held whenever called by the Office of the Chairman or by a majority of the directors. SECTION 3.08. Notice of Meetings. Notice of regular meetings of the Board or of any adjourned meeting thereof need not be given. Notice of each special meeting of the Board shall be given by overnight delivery service or mailed to each director, in either case addressed to such director at such director's residence or usual place of business, at least two days before the day on which the meeting is to be held or shall be sent to such director at such place electronically or by telecopy or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any director who shall, either before or after the meeting, submit a signed waiver of such notice or who shall attend such meeting without protesting, prior to or at its commencement, the lack of notice to such director. Every such notice shall state the time and place but need not state the purpose of the meeting. SECTION 3.09. Rules and Regulations. The Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these bylaws for the conduct of its meetings and management of the affairs of the Corporation as the Board may deem proper. SECTION 3.10. Participation in Meeting by Means of Communication Equipment. Any one or more members of the Board or any committee thereof may participate in any meeting of the Board or of any such committee by means of conference telephone or 7 8 similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at such meeting. SECTION 3.11. Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all of the members of the Board or of any such committee consent thereto in writing and the writing or writings are filed with the minutes of the proceedings of the Board or of such committee. SECTION 3.12. Resignations. Any director of the Corporation may at any time resign by giving written notice to the Board, any Chairman, the Chief Executive Officer, the President or the Secretary. Such resignation shall take effect at the time specified therein or, if the time be not specified therein, upon receipt thereof; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.13. Removal of Directors. Directors may be removed only as provided in Section 6.05 of the Certificate. SECTION 3.14. Vacancies. Subject to Section 3.02(a), and subject to the rights of the holders of any class or series of stock having a preference over the common stock of the Corporation as to dividends or upon liquidation, any vacancies on the Board resulting from death, resignation, removal or other cause shall only be filled by the Board by the affirmative vote of a majority of the remaining directors then in office, even though less than a quorum of the Board, or by a sole remaining director, and newly created directorships resulting from any increase in the number of directors shall be filled by the Board, or if not so filled, by the stockholders at the next annual meeting thereof or at a special meeting called for that purpose in accordance with Section 2.03. Any director elected in accordance with the preceding sentence of this Section 3.14 shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. SECTION 3.15. Compensation. Each director, in consideration of such person serving as a director, shall be entitled to receive from the Corporation such amount per annum and such fees for attendance at meetings of the Board or of committees of the Board, or both, as the Board shall from time to time determine. In addition, each director shall be entitled to receive from the Corporation reimbursement for the reasonable expenses incurred by such person in connection with the performance of such person's duties as a director. Nothing contained in this Section 3.15 shall preclude any director from serving the Corporation or any of its subsidiaries in any other capacity and receiving proper compensation therefor. 8 9 ARTICLE 4 COMMITTEES OF THE BOARD OF DIRECTORS SECTION 4.01. Establishment of Committees of the Board of Directors; Election of Members of Committees of the Board of Directors; Functions of Committees of the Board of Directors. The Board may, in accordance with and subject to the General Corporation Law of the State of Delaware, from time to time establish committees of the Board to exercise such powers and authorities of the Board, and to perform such other functions, as the Board may from time to time determine. Until June 30, 2003, except as otherwise provided by the Board, U S WEST Designees and Corporation Designees will be represented equally on all of the committees of the Board. SECTION 4.02. Procedures; Meetings; Quorum. Regular meetings of committees of the Board, of which no notice shall be necessary, may be held at such times and places as shall be fixed by resolution adopted by a majority of the members thereof. Special meetings of any committee of the Board shall be called at the request of a majority of the members thereof. Notice of each special meeting of any committee of the Board shall be given by overnight delivery service or mailed to each member, in either case addressed to such member at such member's residence or normal place of business, at least two days before the day on which the meeting is to be held or shall be sent to such members at such place electronically or by telecopy or be given personally or by telephone, not later than the day before the meeting is to be held, but notice need not be given to any member who shall, either before or after the meeting, submit a signed waiver of such notice or who shall attend such meeting without protesting, prior to it or at its commencement, the lack of such notice to such member. Any special meeting of any committee of the Board shall be a legal meeting without any notice thereof having been given, if all the members thereof shall be present thereat. Notice of any adjourned meeting of any committee of the Board need not be given. Any committee of the Board may adopt such rules and regulations not inconsistent with the provisions of law, the Certificate or these bylaws for the conduct of its meetings as such committee of the Board may deem proper. A majority of the members of any committee of the Board shall constitute a quorum for the transaction of business at any meeting, and the vote of a majority of the members thereof present at any meeting at which a quorum is present shall be the act of such committee. Each committee of the Board shall keep written minutes of its proceedings and shall report on such proceedings to the Board. ARTICLE 5 OFFICERS SECTION 5.01. Number; Term of Office. The officers of the Corporation shall be such officers as the Board may from time to time determine, which (a) until June 30, 2003, shall include an Office of the Chairman, which initially will consist of two 9 10 members, namely, Philip F. Anschutz and Joseph P. Nacchio; and (b) may include a Chief Executive Officer, President, Chief Financial Officer, General Counsel and one or more Vice Presidents (including, without limitation, Assistant, Executive and Senior Vice Presidents) and a Treasurer, Secretary and Controller and such other officers or agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions or duties as provided in these bylaws or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person's successor shall have been chosen and shall qualify, or until such person's death or resignation, or until such person's removal in the manner hereinafter provided. One person may hold the offices and perform the duties of any two or more of said officers; provided, however, that no officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law, the Certificate or these bylaws to be executed, acknowledged or verified by two or more officers. The Board may from time to time authorize any officer to appoint and remove any such other officers and agents and to prescribe their powers and duties. The Board may require any officer or agent to give security for the faithful performance of such person's duties. SECTION 5.02. Removal. Any officer may be removed, either with or without cause, by the Board at any meeting thereof or, except in the case of any officer elected by the Board, by any superior officer upon whom such power may be conferred by the Board. Until June 30, 2003, notwithstanding anything else in these bylaws, only the Board shall have the authority to remove from office and replace any member of the Office of the Chairman. SECTION 5.03. Resignation. Any officer may resign at any time by giving notice to the Board, the Chief Executive Officer or the Secretary. Any such resignation shall take effect at the date of receipt of such notice or at any later date specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 5.04. Vacancies. A vacancy in any office because of death, resignation, removal or any other cause may be filled for the unexpired portion of the term in the manner prescribed in these bylaws for election to such office. SECTION 5.05. Office of the Chairman; Members, Powers and Duties. Until June 30, 2003, (i) the Office of the Chairman will consist of two members, both of whom will individually be considered a Chairman of the Corporation (each member individually, a "Chairman"); and (ii) subject to the power and authority of the Board as required by applicable law, the Office of the Chairman shall, through one of its members so designated, chair all meetings of the Board and shall have the exclusive power and final authority with respect to the following matters (to the extent Board and/or stockholder action is not required by law): 10 11 (a) the approval of any acquisition or disposition of a business through a merger, strategic acquisition or disposition, asset purchase or sale, joint venture, partnership, lease arrangement or otherwise, in each case involving aggregate sale or purchase proceeds of up to $500 million; (b) the approval of any merger, consolidation or other similar type of transaction between the Corporation and any third party, in each case involving aggregate consideration (including the assumption of indebtedness) of up to $500 million; (c) the setting of general corporate strategy and direction involving approval of long term strategic plans and annual budgets and goals; (d) the allocation of capital resources including approval of the Corporation's annual capital budget and any material amendment or deviation therefrom; and (e) the termination or any significant diminution of the responsibilities of the officers in the eight most senior executive officers of the Corporation (or its subsidiaries) other than any member of the Office of the Chairman. Until June 30, 2003, to the extent Board action is required with respect to any matter referred to in items (a) through (e) above, the Office of the Chairman shall have the sole power and authority to present such matters to the Board. Until June 30, 2003, the Office of the Chairman shall take action by a unanimous vote. Until June 30, 2003, any Chairman shall have the right to call a special meeting of the Board or at a regularly called meeting to present any matter referred to in items (a) through (e) above for consideration by the full Board. Unless otherwise precluded from doing so by these bylaws, any Chairman may be a member of the committees of the Board. Any Chairman may be designated by the Board as an officer of the Corporation and may be elected by the Board as the Chief Executive Officer. In case of the absence or disability of both members of the Office of the Chairman or a vacancy in the Office of the Chairman, the Chief Executive Officer or, if none, the President shall exercise all the powers and perform all the duties of the Office of the Chairman. Until June 30, 2003, the Board shall set the compensation of the members of the Office of the Chairman. SECTION 5.06. Chief Executive Officer; Powers and Duties. Subject to the control of the Board, the Chief Executive Officer shall supervise and direct generally all the business and affairs of the Corporation. Any document may be signed by the Chief Executive Officer or any other person who may be thereunto authorized by the Board or the Chief Executive Officer. The Chief Executive Officer may appoint such assistant officers as are deemed necessary. SECTION 5.07. President, Executive Vice Presidents, Senior Vice Presidents and Vice Presidents; Powers and Duties. The President shall be the chief operating officer of the Corporation. The President and each Executive Vice President, each Senior Vice 11 12 President, and each Vice President shall have such powers and perform such duties as may be assigned by the Board of Directors or the Chief Executive Officer. SECTION 5.08. Secretary and Assistant Secretaries; Powers and Duties. The Secretary shall attend all meetings of the stockholders and the Board and shall keep the minutes for such meetings in one or more books provided for that purpose. The Secretary shall be custodian of the corporate records, except those required to be in the custody of the Treasurer or the Controller, shall keep the seal of the Corporation, and shall execute and affix the seal of the Corporation to all documents duly authorized for execution under seal on behalf of the Corporation, and shall perform all of the duties incident to the office of Secretary, as well as such other duties as may be assigned by the Chief Executive Officer or the Board. The Assistant Secretaries shall perform such of the Secretary's duties as the Secretary shall from time to time direct. In case of the absence or disability of the Secretary or a vacancy in the office, an Assistant Secretary designated by the Chief Executive Officer or by the Secretary, if the office is not vacant, shall perform the duties of the Secretary. SECTION 5.09. Chief Financial Officer; Powers and Duties. The Chief Financial Officer shall be responsible for maintaining the financial integrity of the Corporation, shall prepare the financial plans for the Corporation, and shall monitor the financial performance of the Corporation and its subsidiaries, as well as performing such other duties as may be assigned by the Chief Executive Officer or the Board. SECTION 5.10. Treasurer and Assistant Treasurers; Powers and Duties. The Treasurer shall have care and custody of the funds and securities of the Corporation, shall deposit such funds in the name and to the credit of the Corporation with such depositories as the Treasurer shall approve, shall disburse the funds of the Corporation for proper expenses and dividends, and as may be ordered by the Board, taking proper vouchers for such disbursements. The Treasurer shall perform all of the duties incident to the office of Treasurer, as well as such other duties as may be assigned by the Chief Executive Officer or the Board. The Assistant Treasurers shall perform such of the Treasurer's duties as the Treasurer shall from time to time direct. In case of the absence or disability of the Treasurer or a vacancy in the office, an Assistant Treasurer designated by the Chief Executive Officer or by the Treasurer, if the office is not vacant, shall perform the duties of the Treasurer. SECTION 5.11. General Counsel; Powers and Duties. The General Counsel shall be the chief legal officer of the Corporation. The General Counsel shall have such power and exercise such authority and provide such counsel to the Corporation as deemed necessary or desirable to enforce the rights and protect the property and integrity of the Corporation, shall also have the power, authority, and responsibility for securing for the 12 13 Corporation all legal advice, service, and counseling, and shall perform all of the duties incident to the office of General Counsel, as well as such other duties as may be assigned by the Chief Executive Officer or the Board. SECTION 5.12. Controller and Assistant Controllers; Powers and Duties. The Controller shall keep and maintain in good and lawful order all accounts required by law and shall have sole control over, and ultimate responsibility for, the accounts and accounting methods of the Corporation and the compliance of the Corporation with all systems of accounts and accounting regulations prescribed by law. The Controller shall audit, to such extent and at such times as may be required by law or as the Controller may think necessary, all accounts and records of corporate funds or property, by whomsoever kept, and for such purposes shall have access to all such accounts and records. The Controller shall make and sign all necessary and proper accounting statements and financial reports of the Corporation, and shall perform all of the duties incident to the office of Controller, as well as such other duties as may be assigned by the Chief Executive Officer or the Board. The Assistant Controllers shall perform such of the Controller's duties as the Controller shall from time to time direct. In case of the absence or disability of the Controller or a vacancy in the office, an Assistant Controller designated by the Chief Executive Officer or the Controller, if the office is not vacant, shall perform the duties of the Controller. SECTION 5.13. Salaries. Subject to the last sentence of Section 5.05, the salaries of all officers of the Corporation shall be fixed by or in the manner provided by the Board. Subject to the last sentence of Section 5.05, if authorized by a resolution of the Board, the salary of any officer other than the Chief Executive Officer may be fixed by the Chief Executive Officer or a Committee of the Board. Until June 30, 2003, the compensation committee of the Board shall have the right to approve the filling of any vacancy created in any of the officer positions (exclusive of the Office of the Chairman) as set forth in the letter of understanding between U S WEST and the Corporation dated July 18, 1999 and the setting of salary levels of such executives. No officer shall be disqualified from receiving a salary by reason of also being a director of the Corporation. ARTICLE 6 INDEMNIFICATION SECTION 6.01. Scope of Indemnification. (a) The Corporation shall indemnify an indemnified representative against any liability incurred in connection with any proceeding in which the indemnified representative may be involved as a party or otherwise, by reason of the fact that such person is or was serving in an indemnified capacity, except to the extent that any such indemnification against a particular liability is expressly prohibited by applicable law or where a judgment or other final adjudication 13 14 adverse to the indemnified representative establishes, or where it is determined in accordance with applicable law, that his or her acts or omissions (i) were in breach of such person's duty of loyalty to the Corporation or its stockholders, (ii) were not in good faith or involved intentional misconduct or a knowing violation of law, or (iii) resulted in receipt by such person of an improper personal benefit. The rights granted by this Article 6 shall not be deemed exclusive of any other rights to which those seeking indemnification, contribution, or advancement of expenses may be entitled under any statute, certificate of incorporation, agreement, contract of insurance, vote of stockholders or disinterested directors, or otherwise. The rights of indemnification and advancement of expenses provided by or granted pursuant to this Article 6 shall continue as to a person who has ceased to be an indemnified representative in respect of matters arising prior to such time and shall inure to the benefit of the heirs, executors, administrators and personal representatives of such a person. (b) If an indemnified representative is not entitled to indemnification with respect to a portion of any liabilities to which such person may be subject, the Corporation shall nonetheless indemnify such indemnified representative to the maximum extent for the remaining portion of the liabilities. (c) The termination of a 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 indemnified representative is not entitled to indemnification. (d) To the extent permitted by law, the payment of indemnification provided for by this Article 6, including the advancement of expenses pursuant to Section 6.02, with respect to proceedings other than those brought by or in the right of the Corporation, shall be subject to the conditions that the indemnified representative shall give the Corporation prompt notice of any proceeding, that the Corporation shall have complete charge of the defense of such proceeding and the right to select counsel for the indemnified representative, and that the indemnified representative shall assist and cooperate fully in all matters respecting the proceeding and its defense or settlement. The Corporation may waive any or all of the conditions set forth in the preceding sentence. Any such waiver shall be applicable only to the specific payment for which the waiver is made and shall not in any way obligate the Corporation to grant such waiver at any future time. In the event of a conflict of interest between the indemnified representative and the Corporation that would disqualify the Corporation's counsel from representing the indemnified representative under the rules of professional conduct applicable to attorneys, it shall be the policy of the Corporation to waive any or all of the foregoing conditions subject to such limitations or conditions as the Corporation shall deem to be reasonable in the circumstances. (e) For purposes of this Article 6: 14 15 (1) "indemnified capacity" means any and all past, present, or future services by an indemnified representative in one or more capacities as a director, officer, employee, or agent of the Corporation or, at the request of the Corporation, as a director, officer, employee, agent, fiduciary, or trustee of another corporation, partnership, joint venture, trust, employee benefit plan, or other entity or enterprise; any indemnified representative serving an affiliate of the Corporation in any capacity shall be deemed to be doing so at the request of the Corporation; (2) "affiliate of the Corporation" means an entity that directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the Corporation; (3) "indemnified representative" means any and all directors, officers, and employees of the Corporation and any other person designated as an indemnified representative by the Board; (4) "liability" means any damage, judgment, amount paid in settlement, fine, penalty, punitive damage, excise tax assessed with respect to an employee benefit plan, or cost or expense of any nature (including, without limitation, expert witness fees, costs of investigation, litigation and appeal costs, attorneys' fees, and disbursements); and (5) "proceeding" means any threatened, pending, or completed action, suit, appeal, or other proceeding of any nature, whether civil, criminal, administrative, or investigative, whether formal or informal, whether external or internal to the Corporation, and whether brought by or in the right of the Corporation, a class of its security holders or otherwise. SECTION 6.02. Advancing Expenses. All reasonable expenses incurred in good faith by an indemnified representative in advance of the final disposition of a proceeding described in Section 6.01 shall be advanced to the indemnified representative by the Corporation. Before making any such advance payment of expenses, the Corporation shall receive an undertaking by or on behalf of the indemnified representative to repay such amount if it shall ultimately be determined that such indemnified representative is not entitled to be indemnified by the Corporation pursuant to this Article 6. No advance shall be made by the Corporation if a determination is reasonably and promptly made by a majority vote of disinterested directors, even if the disinterested directors constitute less than a quorum, or (if such a quorum is not obtainable or, even if obtainable, a quorum of disinterested directors so directs) by independent legal counsel in a written opinion, that, based upon the facts known to the Board or counsel at the time such determination is made, the indemnified representative has acted in such a manner as to permit or require the denial of indemnification pursuant to the provisions of Section 6.01. 15 16 ARTICLE 7 CAPITAL STOCK SECTION 7.01. Share Ownership. (a) Holders of shares of stock of each class of the Corporation shall be recorded on the books of the Corporation and ownership of such stock shall be evidenced by a certificate or other form as shall be approved by the Board. Certificates representing shares of stock of each class, if any, shall be signed by, or in the name of, the Corporation by any Chairman or the President, any Vice President and by the Secretary or any Assistant Secretary or the Treasurer or any Assistant Treasurer of the Corporation, and sealed with the seal of the Corporation, which may be a facsimile thereof. Any or all such signatures may be facsimiles if countersigned by a transfer agent or registrar. Although any officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if such officer, transfer agent or registrar were still such at the date of its issue. (b) The stock ledger and blank share certificates shall be kept by the Secretary or by a transfer agent or by a registrar or by any other officer or agent designated by the Board. SECTION 7.02. Transfer of Shares. Transfers of shares of stock of each class of the Corporation shall be made only on the books of the Corporation by the holder thereof, or by such holder's attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or a transfer agent for such stock, if any, and on surrender of the certificate or certificates, if any, for such shares properly endorsed or accompanied by a duly executed stock transfer power (or by proper evidence of succession, assignment or authority to transfer) and the payment of any taxes thereon; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. The person in whose name shares are registered on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation; provided, however, that whenever any transfer of shares shall be made for collateral security and not absolutely, and written notice thereof shall be given to the Secretary or to such transfer agent, such fact shall be stated in the entry of the transfer. No transfer of shares shall be valid as against the Corporation, its stockholders and creditors for any purpose, except to render the transferee liable for the debts of the Corporation to the extent provided by law, until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred. SECTION 7.03. Registered Stockholders and Addresses of Stockholders. (a) The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of stock to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments a person registered on its records 16 17 as the owner of shares of stock, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of stock 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. (b) Each stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be given to such person, and, if any stockholder shall fail to designate such address, corporate notices may be given to such person at such person's post office address, if any, as the same appears on the stock record books of the Corporation or at such person's last known post office address. SECTION 7.04. Lost, Destroyed and Mutilated Certificates. The Corporation may issue to any holder of shares of stock the certificate for which has been lost, stolen, destroyed or mutilated a new certificate or certificates for shares, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction. The Board, or a committee designated thereby, or the transfer agents and registrars for the stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person's legal representative, to give the Corporation a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and said transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. SECTION 7.05. Regulations. The Board may make such additional rules and regulations as it may deem expedient concerning the issue and transfer of shares of stock of each class of the Corporation and may make such rules and take such action as it may deem expedient concerning the issue of certificates in lieu of certificates claimed to have been lost, destroyed, stolen or mutilated. SECTION 7.06. Fixing Date for Determination of Stockholders of Record. In order that the Corporation may determine the 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 or any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than 60 nor less than 10 days before the date of such meeting, nor more than 60 days prior to any other action. A determination of stockholders entitled to notice of or to vote at a meeting of the stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. SECTION 7.07. Transfer Agents and Registrars. The Board may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. 17 18 ARTICLE 8 SEAL The Board shall provide a corporate seal, which shall be in the form of a circle and shall bear the full name of the Corporation and the words and figures of "Corporate Seal Delaware", or such other words or figures as the Board may approve and adopt. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. ARTICLE 9 FISCAL YEAR The fiscal year of the Corporation shall end on the 31st day of December in each year. ARTICLE 10 AMENDMENTS Any bylaw may be adopted, repealed, altered or amended by the affirmative vote of two-thirds of the entire Board at any meeting thereof; provided that notwithstanding anything else in these bylaws, the first, third, and fourth sentences of Section 3.02(a), the second sentence of Section 4.01, Section 5.01(a), the second sentence of Section 5.02, Section 5.05 (except for the third, fourth, and fifth sentences of the last paragraph thereof), the third sentence of Section 5.13, this proviso in this first sentence of Article 10, and the last sentence of Article 10 may only be amended or repealed by an affirmative vote of three-fourths of the Board at any meeting thereof. The stockholders of the Corporation shall have the power to amend, alter or repeal any provision of these bylaws only to the extent and in the manner provided in the Certificate. 18 EX-10.11 3 d84707ex10-11.txt EMPLOYMENT AGREEMENT DATED OCTOBER 6, 1998 1 EXHIBIT 10.11 [QWEST(R) LETTERHEAD] October 6, 1998 Mr. Drake Tempest [Address] Dear Drake: This letter is intended to set forth the terms and conditions of an employment offer for you to come to work for Qwest as EXECUTIVE VICE-PRESIDENT AND GENERAL COUNSEL and to be an Officer for Qwest Communications International Inc. Initially, you will be assigned to Qwest's New York or New Jersey office. However, it is understood that although initially based in the New York area, you will be available to provide your services in Denver during regular business hours. 1. In the event that you relocate to Denver, you will be entitled to be reimbursed for your moving expenses up to a maximum reimbursement of $150,000. Included in your reimbursable expenses are the cost of selling your current home, expenses related to purchasing a new home in Denver, moving expenses, house hunting trips, loss on sale of up to 10% of the purchase price of your current home, gross up of any reimbursed expenses which are treated as income to you, etc. The purpose of this provision is to make you whole for the costs and expenses you would incur in relocating to Denver. You will be reimbursed, by expense report, for your travel and related expenses in conjunction with your trips to Qwest's corporate offices in Denver. These expenses will be charged against your $150,000 relocation allowance. 2. Your annual base salary will be $250,000. 3. You are eligible to participate in Qwest's quarterly executive bonus plan. Your target bonus will be 90% of your base salary. You will be guaranteed your target bonus for the fourth quarter of 1998 and first quarter of 1999. Thereafter, you will participate in the executive bonus plan on the same basis as other senior executives. 4. Walk-Away/Sign-Up Bonus: You are entitled to the following payments to offset some of what you are losing by leaving O'Melveny and Myers, provided you are employed on the date(s) payments are to be made: 11/1/98 - $200,000 11/1/99 - $300,000 In the event of a change in control (within the meaning of Qwest's Equity Incentive Plan currently in effect), any payments not paid will become immediately due and payable. 2 Mr. Drake Tempest October 6, 1998 Page Two 5. You are entitled to participate in Qwest's Equity Incentive Plan. You will receive a non-qualified stock option grant on September 14, 1998 of 450,000 shares. These shares will vest at the rate of 20% per year five (5) years, starting with your first day of employment. All shares will automatically vest in the event of a change in control. The "strike" price will be 28 13/16, the price at the close of business on September 14, 1998. 6. You are entitled to be reimbursed for your COBRA payments until such time as you are covered by Qwest's medical plan and Qwest agrees to waive any pre-existing conditions for you and your family, if any. 7. If you are terminated for reasons other than cause, you are entitled to one (1) year's base salary in a lump sum payment on date of termination. If there is a change in control (within the meaning of Qwest's Equity Incentive Plan currently in effect), you are entitled to resign and receive the same payment on date of termination as if you were terminated. If your duties and responsibilities are adversely and materially diminished, you are entitled to resign and receive the same payment on date of termination as if you were terminated. 8. You are entitled to vacation and holiday time on the same basis as other senior executives which provides that you take vacation at such time as your job permits and observe company designated holidays. 9. If you leave the company, you agree that you are subject to the provisions of the enclosed confidentiality/non-solicitation/non-competition agreement. Your employment will begin on Tuesday, October 13, 1998. If the above terms and conditions are acceptable to you, please sign below and return a copy to me for our files. Sincerely, Joseph P. Nacchio President and Chief Executive Officer I accept the above offer: - -------------------------------------- Drake Tempest Date [RIDE THE LIGHT LOGO] EX-10.12 4 d84707ex10-12.txt EMPLOYMENT AGREEMENT DATED OCT. 18, 2000 1 EXHIBIT 10.12 EMPLOYMENT AGREEMENT This Employment Agreement ("Agreement") is entered into as of this 18th day of October, 2000, by and between Qwest Communications International Inc., a Delaware corporation (the "Company"), and Stephen Jacobsen (the "Employee"). WHEREAS, the Company desires to retain the Employee as President of Global Business Markets and Internet and Multi-Media Markets, and the Employee desires to accept such employment. NOW, THEREFORE, in consideration of the mutual covenants hereinafter contained, and for other good and valuable consideration, it is hereby agreed as follows: 1. Term. The term of this Agreement shall commence as of October 18, 2000, (the "Commencement Date") and continue for three (3) years therefrom (the "Term"); provided, however, that either party may terminate this Agreement consistent with paragraph 7 below at any time upon thirty (30) days written notice to the other party. 2. Duties. Employee is being promoted to the President of Global Business Markets and Internet and Multi-Media Markets. In his capacity as President of Global Business Markets and Internet and Multi-Media Markets, his duties will include management of all financial, marketing, distribution, operations, brand management and product management for internet services associated with business customers. The foregoing responsibilities may not be materially altered, diminished and/or increased without Employee's prior written approval. Employee shall report directly to the Chief Executive Officer and shall perform his obligations under this Agreement in Denver, Colorado except for normal business trips outside of Denver, Colorado. 3. Consideration as Chief Executive Officer. If Employee is successful in the position of President of Global Business Markets and Internet and Multi-media Markets, the Company's Board of Directors will, in good faith, consider him for the position of Chief Executive Officer either during the Term or immediately thereafter. If the Company offers Employee the position of Chief Executive Officer, it will renegotiate, in good faith, the terms and conditions of this Agreement to reflect the additional responsibilities the Employee will assume. 4. Indemnification. During the Term and all times thereafter, Company shall indemnify the Employee to the fullest extent permitted by applicable law, and the Employee shall be entitled to the protection of any insurance policies the Company may elect to maintain generally for the benefit of its directors and officers, with respect to all costs, charges and expenses, including attorney's fees, whatsoever incurred or sustained by the Employee in connection with any action, suit or proceeding to which he may be made a party by reason of being or having been a director, officer, shareholder or employee of the Company, or his serving or having served any other enterprise as a director, officer or employee at the request of the Company. 5. Compensation. During the Term, the Company shall pay to the Employee: (a) Base Salary. The Company shall pay Employee a base salary of Six Hundred Thousand Dollars ($600,000) per annum. Such Base Salary shall be payable in accordance with Company's regular payroll policies. Additionally, such Base Salary shall be subject to review at the end of each employment year (October 18th) for possible increase, but shall in no event be decreased from its then existing level. 2 (b) Performance Bonus Payments. Employee shall be eligible to participate in the Company's bonus program. Commencing with the Fourth Quarter of Calendar Year 2000, Employee's target bonus will be 105%. (c) Other Benefits. During the Term, the Employee shall be entitled to participate in all of the employee benefit plans, programs, perquisites and arrangements of the Company in effect during the Term that are generally available to the President Worldwide Operations and other direct reports to the Chief Executive Officer of the Company subject to, and on a basis consistent with, the terms, conditions and overall administration of such plans, programs and arrangements as applied to the President Worldwide Operations and other direct reports to the Chief Executive Officer. (d) Business Expenses. During the Term, the Company shall reimburse the Employee for all documented reasonable and customary business expenses incurred by the Employee in the performance of his duties under this Agreement and in accordance with the Company's policies regarding reimbursement of such expenses. (e) Stock Options. Company hereby grants an incentive stock option pursuant to the Company's stock option plan as amended October 4, 2000, to purchase 1,000,000 shares of the Company's common stock at an exercise price equal to the price of the Company's stock at the close of trading on October 18, 2000 (the "Option"). The Option vests over four (4) years in accordance with the following schedule: 200,000 options vest on October 18, 2001; 300,000 options vest on October 18, 2002; 250,000 options vest on October 18, 2003; and 250,000 vest on October 18, 2004. The term of the Option shall be ten (10) years from the date of the grant. 6. Most Favored Nation. During the Term, the Employee's compensation "package" including, but not limited to, Base Salary, Performance Bonus Payments, and stock options, will be, in each instance, at least as lucrative as the compensation "package" provided to any other officer of Company except for the one received by the Chief Executive Officer. This provision applies prospectively and does not apply to the "packages" already being received by any other officer of the company. 7. Termination (a) Termination for Cause by Employer or Resignation Without Good Reason by Employee. If Employee's employment is terminated for Cause (as defined below) or if Employee resigns without Good Reason (as defined below), the Company shall only be obligated to pay Employee his salary for work previously performed, a pro rata portion of Employee's Performance Bonus Payment, reimbursement of all outstanding business expenses, and it shall handle Employee's stock option rights in accordance with the provisions of the Stock Option Agreement, attached hereto as Exhibit "A." Additionally, Employee shall be eligible to continue any benefits required pursuant to federal or state laws and regulations, including COBRA. (b) Termination Without Cause by Employer or Resignation With Good Reason by Employee. If Employer terminates this Agreement without Cause (as defined below) or if Employee resigns for Good Reason (as defined below), Employee shall be entitled to receive two times his base pay and performance bonus. Finally, Employee shall be eligible to continuation of any benefits required pursuant to federal or state laws and regulations, including all COBRA. (c) Termination Upon Death. If Employee's employment is terminated as a result of his death, the Company shall pay to Employee's spouse and/or estate Employee's salary for work previously performed, a pro rata portion of Employee's Performance Bonus Payment, and reimbursement of all outstanding business expenses. The Company shall also provide Employee's spouse and/or estate the rights available to 3 them by law or pursuant to the terms and conditions of the Company's benefit plans, and any and all health, life or other insurance policies. Additionally, Company shall handle Employee's stock rights in accordance with the provisions of the Stock Option Agreement, attached hereto as Exhibit "A." 8. Definitions. "Cause," as it relates to termination by the Company, shall mean Employee's (i) conviction for a felony and/or any crime involving moral turpitude, (ii) act of fraud against, or the misappropriation of property belonging to the Company, and (iii) knowing and intentional breach in any material respect of the terms of this Agreement and the failure to cure such breach within ten (10) days of written notice of such breach by the Company. "Good Reason," as it relates to resignation by the Employee, shall mean the Company's (i) material breach of any provision of this Agreement and its failure to cure such breach within ten (10) days of written notice thereof; (ii) filing of a petition of bankruptcy or being adjudicated as bankrupt or insolvent, the making of an assignment for the benefit of creditors, any arrangement pursuant to any bankruptcy law, or if the Company discontinues its business or if a receiver is appointed for the Company which is not discharged within thirty (30) days thereafter; (iii) material diminution during the Term of the Employee's duties or responsibilities; (iv) change in Employee's current reporting relationship to the Chief Executive Officer; or (v) requirement that Employee perform his services for the Company outside of Denver, Colorado, with the exception of normal business trips outside of Denver, Colorado. 9. Amendment. This Agreement may not be amended, waived, changed, modified or discharged except by an instrument in writing executed by or on behalf of the party or parties against whom enforcement of such amendment, waiver, change, modification or discharge is sought. 10. Authority. The Company hereby covenants and represents that the person executing this Agreement on its behalf has both the authority to execute this Agreement on behalf of the Company and to bind it to the obligations set forth herein. 11. Notices. All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if delivered or mailed, by certified mail, return receipt requested, to the other party at his or its last known address. The date of such delivery shall be the date on which the notice, request or demand is actually received. All such notices should be addressed as follows: Qwest Communications International Inc. [Withheld] Stephen Jacobsen [Withheld] 12. Assignability. Neither the Employee nor the Company may assign, transfer, pledge or encumber its interest in this Agreement without the written consent of the other party. Subject to the foregoing, this Agreement shall be binding upon, and shall inure to the benefit of, the parties' assigns, heirs, executors, administrators and legal representatives. 13. Separability. In the event that any provision of this Agreement would be held to be invalid, prohibited or unenforceable for any reason, such provision shall be ineffective to the extent of such invalidity, prohibition or unenforceability, without invalidating the remaining provisions of this Agreement. 4 14. Integration. This Agreement supersedes all other employment agreements between the Company and Employee but does not affect any of Employees existing rights under any previous agreement including, but not limited to, any previous stock option grants that have been made to Employee. 15. Waiver. The failure of a party to insist upon strict adherence to any term, condition or other provision of this Agreement shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term, condition or other provision of this Agreement. 16. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Colorado. 5 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. QWEST COMMUNICATIONS INTERNATIONAL INC. By: ----------------------------------- Name: ----------------------------- Title: ---------------------------- EMPLOYEE: --------------------------------------- Stephen Jacobsen EX-10.13 5 d84707ex10-13.txt EMPLOYMENT AGREEMENT DATED MAY 20, 1999 1 EXHIBIT 10.13 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (the "Agreement") is made and entered into as of the 20th day of May 1999 ("Agreement Date"), by and between QWEST COMMUNICATIONS INTERNATIONAL INC., a Colorado corporation, having its principal executive offices in Denver Colorado (the "Company"), and AFSHIN MOHEBBI (the "Executive"). WHEREAS, the Company engages in the business of providing a broad range of telecommunication services and products; WHEREAS, the Executive desires to become employed by the Company as its President and Chief Operating Officer on the terms and conditions set forth here, and the Company desires to employ Executive in such capacity; NOW, THEREFORE in consideration of the mutual promises and agreements set forth below, the Company and the Executive hereby agree as follows: 1. TERM OF EMPLOYMENT. Subject to the terms of this Agreement, the Company hereby employs the Executive, and the Executive hereby accepts employment as President and Chief Operating Officer for the period beginning May 20, 1999, until terminated by either party in accordance with the terms of this Agreement. 2. POSITION AND DUTIES. a. The Executive shall serve as President and Chief Operating Officer of the Company and shall have such duties, responsibilities and authority as are customarily required of and given to a President and Chief Operating Officer and such other duties and responsibilities commensurate with such position as the Board of Directors ("Board") of the Company shall determine from time to time. b. The Executive will become a member of the board of directors of Qwest on the first anniversary of employment, and Qwest may decide to move up the timetable but is not obligated to do so. It is anticipated that the Executive will frequently attend board meetings to make presentations and to observe the discussion. c. The Executive may (i) with the express authorization of the Board, serve as a director or trustee of other for-profit corporations or businesses which are not in competition with the business of the Company, and (ii) serve on civic or charitable boards or committees. 3. COMPENSATION AND BENEFITS. a. Salary. Executive shall receive for services rendered an annual base salary of Five Hundred Thousand Dollars ($500,000) (the "Base Salary") payable in periodic installments in accordance with the Company's payroll practices. The Board will review the Executive's salary at least annually and may increase (but not reduce) the Executive's annual Base Salary in its sole discretion. Executive's first review shall be January 1, 2000. Once 2 increased, such Base Salary shall not be reduced. Executive's Base Salary as so increased shall thereafter be treated as his Base Salary hereunder. b. ANNUAL BONUS. The Executive shall be eligible to participate in the Company's quarterly executive bonus plan, and his target annual bonus shall be one hundred five percent (105%) of his Base Salary. The Executive shall receive a prorata bonus at the target bonus rate for the second quarter based on the amount of time he is employed at the Company. In addition, the Executive will be guaranteed a minimum bonus for the third and fourth quarters of 1999 at the target bonus rate, but the bonus can be higher if performance warrants it. c. BENEFITS. The Executive shall be entitled to participate in all benefit plans now existing or established hereafter for senior executives and employees to the extent that Executive is eligible under the general provisions of such plans. d. VACATION. The Executive shall be entitled to be covered by Qwest's time off with pay policy. e. TRAVEL, BUSINESS CLUB MEMBERSHIP AND EXPENSES. The Company shall reimburse the Executive all reasonable expenses incurred when performing his duties and responsibilities in accordance with the Company's expense reimbursement policies and guidelines. The Company shall also reimburse the Executive for reasonable attorneys' fees and charges incurred in connection with the separation of his employment with British Telecom, resolving the terms and conditions of the separation, negotiating and preparing the term sheets of employment at the Company and preparing and executing this Agreement. f. RELOCATION. The Company shall pay all reasonable expenses incurred by the Executive in relocating to Denver, Colorado, including moving expenses, costs of selling his current home (within the next 18 months), expenses related to purchasing a home in Denver and related expenses. g. INDEMNIFICATION. To the fullest extent permitted by the indemnification provisions of the Articles of Incorporation and Bylaws of the Company in effect as of the date of this Agreement, and the indemnification provision of the laws of the jurisdiction of the Company's incorporation in effect from time to time, the Company shall indemnify the Executive as a director, senior officer or employee of the Company against all liabilities and reasonable expenses that may be incurred in any threatened, pending or completed action, suit or proceeding, and shall pay for the reasonable expenses incurred by the Executive in the defense of or participation in any proceeding to which the Executive is a party because of his service to the Company. The rights of the Executive under this indemnification provision shall survive the termination of employment. 4. STOCK OPTIONS. The Executive will receive a non-qualified stock option grant of One Million Six Hundred Thousand (1,600,000) shares which will vest at the rate of twenty percent (20%) per year on the 1st, 2nd, 3rd, 4th and 5th anniversary of employment. The strike price of said options will be $39.4375. The Executive will receive a second option grant of Four Hundred Thousand (400,000) shares on the third anniversary of his employment on the same terms and conditions as the first grant except that the strike price will be the market price at the close of business on the date of the second grant. These option grants shall be adjusted to -2- 3 accommodate any stock "splits" which occur on or after May 27, 1999. The option shares referred to in this paragraph (1,600,000 share initial grant and 400,000 share grant on third anniversary of employment) will all automatically vest in the event of a Change of Control of the Company as that term is defined in the Qwest Communications International, Inc. Equity Incentive Plan in effect in May, 1999. In addition, Executive shall participate in all other regular option grants to executives in an amount that is commensurate with his position in the Company relative to others receiving grants. 5. LOAN. The Company shall provide the Executive a Six Hundred Thousand Dollars ($600,000) interest-free loan on his first day of employment to facilitate his transition to employment with the Company, and the loan will be forgiven in equal amounts over the next three (3) years on the first, second and third anniversary of his employment. Any unpaid balance on the loan shall be forgiven in the event of a Change of Control of the Company termination of his employment without cause, or termination by the Executive for good reason. 6. TERMINATION. a. TERMINATION FOR CAUSE. The Company may immediately terminate this Agreement for "cause" by giving written notice to the Executive. Any one or more of the following events shall constitute "cause": (1) Willfull misconduct with respect to the Company which is materially detrimental to the Company; (2) Conviction of (or pleading nolo contendre to) a felony; (3) Failure or refusal to attempt to follow the written direction of the Board within a reasonable period after receiving written notice; (4) Gross continuous nonfeasance with regard to the Executive's material duties, taken as a whole, which materially continue after a written notice thereof is given to the Executive. b. TERMINATION WITHOUT CAUSE. On sixty (60) days prior written notice, the Company may terminate the Executive without "cause" (as defined in Paragraph 6 above); provided, however, that the Company shall pay all accrued salary, bonus, vacation time, and benefits through the termination date. In addition, the Company shall pay to the Executive (i) an amount equal to twelve (12) months of his then Base Salary; (ii) a prorated bonus in an amount equal to the target bonus for the fiscal year in which the Executive is terminated based on the number of months employed during that fiscal year; and (iii) shall also provide for continuation of all existing employee benefits for a period of eighteen (18) months from the termination date unless Executive obtains benefits with another employer at an earlier date. The Company shall have the right to terminate this Agreement without cause based on the death or permanent disability of the Executive provided that the payments referred to in this Section 6.b are made to the Executive or his representative. -3- 4 c. TERMINATION BY EXECUTIVE FOR GOOD REASON. The Executive may terminate his employment for Good Reason upon written notice to the Company, and in such event, said employment termination shall be treated as termination by the Company for reasons other than good cause, and the Executive shall receive the payments referred to in the proceeding Paragraph 6.b. For purposes of this Agreement, Good Reason shall mean: (1) A diminution of the Executive's titles, offices, positions or authority; (2) The assignment to the Executive of any duties inconsistent with the Executive's position, authority or material responsibilities, or the removal of the Executive's authority or material responsibilities; (3) The failure by the Company to timely make any payment due hereunder or to comply with any of the material provisions of this Agreement; (4) The occurrence of a Change of Control of the Company, as defined in the Qwest Equity Incentive Plan; (5) The failure of the Company to elect or re-elect the Executive as a director of the Company, or the removal of the Executive at a director. 7. PROPRIETARY INFORMATION OBLIGATIONS. During the term of employment under this Agreement, the Executive will have access to and become acquainted with the Company's confidential and proprietary information (collectively, "Proprietary Information"), including but not limited to information or plans concerning Company's business, customer and technical information and records. Executive shall not disclose any of the Company's Proprietary Information, directly or indirectly, or use it in any way, either during the term of this Agreement or at any time thereafter, except as reasonably necessary in the course of his employment for the Company or is authorized in writing by the Company. All documents and records relating to the Company's business, whether prepared by the Executive or otherwise, coming into his possession, shall remain the Company's exclusive property and shall be returned to the Company on termination of employment. 8. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure to the benefit of and be enforceable by the Executive and the Company, and their respective successors and assigns, except that Executive may not assign any of his duties under this Agreement without the Company's prior written consent. 9. DISPUTE RESOLUTION AND BINDING ARBITRATION. The Executive and the Company agree that, if a dispute arises concerning or relating to Executive's employment with the Company or the terms and conditions to this Agreement, the dispute will be submitted to binding arbitration under the employment rules of the American Arbitration Association ("AAA") then in effect. The arbitration shall take place in Santa Clara County, California and both the Executive and the Company agree to submit to the jurisdiction of the arbitrator selected in accordance with the AAA rules and procedures. The arbitrator shall decide all issues relating to arbitrability. The costs of such arbitration, including the arbitrator's fees, shall initially be split evenly between the parties to the arbitration. If the Executive prevails as to -4- 5 any matter in such arbitration, the Company shall pay the reasonable attorneys fees and costs (including arbitrator fees, arbitration costs, etc.) incurred by the Executive in connection with those matters on which he prevails in an amount to be determined by the arbitrator. 10. CHOICE OF LAW. All questions concerning the construction validity and interpretation of this Agreement will be governed by the internal law, and not the law of conflicts, of the State of California. 11. SEVERABILITY. If any term, provision or part of this Agreement is found by a court to be invalid, illegal, or incapable of being enforced by any rule of law or public policy, all other terms, provisions and parts of this Agreement shall nevertheless remain in full force and effect as long as the economic or legal substance of the transactions contemplated hereby is not effected in any manner materially adverse to any party. 12. CONSTRUCTION. Each party has cooperated in the drafting and preparation of this Agreement. Hence, in any construction to be made of this Agreement, the same shall not be construed against any party on the basis that the party was the drafter. 13. ATTORNEYS FEES. If any legal proceeding is necessary to enforce or interpret the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys fees as well as costs and disbursements, in addition to any other relief to which the prevailing party may be entitled. 14. NOTICES. Any notices provided hereunder must be in writing and shall be deemed effective on the earlier of personal delivery (including personal delivery by telecopy or private overnight carrier) or the third day after mailing by first class mail to the recipient at the address indicated below: To the Company: [Withheld] To Executive: [Withheld] With a copy to: [Withheld] or to such other address or to the attention of such other person as the recipient party will have specified by prior written notice to the sending party. -5- 6 IN WITNESS WHEREOF, the parties now execute this Agreement, to be effective as of the Agreement Date first above written. QWEST COMMUNICATIONS INTERNATIONAL INC. By: ----------------------- EXECUTIVE: -------------------------- AFSHIN MOHEBBI -6- EX-10.23 6 d84707ex10-23.txt SECURITIES PURCHASE AGREEMENT 1 EXHIBIT 10.23 SECURITIES PURCHASE AGREEMENT This Securities Purchase Agreement (this "AGREEMENT") is entered into as of January 16, 2001, by and between QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation ("QCI"), and BELLSOUTH CORPORATION, a Georgia corporation ("BSC"). QCI and BSC are herein sometimes collectively referred to as the "PARTIES." AGREEMENT NOW, THEREFORE, the Parties, in consideration of the mutual covenants contained herein, and for other good and valuable consideration, the receipt of which is hereby acknowledged, covenant and agree with each other as follows: 1. DEFINITIONS. Unless otherwise defined herein the following terms have the following meanings: "AFFILIATE" means a Person that directly, or indirectly through one or more intermediaries, is controlled by, or is under common control with, a specified Person, or any Person in which a specified Person owns directly or indirectly more than a 10% equity interest. The term "control" (including, with correlative meanings, the terms "controlled by" and "under common control with") means the possession of power to direct the management and policies of the referenced Person, whether through ownership interests, by contract or otherwise. "BSC AFFILIATE" means any Affiliate of BSC. "BSC SHARES" means the shares of QCI's common stock (as such shares may be adjusted in the event of stock dividends, split ups, reverse split ups, mergers, recapitalizations, subdivisions, exchanges of shares or the like) ("QCI Stock") owned by BSC on the date hereof. Capitalized terms used herein without definitions have the meanings ascribed to such terms in the Master Agreement dated as of April 19, 1999 between Qwest Communications Corporation and BellSouth Value Added Services Holdings, Inc., as amended to the date hereof (the "Master Agreement"), and in the QCI Stock Purchase Agreement, as applicable. 2. AGREEMENT TO PURCHASE AND SELL SHARES. Subject to the terms and conditions contained herein, BSC hereby agrees to sell to QCI and QCI hereby agrees to purchase from BSC, 22,222,222 (the "Shares") of the 74,000,000 BSC Shares, at a price equal to $45.00 per share for an aggregate purchase price of $1,000,000,000 (the "Purchase Price"). The closing and the purchase and sale of the Shares (the "Closing") shall be held at the offices of BSC at 11:00 a.m. EST on the date hereof. At the closing, BSC will deliver to QCI one or more certificate(s) for the BSC Shares with a duly executed stock power in favor of QCI for the Shares, against payment of the aggregate Purchase Price by wire transfer of immediately available funds to an account designated by BSC. QCI will, as soon as practicable after the Closing, cause its transfer agent (i) to place 4,705,143 of the BSC Shares in an uncertificated "restricted stop" account, and (ii) to deliver 6 new certificates in the aggregate amount of 47,072,635 of the BSC Shares subject to the legends required under the Common Stock Purchase Agreement dated as of April 19, 1999 between BellSouth Enterprises, Inc. and QCI (the "QCI Stock Purchase Agreement") as well as a legend as follows: "The shares represented by this certificate are subject to restrictions on transfer, including any sale, pledge or other hypothecation, set forth in an Agreement dated as of January 16, 2001, between the Company and BellSouth Corporation, a copy of which may be obtained at no cost by written request 1 2 made by the holder of record of this certificate to the secretary of the Company at the Company's principal executive offices." QCI agrees to remove the above legend at such time as the BSC Shares may be transferred in compliance with the first sentence of paragraph 5A of this Agreement. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BSC. BSC hereby represents, warrants and covenants to QCI as follows: A. BSC is a corporation duly incorporated and validly existing and in good standing under the laws of the state of Georgia and has all necessary corporate power and authority to enter into this Agreement and to transfer the BSC Shares in accordance with the terms of this Agreement at the Closing (such BSC Shares collectively referred to as the "Transfer BSC Shares"), and this Agreement constitutes the legally valid and binding obligation of BSC enforceable against it in accordance with its terms. B. BSC beneficially owns and has the unrestricted right (other than as such right may be restricted by the Securities Act of 1933 as amended (the "Securities Act")) to transfer the Transfer BSC Shares, free and clear of all liens, claims, charges and other encumbrances (other than any restrictions under the QCI Stock Purchase Agreement). Upon completion of the Closing QCI will be the legal and beneficial owner of the Transfer BSC Shares, free and clear of all liens, claims, charges, transfer restrictions and other encumbrances (other than any restrictions under the Securities Act and the QCI Stock Purchase Agreement). C. The execution and delivery by BSC of this Agreement and the performance by BSC of its obligations hereunder, have been duly authorized by all necessary corporate action and do not and will not contravene, violate, result in a breach of or constitute a default under (i) its articles of incorporation or bylaws, (ii) any regulation of any governmental entity or any decision, ruling, order, or award of any court or any arbitrator applicable to it or any of its properties, or (iii) any agreement that BSC is a party to or by which it or any of its properties may be bound or affected. 4. REPRESENTATIONS AND WARRANTIES OF QCI. QCI hereby represents and warrants to BSC as follows: A. QCI is a corporation duly incorporated and validly existing and in good standing under the laws of the state of Delaware, and has all necessary corporate power and authority to enter into this Agreement and perform its obligations hereunder, including to purchase Transfer BSC Shares from BSC to be transferred on the date hereof under the terms described herein; and this Agreement constitutes the legally valid and binding obligation of QCI enforceable against it in accordance with its terms. B. The execution and delivery by QCI of this Agreement and the performance by QCI of its obligations hereunder, have been duly authorized by all necessary corporate action and do not and will not contravene, violate, result in a breach of or constitute a default under (i) its articles of incorporation or bylaws, (ii) any regulation of any governmental entity or any decision, ruling, order or award of any court or arbitrator applicable to it or any of its properties, or (iii) any agreement that QCI is a party to or by which it or any of its properties may be bound or affected. 5. COVENANTS WITH RESPECT TO BSC SHARES. A. Until the earliest of (i) the date of termination of the Master Agreement by Qwest (other than pursuant to Section 4.2(a) or 4.2(c) (with respect to an event relating to Vasco or its Controlled Affiliate) of the Master Agreement) and (ii) with respect to (x) 11,111,111 BSC Shares, February 16, 2001, and (y) 40,666,667 BSC Shares, January 16, 2002 and (iii) the happening of any event giving rise to early termination in Section 7.4 of the QCI Stock Purchase Agreement, BSC shall not, and shall not cause or permit its subsidiaries or any 2 3 Group, including BSC or any of its subsidiaries, to, directly or indirectly, Transfer any BSC Shares, other than a transfer permitted by Section 7.2(b)(1) or (2) of the QCI Stock Purchase Agreement or a Transfer contemplated by this Agreement or by the Services Purchase Agreement entered into as of the date hereof by and between QCI and BSC. Effective at the Closing, the QCI Stock Purchase Agreement shall hereby be amended to provide that the transfer restrictions contained in Section 7.2(d) thereof (as modified by Section 8.1(l)) shall remain in effect from the termination of the restrictions with respect to any BSC Shares contained in this Section until June 1, 2004. B. The certificates evidencing the Transfer BSC Shares will be properly endorsed for transfer to, or accompanied by, a duly executed stock power in favor of QCI. BSC will pay any transfer or recordation taxes payable with respect to the transfer of the Transfer BSC Shares. 6. GOVERNING LAW. This agreement shall be governed by and construed in accordance with the laws of the state of New York without regard to conflicts of law principles. 7. NO THIRD PARTY BENEFICIARIES. This Agreement does not provide and is not intended to provide third parties (including, but not limited to, customers of BSC and BSC Affiliates) with any remedy, claim, liability, reimbursement, cause of action, or any other right. 8. ASSIGNMENT. This Agreement and all of the provisions hereof will be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns. Neither party may assign, transfer or convey by operation of law or otherwise its rights or obligations hereunder. Any assignment, transfer or other disposition by either Party that is in violation of this Section shall be absolutely null and void ab initio. 9. NOTICES. Each notice, demand, certification or other communication given or made under this Agreement will be in writing and will be delivered by hand or sent by registered mail or by facsimile transmission to the address of the respective Party as shown below (or such other address as may be designated in writing to the other party hereto in accordance with the terms of this Section): If to QCI: Qwest Communications International Inc. 1801 California Street Denver, Colorado 80202 Attn: Chief Financial Officer With a copy addressed as set forth above, but to the attention of General Counsel If to BSC: BellSouth Corporation 1155 Peachtree Street, N.E. Atlanta, Georgia 30309-3610 Attn: [Withheld] With a copy addressed as set forth above but to the attention of [Withheld] Any change to the name, address and facsimile numbers may be made at any time by giving fifteen (15) days prior written notice in accordance with this Section. Any such notice, demand or other communication will be deemed to have been received, if delivered by hand, at the time of delivery or, if posted, at the expiration of five (5) Business Days after the date of mailing, or, if sent by facsimile, on the next Business Day following the day of sending. 3 4 10. SEVERABILITY. If any provision of this Agreement is determined to be invalid, illegal or unenforceable, such provision will be deemed to be deleted from this Agreement and the remaining provisions will continue in full force and effect. 11. HEADINGS. The Section headings of this Agreement are for convenience of reference only and are not intended to restrict, affect or influence the interpretation or construction of provisions of such Section. 12. TELECOPY/COUNTERPARTS. This Agreement and any amendment hereto or any document delivered pursuant hereto may be executed by telecopy in counterparts, each of which when executed and delivered will be deemed an original. Such counterparts will together (as well as separately) constitute one and the same instrument. Any execution by telecopy will be followed promptly by signed original counterparts. 13. ENTIRE AGREEMENT. This Agreement supersedes all prior or written understandings between the parties hereto and constitutes the entire agreement with respect to the subject matter herein and therein. This Agreement will not be modified or amended except by a writing signed by authorized representatives of the parties hereto. 14. DISPUTES. All disputes arising under or relating to this Agreement or the subject matter hereof shall be referred and resolved in accordance with Section 1.7 and 6.2 of the Master Agreement as if a "Dispute" thereunder, provided that upon termination of the Master Agreement, such disputes will be submitted first to the Executives and Section 1.7(c) shall be replaced by the following: (c) If the Senior Executive Officers are unable to resolve any such Dispute within such thirty-day period, it shall be deemed a "Section 6.2 Dispute" and either party may invoke the provisions of Section 6.2 of this Master Agreement. 15. PUBLICITY. BSC and QCI will agree on the form and content of the initial public announcement to be made concerning this Agreement and the transactions contemplated hereby, and neither BSC nor QCI shall make such public announcement without the consent of the other, except as required by law. 16. LIMITATION OF LIABILITY. In no event will BSC or QCI be liable to the other hereunder for consequential, incidental, indirect or special damages, including, but not limited to, loss of revenue, loss of business opportunity, or the costs associated therewith. 17. FEES AND EXPENSES. Each of BSC and QCI agrees to pay its own expenses and disbursements incident to the performance of its obligations hereunder. 4 5 IN WITNESS WHEREOF, the Parties have executed this Agreement effective on the date first written above. BELLSOUTH CORPORATION By: ------------------------------ Name: Title: QWEST COMMUNICATIONS INTERNATIONAL INC. By: ------------------------------ Name: Title: 5 EX-10.33 7 d84707ex10-33.txt PURCHASE AGREEMENT 1 EXHIBIT 10.33 PURCHASE AGREEMENT QWEST CAPITAL FUNDING, INC. $2,250,000,000 OF 7.25% NOTES DUE FEBRUARY 15, 2011 $1,000,000,000 OF 7.75% NOTES DUE FEBRUARY 15, 2031 UNCONDITIONALLY GUARANTEED AS TO PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST BY QWEST COMMUNICATIONS INTERNATIONAL INC. February 7, 2001 Banc of America Securities LLC Bank of America Corporate Center 100 North Tryon Street Charlotte, NC 28255 Chase Securities Inc. 270 Park Avenue New York, NY 10017 As Representatives of the several Initial Purchasers named in Schedule I hereto Ladies and Gentlemen: Qwest Capital Funding, Inc. (formerly known as U S WEST Capital Funding, Inc.), a Colorado corporation (the "COMPANY"), proposes to issue and sell to the several Initial Purchasers listed in Schedule I hereto (the "INITIAL PURCHASERS") for whom Banc of America Securities LLC and Chase Securities Inc. are acting as representatives (the "REPRESENTATIVES"), $2,250,000,000 of 7.25% Notes due February 15, 2011 (the "2011 NOTES") and $1,000,000,000 of 7.75% Notes due February 15, 2031 (the "2031 NOTES" together with the 2011 Notes, the "NOTES"). The Securities will be unconditionally guaranteed as to payment of principal, premium, if any, and interest (the "GUARANTEES" and together with the Notes, the "SECURITIES") by Qwest Communications International Inc. (as successor to U S WEST, Inc. ("U S WEST")), a Delaware corporation (the "GUARANTOR"), and will be issued pursuant to the provisions of an Indenture, dated as of June 29, 1998, as amended by the First Supplemental Indenture, dated as of June 30, 2000 (as so amended, the "INDENTURE"), among the Company, the Guarantor and Bank One Trust Company, National Association, as trustee (the "TRUSTEE"). The Securities will have the benefit of a Registration Rights Agreement, dated as of February 14, 2001 (the "REGISTRATION RIGHTS AGREEMENT"), among the Company, the Guarantor and the Initial Purchasers, pursuant to which the Company and the Guarantor have agreed, for the benefit of the Initial Purchasers and their respective direct and indirect transferees and assigns, to register the Securities under the Securities Act of 1933, as amended (the "SECURITIES ACT") subject to the terms and conditions therein specified. The sale of the Securities to the Initial Purchasers will be made without registration of the Securities under the Securities Act, in reliance upon exemptions therefrom. 1 2 In connection with the sale of the Securities, the Company and the Guarantor have prepared an offering memorandum dated February 13, 2001 (the "OFFERING MEMORANDUM"), for the information of the Initial Purchasers and for delivery to prospective purchasers of the Securities. The term Offering Memorandum shall be deemed to mean and include documents incorporated by reference therein. All references in this Agreement to financial statements and schedules and other information which is "contained," "included," "stated" or "given" in the Offering Memorandum (or other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information which is incorporated by reference in the Offering Memorandum. The Company and the Guarantor hereby agree with the Initial Purchasers as follows: 1. The Company agrees to issue and sell the Securities to the several Initial Purchasers as hereinafter provided, and each Initial Purchaser, upon the basis of the representations and warranties herein contained, but subject to the conditions hereinafter stated, agrees to purchase, severally and not jointly, from the Company the respective principal amount of 2011 Notes set forth opposite such Initial Purchaser's name in Schedule I hereto at a price (the "PURCHASE PRICE") equal to 99.543% of their principal amount, and the principal amount of 2031 Notes set forth opposite such Initial Purchaser's name in Schedule I hereto at a Purchase Price equal to 98.824% of their principal amount, plus in each case accrued interest, if any, from February 14, 2001 to the date of payment and delivery. 2. The Company and the Guarantor understand that the Initial Purchasers intend (i) to offer privately pursuant to Rule 144A ("Rule 144A") and pursuant to Regulation S ("Regulation S"), each under the Securities Act their respective portions of the Securities as soon after this Agreement has become effective as in the judgment of the Initial Purchasers is advisable and (ii) initially to offer the Securities upon the terms set forth in the Offering Memorandum. Each of the Company and the Guarantor confirms that it has authorized the Initial Purchasers, subject to the restrictions set forth below, to distribute copies of the Offering Memorandum in connection with the offering of the Securities. Each Initial Purchaser hereby severally makes to the Company and the Guarantor the following representations and agreements: (i) it is a "qualified institutional buyer" within the meaning of Rule 144A under the Securities Act; and (ii) (A) it will not solicit offers for, or offer to sell, the Securities by any form of general solicitation or general advertising (as those terms are used in Regulation D under the Securities Act ("REGULATION D")) and (B) it will solicit offers for the Securities only from, and will offer the Securities only to, persons whom it reasonably believes to be (x) in the case of offers inside the United States, "qualified institutional buyers" within the meaning of Rule 144A and (y) in the case of offers outside the United States, to persons other than U.S. persons, as defined under Regulation S ("FOREIGN PURCHASERS", which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust)) that, in each case, in purchasing the Securities are deemed to have represented and agreed as provided in the Offering Memorandum; With respect to offers and sales outside the United States, as described in clause (ii)(B)(y) above, each Initial Purchaser hereby represents and agrees with the Company and the Guarantor that: (i) it understands that no action has been or will be taken by the Company or the Guarantor that would permit a public offering of the Securities, or possession or distribution of the Offering Memorandum or any other offering or publicity material relating to the Securities, in any country or jurisdiction where action for that purpose is required; (ii) it will comply with all applicable laws and regulations in each jurisdiction in which it acquires, offers, sells or delivers Securities or has in its possession or distributes the Offering Memorandum or any such other material, (iii) it understands that the Securities have not been and will not be registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except in accordance with Regulation S or pursuant to an exemption from, or in a transaction not subject to, the registration requirements of the Securities Act; (iv) it has offered the Securities and will offer and sell the Securities (x) as part of its distribution at any time and (y) otherwise until 40 days after the later of the commencement of the offering and the Closing Date (as defined in Section 3 below), only in accordance with Rule 903 of Regulation S. Accordingly, neither such Initial Purchaser, nor any of its Affiliates, as defined under Regulation S-X under the Securities Act, nor any persons acting on its behalf has engaged or will engage 2 3 in any directed selling efforts (within the meaning of Regulation S) with respect to the Securities, and such Initial Purchaser, its Affiliates and any such persons have complied and will comply with the offering restrictions requirement of Regulation S; (v) it agrees that (i) it has not offered or sold Securities and, prior to six months after the issue date of such Securities, will not offer or sell any such Securities 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, (ii) it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the Securities in, from or otherwise involving the United Kingdom, and (iii) it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with an issue of Securities to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996 (as amended) or is a person to whom such document may otherwise lawfully be issued or passed on. Terms used in this Section 2 and not otherwise defined in this Agreement have the meanings given to them by Regulation S. 3. Payment for the Securities shall be made by wire transfer in immediately available funds to the account specified by the Company to the Representatives at 9:00 A.M., New York City time, on February 14, 2001, or at such other time on the same or such other date, not later than the third Business Day thereafter, as the Representatives and the Company may agree upon in writing. The time and date of such payment are referred to herein as the "CLOSING DATE". As used herein, the term "BUSINESS DAY" means any day other than a day on which banks are permitted or required to be closed in New York City. Payment for the Securities shall be made against delivery with respect to Securities to be resold to "qualified institutional buyers" by the Initial Purchasers, to the nominee of The Depository Trust Company for the respective accounts of the several Initial Purchasers of the Securities of one or more global notes (collectively, "RESTRICTED GLOBAL NOTES") representing such Securities and with respect to Securities to be resold to foreign purchasers by the Initial Purchasers, to the nominee of The Depository Trust Company for the respective accounts of the several Initial Purchasers of the Securities of one or more Regulation S global notes (collectively, the "REGULATION S GLOBAL NOTES" and, together with the Restricted Global Notes, the "GLOBAL NOTES") representing such Securities, with any transfer taxes payable in connection with the transfer to the Initial Purchasers of the Securities duly paid by the Company. The Global Notes will be made available for inspection by the Initial Purchasers at the office of Brown & Wood LLP, One World Trade Center, New York, New York 10048 not later than 1:00 P.M., New York City time, on the Business Day prior to the Closing Date. 4. The Company and the Guarantor represent and warrant to each Initial Purchaser that: (a) the Offering Memorandum will not, in the form used by the Initial Purchasers to confirm sales of the Securities and as of the Closing Date, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at such dates, not misleading; provided, however, that this representation and warranty shall not apply to any statements or omissions made in reliance upon and in conformity with written information furnished to the Company or the Guarantor by any Initial Purchaser, or on behalf of any Initial Purchaser by the Representatives, specifically for use therein; (b) the documents incorporated by reference in the Offering Memorandum (the "Incorporated Documents"), when they were filed with the Securities and Exchange Commission (the "Commission"), conformed in all material respects to the requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations of the Commission thereunder, and none of such documents contained an untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; and any further 3 4 documents so filed and incorporated by reference in the Offering Memorandum, when such documents are filed with the Commission, will conform in all material respects to the requirements of the Exchange Act, and will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; (c) the financial statements of U S WEST and the Guarantor, together with the related schedules and notes thereto, included and incorporated by reference in the Offering Memorandum present fairly the consolidated financial position of each such entity and its consolidated subsidiaries as of the dates indicated and the statement of operations, shareowners' equity and cash flows of each such entity and its consolidated subsidiaries for the periods specified; and said financial statements have been prepared in conformity with generally accepted accounting principles and practices applied on a consistent basis throughout the periods involved. The pro forma financial statements of the Guarantor and U S WEST and the related notes thereto included and incorporated by reference in the Offering Memorandum, to the best knowledge of the Company and the Guarantor, present fairly the information shown therein, have been prepared in accordance with the Commission's rules and guidelines with respect to the pro forma financial statements and have been properly compiled on the bases described therein and the assumptions used therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein; (d) since the respective dates as of which information is given in the Offering Memorandum, except as otherwise stated therein, (A) there has been no material adverse change in the financial condition or results of operations of the Company or of the Guarantor and its subsidiaries, taken as a whole (a "Material Adverse Effect"), (B) there have been no transactions entered into by the Company or by the Guarantor or any of its subsidiaries, other than those in the ordinary course of business, which are material with respect to the Company or the Guarantor and its subsidiaries, taken as a whole, and (C) there has been no dividend or distribution of any kind declared, paid or made by the Company or the Guarantor on any class of its capital stock, except for regular quarterly dividends on the Guarantor's common stock in amounts that are consistent with past practice; (e) this Agreement has been duly authorized, executed and delivered by each of the Company and the Guarantor; (f) the Indenture has been duly authorized, executed and delivered by each of the Company and the Guarantor and (assuming the due authorization, execution and delivery by the Trustee) constitutes the legal, valid and binding agreement of the Company and the Guarantor enforceable against each of them in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law); (g) the Registration Rights Agreement has been duly authorized by the Company and the Guarantor and, when executed and delivered by the Company and the Guarantor, will constitute a valid and binding agreement of each of the Company and the Guarantor, enforceable against the Company and the Guarantor in accordance with its terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and except that enforcement of rights to indemnification and contribution contained therein may be limited by applicable Federal or state laws or the public policy underlying such laws; (h) the Securities have been duly authorized and, at the Closing Date, will have been duly executed by the Company and, when authenticated, issued and delivered in the manner provided for in the Indenture and delivered against payment of the purchase price therefor as provided in this Agreement, will constitute 4 5 legal, valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture; (i) the Guarantees have been duly authorized and, at the Closing Date, will have been duly executed by the Guarantor and, when issued and delivered in the manner provided for in the Indenture, will constitute legal, valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture; (j) the Exchange Notes (as defined in the Registration Rights Agreement) have been duly authorized and, when authenticated, issued and delivered in the manner provided for in the Indenture and issued and delivered in exchange for the Securities Notes in the manner contemplated in the Registration Rights Agreement, will constitute valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law), and will be in the form contemplated by, and entitled to the benefits of, the Indenture; (k) the Exchange Guarantees (as defined in the Registration Rights Agreement) have been duly authorized and, when authenticated, issued and delivered in the manner provided for in the Indenture and issued and delivered in the manner contemplated in the Registration Rights Agreement, will constitute valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with their terms, except as the enforcement thereof may be limited by bankruptcy, insolvency (including, without limitation, all laws relating to fraudulent transfers), reorganization, moratorium or similar laws affecting enforcement of creditors' rights generally and except as enforcement thereof is subject to general principles of equity (regardless of whether enforcement is considered in a proceeding in equity or at law, and will be in the form contemplated by, and entitled to the benefit of the Indenture); (l) as of the Closing Date, the Securities, the Exchange Notes, the Exchange Guarantees, the Indenture and the Registration Rights Agreement will conform in all material respects to the respective statements relating thereto contained in the Offering Memorandum; (m) the execution, delivery and performance of this Agreement and the Registration Rights Agreement and the consummation of the transactions contemplated herein and therein (including, without limitation, the issuance and sale of the Securities and the Guarantees)) and compliance by the Company and the Guarantor with their respective obligations hereunder and thereunder have been duly authorized by all necessary corporate action and do not and will not, whether with or without the giving of notice or passage of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined below) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company, the Guarantor or any subsidiary of the Guarantor pursuant to, any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or other agreement or instrument to which the Company, the Guarantor or any subsidiary of the Guarantor is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company, the Guarantor or any subsidiary of the Guarantor is subject (collectively, "Agreements and Instruments") (except for such conflicts, breaches or defaults or liens, charges or encumbrances that would not result in a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or bylaws of the Company, the 5 6 Guarantor or any subsidiary of the Guarantor or, to the best knowledge of the Company and the Guarantor, any applicable law, statute, rule, regulation, judgment, order, writ or decree of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company, the Guarantor or any subsidiary of the Guarantor or any of their assets, properties or operations. As used herein, a "Repayment Event" means any event or condition which gives the holder of any note, debenture or other evidence of indebtedness of the Company, the Guarantor or any subsidiary of the Guarantor (or any person acting on such holder's behalf) the right to require the repurchase, redemption or repayment of all or a portion of such indebtedness by the Company, the Guarantor or any subsidiary of the Guarantor; (n) other than as set forth in the Offering Memorandum, there is not pending or, to the knowledge of the Company or the Guarantor, threatened, any action, suit, proceeding, inquiry or investigation to which the Company, the Guarantor or any subsidiary of the Guarantor is a party or to which the assets, properties or operations of the Company, the Guarantor or any subsidiary of the Guarantor is subject, before or by any court or governmental agency or body, domestic or foreign, which might reasonably be expected to result in a Material Adverse Effect or which might reasonably be expected to materially and adversely affect the assets, properties or operations of the Company, the Guarantor and any subsidiary of the Guarantor, taken as a whole, or the consummation of the transactions contemplated by this Agreement or the Indenture or the performance by the Company or the Guarantor of their respective obligations thereunder; (o) the Guarantor and its subsidiaries possess such permits, licenses, approvals, consents and other authorizations (collectively, "Governmental Licenses") issued by the appropriate federal, state, local or foreign regulatory agencies or bodies necessary to conduct the business now operated by them; the Guarantor and its subsidiaries are in compliance with the terms and conditions of all such Governmental Licenses, except where the failure so to comply would not, singly or in the aggregate, have a Material Adverse Effect; all of the Governmental Licenses are valid and in full force and effect, except when the invalidity of such Governmental Licenses or the failure of such Governmental Licenses to be in full force and effect would not have a Material Adverse Effect; and neither the Guarantor nor any of its subsidiaries has received any notice of proceedings relating to the revocation or modification of any such Governmental Licenses which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would result in a Material Adverse Effect; (p) none of the Company, the Guarantor or any of their respective affiliates (as defined in Rule 501(b) of Regulation D) has directly, or through any agent, sold, offered for sale, solicited offers to buy or otherwise negotiated in respect of, any security (as defined in the Securities Act) which is or will be integrated with the sale of the Securities in a manner that would require the registration under the Securities Act of the offering contemplated by the Offering Memorandum; (q) none of the Company, the Guarantor, any affiliate (as defined in Rule 501(b) of Regulation D) of the Company or the Guarantor or any person acting on its or their behalf has offered or sold the Securities by means of any general solicitation or general advertising within the meaning of Rule 502(c) under the Securities Act, or by means of any directed selling efforts within the meaning of Rule 902 of Regulation S, and the Company, the Guarantor, any affiliate of the Company and the Guarantor and any person acting on its or their behalf has complied with and will implement the "offering restrictions" requirements of Regulation S; (r) the Securities satisfy the requirements set forth in Rule 144A(d)(3) under the Securities Act; (s) assuming the accuracy of the representations of the Initial Purchasers contained in Section 2 hereof, it is not necessary in connection with the offer, sale and delivery of the Securities in the manner contemplated by this Agreement to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"); and (t) none of the transactions contemplated by this Agreement (including, without limitation, the use of the proceeds from the sale of the Securities) will violate or result in a violation of Section 7 of the Exchange Act, or any regulation promulgated thereunder, including, without limitation, Regulations T, U, and X of the Board of Governors of the Federal Reserve System. 5. The Company and the Guarantor covenant and agree with each of the several Initial Purchasers as follows: 6 7 (a) to deliver to the Initial Purchasers as many copies of the Offering Memorandum (including all amendments and supplements thereto) as the Initial Purchasers may reasonably request; (b) before distributing any amendment or supplement to the Offering Memorandum, to furnish to the Representatives a copy of the proposed amendment or supplement for review and not to distribute any such proposed amendment or supplement to which the Representatives reasonably object; (c) if, at any time prior to the earlier of (i) 9 months from the date of the Offering Memorandum and (ii) notice by the Representatives to the Company and the Guarantor of the completion of the initial placement of the Securities, any event shall occur as a result of which the Offering Memorandum as then amended or supplemented would 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, or if it is necessary to amend or supplement the Offering Memorandum to comply with law, forthwith to prepare and furnish, at the expense of the Company, to the Initial Purchasers and to the dealers (whose names and addresses the Representatives will furnish to the Company) to which Securities may have been sold by the Initial Purchasers on behalf of the Initial Purchasers and to any other dealers upon request, such amendments or supplements to the Offering Memorandum as may be necessary to correct such statement or omission or to effect compliance with law; (d) to endeavor to qualify the Securities for offer and sale under the securities or Blue Sky laws of such jurisdictions as the Representatives shall reasonably request and to continue such qualification in effect so long as reasonably required for distribution of the Securities; provided that the Company shall not be required to file a general consent to service of process in any jurisdiction; (e) during the period of two years after the date hereof, to furnish to the Initial Purchasers, as soon as practicable after the end of each fiscal year, a copy of the Guarantor's annual report to shareholders, if any, for such year, and to furnish to the Initial Purchasers and to counsel to the Initial Purchasers, (i) as soon as available, a copy of each report of the Guarantor filed with the Commission under the Exchange Act or mailed to stockholders, and (ii) from time to time, such other information concerning the Guarantor or the Company as the Initial Purchasers may reasonably request; (f) during the period beginning on the date hereof and continuing to and including the Business Day following the Closing Date, not to, directly or indirectly, sell, offer to sell, grant any option for the sale of, or otherwise dispose of, any of its senior debt securities having a maturity of one year or more without the prior written consent of the Representatives; (g) to use the net proceeds received by the Company from the sale of the Securities pursuant to this Agreement in the manner specified in the Offering Memorandum under the caption "Use of Proceeds"; (h) to furnish to the holders of the Securities no later than 90 days after the end of each fiscal year an annual report (including a balance sheet and statements of income, stockholders' equity and cash flows of the Guarantor and its consolidated subsidiaries certified by independent public accountants) and, as soon as practicable after the end of each of the first three quarters of each fiscal year (beginning with the fiscal quarter ending after the date of the Offering Memorandum), consolidated summary financial information of the Guarantor and its subsidiaries of such quarter in reasonable detail; (i) during the period of two years after the Closing Date, the Company and the Guarantor will not, and will not permit any of their respective controlled "affiliates" (as defined in Rule 144 under the Securities Act) to, resell any of the Securities which constitute "restricted securities" under Rule 144 that have been reacquired by any of them; (j) whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, to pay or cause to be paid all costs and expenses incident to the performance of its obligations hereunder and under the Registration Rights Agreement, including without limiting the generality of the foregoing, all fees, costs and expenses (i) incident to the preparation, issuance, execution, authentication and delivery of the Securities, including any expenses of the Trustee, (ii) incident to the preparation, printing and distribution of the Offering Memorandum (including all exhibits, amendments and supplements thereto), (iii) incurred in connection with the registration or qualification and determination of eligibility for investment of the Securities under the laws of such jurisdictions as the Representatives may designate 7 8 (including reasonable fees of counsel for the Initial Purchasers and their disbursements) and the printing of memoranda relating thereto, (iv) in connection with the approval for trading of the Securities on any securities exchange or inter-dealer quotation system, if so requested, (v) in connection with the printing (including word processing and duplication costs) and delivery of this Agreement, the Indenture, any Preliminary and Supplemental Blue Sky Memoranda and any Legal Investment Survey and the furnishing to Initial Purchasers and dealers of copies of the Offering Memorandum, including mailing and shipping, as herein provided, (vi) payable to rating agencies in connection with the rating of the Securities, if applicable, and (vii) any expenses incurred by the Company in connection with a "road show" presentation to potential investors; (k) while the Securities remain outstanding and are "restricted securities" within the meaning of Rule 144(a)(3) and cannot be sold without restriction under Rule 144(k) under the Securities Act, the Company and the Guarantor will, during any period in which the Guarantor is not subject to Section 13 or 15(d) under the Exchange Act or is not complying with the reporting requirements thereof, make available to the purchasers and any holder of Securities in connection with any sale thereof and any prospective purchaser of Securities and securities analysts, in each case upon request, the information specified in, and meeting the requirements of, Rule 144A(d)(4) under the Securities Act (or any successor thereto); (l) neither the Company nor the Guarantor will take any action prohibited by Regulation M under the Exchange Act, in connection with the distribution of the Securities contemplated hereby; (m) none of the Company, the Guarantor, any of their respective affiliates (as defined in Rule 501(b) of Regulation D under the Securities Act) or any person acting on behalf of the Company, the Guarantor or such affiliate will solicit any offer to buy or offer or sell the Securities by means of any form of general solicitation or general advertising, including: (i) any advertisement, article, notice or other communication published in any newspaper, magazine or similar medium or broadcast over television or radio; and (ii) any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; and (n) none of the Company, the Guarantor, any of their respective affiliates (as defined in Rule 144(a)(1) under the Securities Act) or any person acting on behalf of any of the foregoing will engage in any directed selling efforts with respect to the Securities within the meaning of Regulation S; and (o) none of the Company, the Guarantor, any of their respective affiliates (as defined in Regulation 501(b) of Regulation D under the Securities Act) or any person acting on behalf of the Company, the Guarantor or such affiliate will sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in the Securities Act) which will be integrated with the sale of the Securities in a manner which would require the registration under the Securities Act of the Securities and the Company and the Guarantor will take all action that is appropriate or necessary to assure that its offerings of other securities will not be integrated for purposes of the Securities Act with the offering contemplated hereby. 6. The several obligations of the Initial Purchasers hereunder to purchase the Securities on the Closing Date are subject to the performance by the Company and the Guarantor of their respective obligations hereunder and to the following additional conditions: (a) the representations and warranties of the Company and the Guarantor contained herein are true and correct on and as of the Closing Date as if made on and as of the Closing Date, the statements of the officers of the Company and the Guarantor made pursuant to Section 6(e) hereof are true and correct and the Company and the Guarantor shall have complied with all agreements and all conditions on their part to be performed or satisfied hereunder at or prior to the Closing Date; (b) except as previously disclosed to the Initial Purchasers by in writing the Company or the Guarantor prior to the execution of this Agreement, on or after the date of this Agreement and prior to the Closing Date, there shall not have occurred any downgrading, nor shall any notice have been given of (i) any downgrading, (ii) any intended or potential downgrading or (iii) any review or possible change that does not indicate an improvement, in the rating accorded any debt securities of or guaranteed by the Company or the Guarantor by any "nationally recognized statistical rating organization", as such term is defined for purposes of Rule 436(g)(2) under the Securities Act; 8 9 (c) since the respective dates as of which information is given in the Offering Memorandum, there shall not have been any change in the financial condition of the Company or of the Guarantor and its subsidiaries, taken as a whole, or in the earnings, affairs or business prospects of the Company or of the Guarantor and its subsidiaries, taken as a whole, otherwise than as set forth or contemplated in the Offering Memorandum as of February 13, 2001, the effect of which is, in the judgment of the Representatives, so material and adverse as to make it impracticable or inadvisable to proceed with the offering or the delivery of the Securities on the Closing Date on the terms and in the manner contemplated in the Offering Memorandum; (d) the Representatives shall have received on and as of the Closing Date a certificate of the President, any Vice President, the Treasurer, any Assistant Treasurer or the Associate General Counsel of the Company in which such officers shall state that, to the best of their knowledge after reasonable investigation, the representations and warranties of the Company in this Agreement are true and correct as if made at and as of the Closing Date, that the Company has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date and that, since the respective dates as of which information is given in the Offering Memorandum, there has been no material adverse change in the financial condition or results of operations of the Company, or, to the best knowledge of the Company, of the Guarantor, and its subsidiaries, taken as a whole, except as set forth in or contemplated by the Offering Memorandum as of February 13, 2001; (e) the Representatives shall have received on and as of the Closing Date a certificate of the Chief Executive Officer, the President, any Vice President, the Treasurer, any Assistant Treasurer, or the Associate General Counsel of the Guarantor in which such officers shall state that, to the best of their knowledge after reasonable investigation, the representations and warranties of the Guarantor in this Agreement are true and correct as if made at and as of the Closing Date, that the Guarantor has complied in all material respects with all agreements and satisfied all conditions on its part to be performed or satisfied hereunder at or prior to the Closing Date and that, since the respective dates as of which information is given in the Offering Memorandum, there has been no material adverse change in the financial condition or results of operations of the Guarantor and its subsidiaries, taken as a whole, except as set forth in or contemplated by the Offering Memorandum; (f) Holme Roberts & Owen LLP shall have furnished to the Initial Purchasers their written opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers, to the effect that: (i) The Company is a corporation duly incorporated, and is validly existing and in good standing under the laws of the State of Colorado, with corporate power to own, lease and operate its properties and to carry on its business as now being conducted. (ii) The execution, delivery and performance of this Agreement have been duly authorized by all necessary corporate action on the part of the Company, and this Agreement has been duly executed and delivered by the Company. (iii) The execution, delivery and performance of the Indenture has been duly authorized by all necessary corporate action on the part of the Company, and the Indenture has been duly executed and delivered by the Company. (iv) The Registration Rights Agreement has been duly authorized by all necessary corporate action on the part of the Company, and the Registration Rights Agreement has been duly executed and delivered by the Company. In rendering such opinion, such counsel may rely as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and of public officials The opinion of Holme Roberts & Owen LLP described above shall be rendered to the Initial Purchasers at the request of the Company and shall so state therein. 9 10 (g) O'Melveny & Myers LLP shall have furnished to the Initial Purchasers their written opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers, to the effect that: (i) The Guarantor is a corporation duly incorporated, and is validly existing in good standing under the laws of the State of Delaware, with corporate power to own, lease and operate its properties and to carry on its business as described in the Offering Memorandum. (ii) The execution, delivery and performance of the Indenture have been duly authorized by all necessary corporate action on the part of the Guarantor, and the Indenture has been duly executed and delivered by the Guarantor. (iii) The execution, delivery and performance of this Agreement and the Registration Rights Agreement have been duly authorized by all necessary corporate action on the part of the Guarantor, and this Agreement and the Registration Rights Agreement have been duly executed and delivered by the Guarantor. (iv) The Indenture constitutes the legally valid and binding obligation of each of the Company and the Guarantor, enforceable against each of the Company and the Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditor's rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. (v) The Notes, when duly executed and authenticated in the manner contemplated by the Indenture and issued and delivered to the Initial Purchasers against payment therefor in accordance with the provisions hereof, will be legally valid and binding obligations of the Company entitled to the benefits of the Indenture, enforceable against the Company in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditor's rights generally (including, without limitation, fraudulent conveyance laws), and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. (vi) The Guarantees, when duly executed in the manner contemplated by the Indenture and issued and delivered to the Initial Purchasers in accordance with the provisions hereof, will be legally valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditor's rights generally (including, without limitation, fraudulent conveyance laws), and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. (vii) The Exchange Notes (as defined in the Registration Rights Agreement), when duly executed in the manner contemplated in the Indenture and issued and delivered in exchange for the Notes in the manner contemplated in the Registration Rights Agreement, will be legally valid and binding obligations of the Company, enforceable against the Company in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to affecting creditors rights generally (including, without limitation, fraudulent conveyance laws), and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. (viii) The Exchange Guarantees (as defined in the Registration Rights Agreement), when duly executed in the manner contemplated in the Indenture and issued and delivered in the manner contemplated in the Registration Rights Agreement, will be legally valid and binding obligations of the Guarantor, enforceable against the Guarantor in accordance with their terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or effecting creditors rights generally (including, without limitation, fraudulent conveyance laws), and by general principles of equity including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law. 10 11 (ix) The Registration Rights Agreement constitutes the legally valid and binding obligation of the Company and the Guarantor, enforceable against the Company and the Guarantor in accordance with its terms, except as may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws relating to or affecting creditor's rights generally (including, without limitation, fraudulent conveyance laws) and by general principles of equity, including, without limitation, concepts of materiality, reasonableness, good faith and fair dealing and the possible unavailability of specific performance or injunctive relief, regardless of whether considered in a proceeding in equity or at law, and except that no opinion is expressed with respect to the provisions contained in Section 4 of the Registration Rights Agreement. (x) No order, consent, permit or approval of or filing with any federal governmental authority is required on the part of the Company or the Guarantor for the execution and delivery of this Agreement, the Indenture or the issuance and sale of the Securities to the Initial Purchasers pursuant to the terms of this Agreement, except such as may be required under applicable blue sky or state securities laws. (xi) The statements in the Offering Memorandum under the headings "Description of Notes", "Exchange Offer; Registration Rights" and "Notice to Investors", insofar as they summarize provisions of the Indenture or the Securities or constitute a summary of certain provisions of the documents referred to therein, fairly summarize the matters referred to therein. (xii) The Notes satisfy the requirement set forth in Rule 144A(d)(3) under the Securities Act. (xiii) Based upon the representations, warranties and agreements of the Company and the Guarantor in Sections 4(p), 4(q), 4(r), 5(m), 5(n), 5(o) and 6(a) of this Agreement and of the Initial Purchasers in Section 2 of this Agreement and on the truth and accuracy of the representations and agreements deemed to be made by the purchasers of the Securities contained in the Offering Memorandum, it is not necessary in connection with the offer, sale and delivery of the Securities to the Initial Purchasers under this Agreement or in connection with the initial resale of such Securities by the Initial Purchasers in accordance with Section 2 of this Agreement to register the Securities under the Securities Act or to qualify the Indenture under the Trust Indenture Act; provided, however, that such counsel need not express any opinion with respect to the conditions under which the Securities may be further resold. (xiv) The documents incorporated by reference in the Offering Memorandum, on the respective dates they were filed, appeared on their face to comply in all material respects with the requirements as to form for reports on Form 10-K, Form 10-Q and Form 8-K, as the case may be, under the Exchange Act, as amended, and Form S-4 under the Securities Act, and the related rules and regulations in effect at the respective dates of their filings, except that such counsel need express no opinion concerning the financial statements and other financial information contained or incorporated by reference therein. In rendering such opinion, such counsel may rely as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and the Guarantor and of public officials. Such counsel may also rely as to matters of Colorado law upon the opinion of Holme Roberts & Owen LLP without independent verification. Such counsel need express no opinion as to matters relating to the Federal Communications Commission or any state public utilities commission or similar authority for the Company or the Guarantor, as applicable. In addition, such counsel may state that in connection with such counsel's participation in conferences in connection with the preparation of the Offering Memorandum, such counsel has not independently verified the accuracy, completeness or fairness of the statements contained or incorporated therein, and the limitations inherent in the examination made by such counsel and the knowledge available to such counsel are such that such counsel is unable to assume, and does not assume, any responsibility for such accuracy, completeness or fairness (except as otherwise specifically stated in paragraph (xii) above). However, such counsel shall state that on the basis of such counsel's review of the Offering Memorandum and the documents incorporated by reference therein and their participation in conferences in connection with the preparation of the Offering Memorandum, such counsel does not believe that the Offering Memorandum and the documents incorporated therein, considered as a whole, as of its issue date or on the date of the opinion, contained any untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not 11 12 misleading. However, such counsel need express no opinion or belief as to the financial statements and other financial information contained or incorporated by reference in the Offering Memorandum or in the documents incorporated therein by reference. Such opinion may state that it does not address the impact on the opinions contained therein of any litigation or ruling relating to the divestiture by American Telephone and Telegraph Company of ownership of its operating telephone companies (the "DIVESTITURE"). The opinion of O'Melveny & Myers LLP described above shall be rendered to the Initial Purchasers at the request of the Company and shall so state therein. (h) Yash A. Rana, Esq., Associate General Counsel for the Company and the Guarantor shall have furnished to the Initial Purchasers his written opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers, to the effect that: (i) The execution, delivery and performance of this Agreement and the Registration Rights Agreement have been duly authorized by all necessary corporate action on the part of the Guarantor, and this Agreement has been duly executed and delivered by the Guarantor. (ii) All state regulatory consents, approvals, authorizations or other orders (except as to the state securities or blue sky laws, as to which such counsel need express no opinion) legally required for the execution of the Indenture and the issuance and sale of the Securities to the Initial Purchasers pursuant to the terms of this Agreement have been obtained; provided that such counsel may rely on opinions of local counsel satisfactory to such counsel. (iii) To such counsel's knowledge, there is not pending or threatened any action, suit, proceeding, inquiry or investigation to which the Company, the Guarantor or any subsidiary of the Guarantor is a party or to which the assets, properties or operations of the Company, the Guarantor or any subsidiary of the Guarantor is subject, before or by any court or governmental agency or body, domestic or foreign, which (a) might reasonably be expected to result in a Material Adverse Effect, or (b) might reasonably be expected to materially and adversely affect the consummation by the Company or the Guarantor of the transactions contemplated by this Agreement, the Registration Rights Agreement or the Securities or the Indenture or the performance by the Company or the Guarantor of their respective obligations hereunder or thereunder. (iv) The execution, delivery and performance of this Agreement and the Registration Rights Agreement by the Company and the Guarantor will not (A) violate the charter or bylaws of the Company or the Guarantor, or (B) violate, breach or result in a default under any material contract, indenture, mortgage, loan agreement, note, lease or other material agreement known to such counsel to which the Company or Guarantor is a party or to which any of their respective properties or assets are subject; provided that such counsel need express no opinion as to the effect of the Company's or Guarantor's performance of its obligations under this Agreement or the Registration Rights Agreement on the compliance by the Company or the Guarantor with financial covenants in any such contract, indenture, mortgage, loan agreement, note, lease or other agreement. (v) To such counsel's knowledge, neither the Company, the Guarantor nor any of its subsidiaries is in violation of its charter or bylaws. Such counsel may state that is does not address the impact of the opinions contained therein on any litigation or ruling relating to the Divestiture. Such counsel need express no opinion with respect to matters relating to the Federal Communications Commission or state public utilities commissions for the Company or the Guarantor, as applicable. (i) Hogan & Hartson L.L.P. shall have furnished to the Initial Purchasers their written opinion, dated the Closing Date, in form and substance satisfactory to the Initial Purchasers, to the effect that no consent, approval, authorization or other action by, or filing or registration with, any federal or state government authority is required in connection with the execution and delivery by the Company or the Guarantor of this Agreement or the issuance and sale of the Securities to the Initial Purchasers pursuant to the terms of this Agreement. (j) on the date of the issuance of the Offering Memorandum and also on the Closing Date, Arthur Andersen LLP and KPMG LLP shall have furnished to the Initial Purchasers letters, dated the respective dates of delivery thereof, in form and substance satisfactory to the Representatives, containing statements 12 13 and information of the type customarily included in accountants "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Offering Memorandum; (k) the Initial Purchasers shall have received on and as of the Closing Date an opinion of Brown & Wood LLP, counsel to the Initial Purchasers, with respect to the validity of the Indenture and the Securities, and such other related matters as the Initial Purchasers may reasonably request, and such counsel shall have received such papers and information as they may reasonably request to enable them to pass upon such matters; (l) the Initial Purchasers shall have received prior to the Closing Date a copy of the Registration Rights Agreement, in the form and substance satisfactory to the Initial Purchasers, duly executed by the Company and the Guarantor, and the Registration Rights Agreement shall be in full force and effect at the Closing Date; and (m) on or prior to the Closing Date the Company shall have furnished to the Initial Purchasers such further certificates and documents as the Initial Purchasers shall reasonably request. 7. (a) The Company and the Guarantor jointly and severally agree to indemnify and hold harmless each Initial Purchaser against any losses, claims, damages or liabilities, joint or several, to which such Initial Purchaser may become subject, as incurred, under the Securities Act, the Exchange Act 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 any material fact contained in the Offering Memorandum or any amendment 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, in the light of the circumstances under which they were made, not misleading, and will reimburse each Initial Purchaser, as incurred, for any legal or other expenses reasonably incurred by such Initial Purchaser in connection with investigating or defending any such loss, claim, damage, liability or action or amounts paid in settlement of any litigation or investigation or proceeding related thereto if such settlement is effected with the written consent of the Company and the Guarantor; provided, however, that the Company and the Guarantor will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon any untrue statement or alleged untrue statement or omission or alleged omission made in any of such documents in reliance upon and in conformity with written information furnished to the Company or the Guarantor by any Initial Purchaser, or on behalf of any Initial Purchaser by the Representatives, specifically for use therein. (b) Each Initial Purchaser will indemnify and hold harmless the Company and the Guarantor against any losses, claims, damages or liabilities to which the Company or the Guarantor may become subject, as incurred, under the Securities Act 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 any material fact contained in the Offering Memorandum or any amendment or supplement thereto, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in reliance upon and in conformity with written information furnished to the Company or the Guarantor by such Initial Purchaser, or on behalf of such Initial Purchaser by the Representatives, specifically for use therein, and will reimburse the Company and the Guarantor, as incurred, for any legal or other expenses reasonably incurred by the Company and the Guarantor in connection with investigating or defending any such loss, claim, damage, liability or action. (c) Promptly after receipt by an indemnified party under this Section 7 of 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 7, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this Section 7. In case any such action is brought against any indemnified party, and it notifies the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party (who shall not, except with the consent of the indemnified party, be counsel to the indemnifying party), and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. The indemnifying party 13 14 or parties shall not be liable under this Agreement with respect to any settlement made by any indemnified party or parties without prior written consent by the indemnifying party or parties to such settlement. (d) If the indemnification provided for in this Section 7 is unavailable or insufficient to hold harmless an indemnified party under subsection (a) or (b) above, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of the losses, claims, damages or liabilities referred to in subsection (a) or (b) above, (i) in such proportion as is appropriate to reflect the relative benefits received by the Company and the Guarantor on the one hand and the Initial Purchasers on the other from the offering of the Securities or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of the Company and the Guarantor on the one hand and the Initial Purchasers on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities as well as any other relevant equitable considerations. The relative benefits received by the Company and the Guarantor on the one hand and the Initial Purchasers on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total discounts and commissions received by the Initial Purchasers. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Guarantor or the Initial Purchasers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The amount paid by an indemnified party as a result of the losses, claims, damages or liabilities referred to in the first sentence of this subsection (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any action or claim which is the subject of this subsection (d). Notwithstanding the provisions of this subsection (d), no Initial Purchaser shall be required to contribute any amount in excess of the amount by which the total price at which the Securities purchased by it were offered exceeds the amount of any damages which such Initial Purchaser has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Initial Purchasers' obligations in this subsection (d) to contribute are several in proportion to the respective principal amount of the Securities set forth opposite their names in Schedule I hereto, and not joint. (e) The obligations of the Company and the Guarantor under this Section 7 shall be in addition to any liability which the Company or the Guarantor may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls any Initial Purchaser within the meaning of the Securities Act or the Exchange Act; and the obligations of the Initial Purchasers under this Section 7 shall be in addition to any liability which the respective Initial Purchasers may otherwise have and shall extend, upon the same terms and conditions, to each person, if any, who controls the Company or the Guarantor within the meaning of the Securities Act or the Exchange Act. The indemnity and contribution agreements contained in this Section 7 and the representations and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect regardless of (i) any termination of this Agreement, (ii) any investigation made by or on behalf of any Initial Purchaser or any person controlling any Initial Purchaser or by or on behalf of the Company or the Guarantor or any person controlling the Company or the Guarantor and (iii) acceptance of and payment for any of the Securities. 14 15 8. Notwithstanding anything herein contained, this Agreement may be terminated in the absolute discretion of the Initial Purchasers, by notice given to the Company and the Guarantor, if after the execution and delivery of this Agreement and prior to the Closing Date (i) trading generally shall have been suspended or materially limited on or by, as the case may be, any of the New York Stock Exchange, the American Stock Exchange, the Nasdaq National Market, the Chicago Board Options Exchange, the Chicago Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any securities of or guaranteed by the Company or the Guarantor shall have been suspended on any exchange or in any over-the-counter market, (iii) a general moratorium on commercial banking activities in New York shall have been declared by either Federal or New York State authorities, or (iv) there shall have occurred any outbreak or escalation of hostilities or any change in financial markets or any calamity or crisis that, in the judgment of the Initial Purchasers, is material and adverse and which, in the judgment of the Initial Purchasers, makes it impracticable to market the Securities on the terms and in the manner contemplated in the Offering Memorandum. 9. This Agreement shall become effective upon the execution and delivery hereof by the parties hereto. 10. If, on the Closing Date any one or more of the Initial Purchasers shall fail or refuse to purchase Securities which it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase is not more than one-tenth of the aggregate principal amount of the Securities to be purchased on such date, the other Initial Purchasers shall be obligated severally in the proportions that the principal amount of Securities set forth opposite their respective names in Schedule I bears to the aggregate principal amount of Securities set forth opposite the names of all such non-defaulting Initial Purchasers, or in such other proportions as the Initial Purchasers may specify, to purchase the Securities which such defaulting Initial Purchaser or Initial Purchasers agreed but failed or refused to purchase on such date; provided that in no event shall the principal amount of Securities that any Initial Purchaser has agreed to purchase pursuant to Section 1 be increased pursuant to this Section 10 by an amount in excess of one-tenth of such principal amount of Securities without the written consent of such Initial Purchaser. If, on the Closing Date any Initial Purchaser or Initial Purchasers shall fail or refuse to purchase Securities which it or they have agreed to purchase hereunder on such date, and the aggregate principal amount of Securities with respect to which such default occurs is more than one-tenth of the aggregate principal amount of Securities to be purchased on such date, and arrangements satisfactory to the Initial Purchasers, the Company and the Guarantor for the purchase of such Securities are not made within 36 hours after such default, this Agreement shall terminate without liability on the part of any non-defaulting Initial Purchaser, the Company or the Guarantor. In any such case either the Initial Purchasers, the Company or the Guarantor shall have the right to postpone the Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Offering Memorandum or in any other documents or arrangements may be effected. Any action taken under this paragraph shall not relieve any defaulting Initial Purchaser from liability in respect of any default of such Initial Purchaser under this Agreement. 11. If this Agreement shall be terminated by the Initial Purchasers, or any of them, because of any failure or refusal on the part of the Company or the Guarantor to comply with the terms or to fulfill any of the conditions of this Agreement, or if for any reason the Company or the Guarantor shall be unable to perform its obligations under this Agreement or any condition of the Initial Purchasers' obligations cannot be fulfilled, (i) the Company and the Guarantor shall remain responsible for the expenses to be paid or reimbursed by them pursuant to Section 5(j) and (ii) except in the event this Agreement is terminated pursuant to clauses (i), (iii) or (iv) of Section 8, the Company and the Guarantor agree to reimburse the Initial Purchasers or such Initial Purchasers as have so terminated this Agreement with respect to themselves, severally, for the out-of-pocket expenses reasonably incurred by such Initial Purchasers in connection with this Agreement or the offering contemplated hereunder, not exceeding $75,000, and for the fees and disbursements of their counsel. 12. This Agreement shall inure to the benefit of and be binding upon the Company, the Guarantor, the Initial Purchasers, any controlling persons referred to herein and their respective successors and assigns. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any other person, firm or corporation any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. No purchaser of Securities from any Initial Purchaser shall be deemed to be a successor by reason merely of such purchase. 13. All notices and other communications hereunder shall be in writing and shall be deemed to have been duly given if mailed or transmitted by any standard form of telecommunication. Notices to the Initial Purchasers shall be given to the Initial Purchasers c/o Banc of America Securities LLC, Banc of America Corporate Center, 100 North Tryon Street, Charlotte, NC 28255 (telefax: (704) 388-9939); Attention: Capital Markets Services and Chase Securities Inc., 270 Park Avenue, New York, New York 10017 (telefax: (212) 648-5909); Attention: Syndicate Department. Notices to the Company and the Guarantor shall be given to each of them at 1801 California Street, Denver, Colorado 80202 (telefax: (303) 896-6468); Attention: Sean P. Foley, with a copy to General Counsel (telefax: (303) 296-5974). 14. This Agreement may be signed in counterparts, each of which shall be an original and all of which together shall constitute one and the same instrument. 15. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAWS PROVISIONS THEREOF. 15 16 If the foregoing is in accordance with your understanding, please sign and return counterparts hereof. Very truly yours, QWEST CAPITAL FUNDING, INC. By: --------------------------------------- Name: Title: QWEST COMMUNICATIONS INTERNATIONAL INC. By: --------------------------------------- Name: Title: Accepted: February 7, 2001 BANC OF AMERICA SECURITIES LLC CHASE SECURITIES INC. By: BANC OF AMERICA SECURITIES LLC By: ------------------------------- Name: Title: By: CHASE SECURITIES INC. By: ------------------------------- Name: Title: For themselves and as Representatives of the other Initial Purchasers named in Schedule I hereto. 16 EX-10.34 8 d84707ex10-34.txt REGISTRATION RIGHTS AGREEMENT 1 EXHIBIT 10.34 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of February 14, 2001 among Qwest Communications International Inc., a Delaware corporation (the "Guarantor"), Qwest Capital Funding, Inc., a Colorado corporation (the "Company"), and the Initial Purchasers (as hereinafter defined). This Agreement is made pursuant to the Purchase Agreement dated February 7, 2001 (the "Purchase Agreement"), among the Guarantor, the Company, as issuer of the 7.25% Notes due February 15, 2011 and the 7.75% Notes due February 15, 2031 (the "Notes"), and the Initial Purchasers, which provides for, among other things, the sale by the Company to the Initial Purchasers of the aggregate principal amount of Notes specified therein. The Notes will be unconditionally guaranteed as to payment of principal, premium, if any, and interest by the Guarantor (the "Guarantees", and together with the Notes, the "Securities"). In order to induce the Initial Purchasers to enter into the Purchase Agreement, the Guarantor and the Company have agreed to provide to the Initial Purchasers and their direct and indirect transferees the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the closing under the Purchase Agreement. In consideration of the foregoing, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following capitalized defined terms shall have the following meanings: "Advice" shall have the meaning set forth in the last paragraph of Section 3 hereof. "Affiliate" has the same meaning as given to that term in Rule 405 under the Securities Act or any successor rule thereunder. "Applicable Period" shall have the meaning set forth in Section 3(s) hereof. "Business Day" means any day other than a Saturday, a Sunday, or a day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed. "Closing Time" shall mean the Closing Time as defined in the Purchase Agreement. "Company" shall have the meaning set forth in the preamble to this Agreement and also includes the Company's successors and permitted assigns. "Depositary" shall mean The Depository Trust Company, or any other depositary appointed by the Company; provided, however, that such depositary must have an address in the Borough of Manhattan, The City of New York. "Effectiveness Period" shall have the meaning set forth in Section 2(b) hereof. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Exchange Guarantees" shall mean the Guarantor's unconditional guarantee of principal, premium, if any, and interest of the Exchange Notes containing terms identical in all material respects to the Guarantees. "Exchange Notes" shall mean the 7.25% Notes due February 15, 2011 and the 7.75% Notes due February 15, 2031 issued by the Company under the Indenture containing terms identical in all material respects to the Notes (except that (i) interest thereon shall accrue from the last date on which interest was paid or duly provided for on the Notes or, if no such interest has been paid, from the date of their original issue, (ii) they will not contain terms with respect to transfer restrictions under the Securities Act, (iii) they will not provide for any Special Interest Premium thereon and (iv) they will be entitled to the benefit of the Exchange Guarantees) to be offered to Holders of Notes in exchange for Notes pursuant to the Exchange Offer. "Exchange Offer" shall mean the offer by the Company to the Holders to exchange all of the Registrable Securities for a like amount of Exchange Notes pursuant to Section 2(a) hereof. "Exchange Offer Registration" shall mean a registration under the Securities Act effected pursuant to Section 2(a) hereof. "Exchange Offer Registration Statement" shall mean an exchange offer registration statement on Form S-4 (or, if applicable, on another appropriate form), and all amendments and supplements to such registration statement, in each case including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. 1 2 "Exchange Period" shall have the meaning set forth in Section 2(a) hereof. "Guarantees" shall have the meaning set forth in the preamble to this Agreement. "Holder" shall mean any Initial Purchaser, for so long as it owns any Registrable Securities, and each of its successors, assigns and direct and indirect transferees who become registered owners of Registrable Securities under the Indenture. "Indenture" shall mean the Indenture, dated as of June 29, 1998, between the Company, as issuer, the Guarantor (as successor to US WEST, Inc.) and Bank One Trust Company, National Association, as trustee, as the same may be amended or supplemented from time to time in accordance with the terms thereof. "Initial Purchasers" shall mean Banc of America Securities LLC, Chase Securities Inc., Credit Suisse First Boston Corporation, Goldman, Sachs & Co., Lehman Brothers Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Salomon Smith Barney Inc., ABN AMRO Incorporated, Banc One Capital Markets, Inc., Commerzbank Capital Markets Corp., First Union Securities, Inc., Fleet Securities Inc., Mellon Financial Markets, LLC, RBC Dominion Securities Corporation, U.S. Bancorp Piper Jaffray Inc., Utendahl Capital Partners, L.P., Wells Fargo Brokerage Services, LLC, and The Williams Capital Group, L.P. "Inspectors" shall have the meaning set forth in Section 3(n) hereof. "Issue Date" shall mean February 14, 2001, the initial date of delivery of the Notes from the Company to the Initial Purchasers. "Issuer" shall mean the Company as defined in the preamble hereto. "Majority Holders" shall mean the Holders of a majority of the aggregate principal amount of outstanding Notes and Exchange Notes. "Notes" shall have the meaning set forth in the preamble to this Agreement. "Participating Broker-Dealer" shall have the meaning set forth in Section 3(t) hereof. "Person" shall mean an individual, partnership, corporation, trust or unincorporated organization, limited liability corporation, or a government or agency or political subdivision thereof. "Prospectus" shall mean the prospectus included in a Registration Statement, including any preliminary prospectus, and any such prospectus as amended or supplemented by any prospectus supplement, including a prospectus supplement with respect to the terms of the offering of any portion of the Registrable Securities covered by a Shelf Registration Statement, and by all other amendments and supplements to a prospectus, including post-effective amendments, and in each case including all documents incorporated by reference therein. "Purchase Agreement" shall have the meaning set forth in the preamble to this Agreement. "Records" shall have the meaning set forth in Section 3(n) hereof. "Registrable Securities" shall mean the Securities; provided, however, that any Securities shall cease to be Registrable Securities when any of the following occurs: (i) a Registration Statement with respect to such Securities for the exchange or resale thereof shall have been declared effective under the Securities Act and such Securities shall have been disposed of pursuant to such Registration Statement, (ii) such Securities shall have been sold to the public pursuant to Rule 144(k) (or any similar provision then in force, but not Rule 144A) under the Securities Act or are eligible to be sold without restriction as contemplated by Rule 144(k), (iii) such Securities shall have ceased to be outstanding or (iv) such Securities shall have been exchanged for Exchange Notes together with the Exchange Guarantees upon consummation of the Exchange Offer and are thereafter freely tradable by the Holder thereof (other than an Affiliate of the Company or the Guarantor). "Registration Expenses" shall mean any and all expenses incident to performance of or compliance by the Company and the Guarantor with this Agreement, including without limitation: (i) all SEC or National Association of Securities Dealers, Inc. (the "NASD") registration and filing fees, including, if applicable, the fees and expenses of any "qualified independent underwriter" (and its counsel) that is required to be retained by any Holder of Registrable Securities in accordance with the rules and regulations of the NASD, (ii) all fees and expenses incurred in connection with compliance with state securities or blue sky laws (including reasonable fees and disbursements of one counsel for all underwriters and Holders as a group in connection with blue sky qualification of any of the Exchange Securities or Registrable Securities) and compliance with the rules of the NASD, (iii) all expenses of any Persons in preparing or assisting in preparing, word processing, printing and 2 3 distributing any Registration Statement, any Prospectus and any amendments or supplements thereto, and in preparing or assisting in preparing, printing and distributing any underwriting agreements, securities sales agreements and other documents relating to the performance of and compliance with this Agreement, (iv) all rating agency fees, (v) the fees and disbursements of counsel for the Company and the Guarantor and of the independent certified public accountants of the Company and the Guarantor and its subsidiaries, including the expenses of any "cold comfort" letters required by or incident to the performance of and compliance with this Agreement, (vi) the reasonable fees and expenses of the Trustee and its counsel and any exchange agent or custodian, and (vii) the reasonable fees and expenses of any special experts retained by the Company and the Guarantor in connection with any Registration Statement. "Registration Statement" shall mean any registration statement of the Company and the Guarantor which covers any of the Exchange Securities or Registrable Securities pursuant to the provisions of this Agreement, and all amendments and supplements to any such Registration Statement, including post-effective amendments, in each case including the Prospectus contained therein, all exhibits thereto and all documents incorporated by reference therein. "Rule 144(k) Period" shall mean the period of two years (or such shorter period as may hereafter be referred to in Rule 144(k) under the Securities Act (or similar successor rule)) commencing on the Issue Date. "SEC" shall mean the Securities and Exchange Commission. "Securities" shall have the meaning set forth in the preamble to this Agreement. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Shelf Registration" shall mean a registration effected pursuant to Section 2(b) hereof. "Shelf Registration Event" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Event Date" shall have the meaning set forth in Section 2(b) hereof. "Shelf Registration Statement" shall mean a "shelf" registration statement of the Company pursuant to the provisions of Section 2(b) hereof which covers all of the Registrable Securities (except Registrable Securities which the Holders have elected not to include in such Shelf Registration Statement or the Holders of which have not complied with their obligations under the penultimate paragraph of Section 3 hereof or under the first paragraph of Section 2(b) hereof) on an appropriate form under Rule 415 under the Securities Act, or any similar rule that may be adopted by the SEC, and 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 documents incorporated by reference therein. "Special Interest Premium" shall have the meaning set forth in Section 2(e) hereof. "TIA" shall have the meaning set forth in Section 3(k) hereof. "Trustee" shall mean the trustee under the Indenture. 2. Registration Under the Securities Act. (a) Exchange Offer. Except as set forth in Section 2(b) below, the Company and the Guarantor shall, for the benefit of the Holders, at the Company's cost, use its reasonable best efforts to (i) file with the SEC within 150 calendar days after the Issue Date an Exchange Offer Registration Statement on an appropriate form under the Securities Act relating to the Exchange Offer, (ii) cause such Exchange Offer Registration Statement to be declared effective under the Securities Act by the SEC not later than the date which is 210 calendar days after the Issue Date, (iii) keep such Exchange Offer Registration Statement effective for not less than 30 calendar days (or longer if required by applicable law) after the date notice of the Exchange Offer is mailed to the Holders and (iv) cause the Exchange Offer to be consummated within 240 calendar days after the Issue Date. Promptly after the effectiveness of the Exchange Offer Registration Statement, the Company shall commence the Exchange Offer, it being the objective of such Exchange Offer to enable each Holder eligible and electing to exchange Registrable Securities for a like principal amount of Exchange Notes together with the Exchange Guarantees (provided that such Holder (i) is not an Affiliate of the Company or the Guarantor, (ii) is not a broker-dealer tendering Registrable Securities acquired directly from the Company, (iii) acquires the Exchange Securities in the ordinary course of such Holder's business and (iv) has no arrangements or understandings with any Person to participate in the Exchange Offer for the purpose of distributing the Exchange Securities) to transfer such Exchange Securities from and after their 3 4 receipt without any limitations or restrictions under the Securities Act and under state securities or blue sky laws. In connection with the Exchange Offer, the Company and the Guarantor 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 and related documents; (ii) keep the Exchange Offer open for acceptance for a period of not less than 30 days after the date notice thereof is mailed to the Holders (or longer if required by applicable law) (such period referred to herein as the "Exchange Period"); (iii) utilize the services of the Depositary for the Exchange Offer with respect to Notes represented by a global certificate; (iv) permit Holders to withdraw tendered Registrable Securities at any time prior to the close of business, New York City time, on the last Business Day of the Exchange Period, by sending to the institution specified in the notice to Holders, a telegram, telex, facsimile transmission or letter setting forth the name of such Holder, the principal amount of Registrable Securities delivered for exchange, and a statement that such Holder is withdrawing his election to have such Registrable Securities exchanged; (v) notify each Holder that any Registrable Security not tendered by such Holder in the Exchange Offer will remain outstanding and continue to accrue interest but will not retain any rights under this Agreement (except in the case of the Initial Purchasers and Participating Broker-Dealers as provided herein); and (vi) otherwise comply in all respects with all applicable laws relating to the Exchange Offer. As soon as practicable after the close of the Exchange Offer, the Company and the Guarantor shall: (i) accept for exchange all Registrable Securities or portions thereof duly tendered and not validly withdrawn pursuant to the Exchange Offer in accordance with the terms of the Exchange Offer Registration Statement and letter of transmittal which is an exhibit thereto; (ii) deliver, or cause to be delivered, to the Trustee for cancellation all Registrable Securities or portions thereof so accepted for exchange by the Company and the Guarantor; and (iii) issue, and cause the Trustee under the Indenture to promptly authenticate and deliver to each Holder, Exchange Securities equal in principal amount to the principal amount of the Notes as are surrendered by such Holder, and the Guarantor will execute the Exchange Guarantees. Interest on each Exchange Note issued pursuant to the Exchange Offer will accrue from the last date on which interest was paid or duly provided for on the Note surrendered in exchange therefor or, if no interest has been paid on such Note, from the Issue Date. To the extent not prohibited by any law or applicable interpretation of the staff of the SEC, the Company and the Guarantor shall use reasonable best efforts to complete the Exchange Offer as provided above, and shall comply with the applicable requirements of the Securities Act, the Exchange Act and other applicable laws in connection with the Exchange Offer. The Exchange Offer shall not be subject to any conditions other than the conditions referred to in Section 2(b)(i) and (ii) below and those conditions that are customary in similar exchange offers. Each Holder of Registrable Securities who wishes to exchange such Registrable Securities for Exchange Securities in the Exchange Offer will be required to make certain customary representations in connection therewith, including, in the case of any Holder, representations that (i) it is not an Affiliate of the Company or the Guarantor, (ii) it is not a broker-dealer tendering Registrable Securities acquired directly from the Company, (iii) the Exchange Securities to be received by it are being acquired in the ordinary course of its business and (iv) at the time of the Exchange Offer, it has no arrangements or understandings with any Person to participate in the distribution (within the meaning of the Securities Act) of the Exchange Securities. The Company and the Guarantor shall inform the Initial Purchasers, after consultation with the Trustee, of the names and addresses of the Holders to whom the Exchange Offer is made, and the Initial Purchasers shall have the right to contact such Holders in order to facilitate the tender of Registrable Securities in the Exchange Offer. Upon consummation of the Exchange Offer in accordance with this Section 2(a), the provisions of this Agreement shall continue to apply, mutatis mutandis, solely with respect to Exchange Securities held by Participating Broker-Dealers, and the Company and the Guarantor shall have no further obligation to register the Registrable Securities held by any Holder pursuant to Section 2(b) of this Agreement. (b) Shelf Registration. If (i) because of any change in law or in currently prevailing interpretations thereof by the staff of the SEC, the Company or the Guarantor is not permitted to effect the Exchange Offer as contemplated by 4 5 Section 2(a) hereof, (ii) the Exchange Offer is not consummated within 240 days after the Issue Date or (iii) upon the request of any Initial Purchaser with respect to any Registrable Securities held by it, if such Initial Purchaser is not permitted, in the reasonable opinion of Brown & Wood LLP, pursuant to applicable law or applicable interpretations of the staff of the SEC, to participate in the Exchange Offer and thereby receive securities that are freely tradeable without restriction under the Securities Act and applicable blue sky or state securities laws (other than due solely to the status of such Initial Purchaser as an Affiliate of the Company or the Guarantor or as a Participating Broker-Dealer)(any of the events specified in (i), (ii) or (iii) being a "Shelf Registration Event", and the date of occurrence thereof, the "Shelf Registration Event Date"), then in addition to or in lieu of conducting the Exchange Offer contemplated by Section 2(a), as the case may be, the Company and the Guarantor shall promptly notify the Holders in writing thereof and shall, at its cost, file as promptly as practicable after such Shelf Registration Event Date and, in any event, within 90 days after such Shelf Registration Event Date, a Shelf Registration Statement providing for the sale by the Holders of all of the Registrable Securities (other than Registrable Securities owned by Holders who have elected not to include such Registrable Securities in such Shelf Registration Statement or who have not complied with their obligations under the penultimate paragraph of Section 3 hereof or under this paragraph, and shall use its reasonable best efforts to cause such Shelf Registration Statement to be declared effective by the SEC as soon as practicable. No Holder of Registrable Securities shall be entitled to include any of its Registrable Securities in any Shelf Registration pursuant to this Agreement unless and until such Holder agrees in writing to be bound by all of the provisions of this Agreement applicable to such Holder and furnishes to the Company and the Guarantor in writing, within 15 days after receipt of a request therefor, such information as the Company and the Guarantor may, after conferring with counsel with regard to information relating to Holders that would be required by the SEC to be included in such Shelf Registration Statement or Prospectus included therein, reasonably request for inclusion in any Shelf Registration Statement or Prospectus included therein. Each Holder as to which any Shelf Registration is being effected agrees to furnish to the Company and the Guarantor all information with respect to such Holder necessary to make the information previously furnished to the Company and the Guarantor by such Holder not materially misleading. The Company and the Guarantor agree to use their reasonable best efforts to keep the Shelf Registration Statement continuously effective and the Prospectus usable for resales for the earlier of: (a) the Rule 144(k) Period or (b) such time as all of the securities covered by the Shelf Registration Statement have been sold pursuant to the Shelf Registration Statement or cease to be Registrable Securities (the "Effectiveness Period"). The Company and the Guarantor shall not permit any securities other than (i) the Company's and the Guarantor's issued and outstanding securities possessing incidental registration rights and (ii) Registrable Securities, to be included in the Shelf Registration. The Company and the Guarantor will, in the event a Shelf Registration Statement is declared effective, provide to each Holder of Registrable Securities covered thereby a reasonable number of copies of the Prospectus which is a part of the Shelf Registration Statement, notify each such Holder when the Shelf Registration has become effective and take any other action required to permit unrestricted resales of the Registrable Securities. The Company and the Guarantor further agree, if necessary, to supplement or amend the Shelf Registration Statement, if required by the rules, regulations or instructions applicable to the registration form used by the Company and the Guarantor for such Shelf Registration Statement or by the Securities Act or by any other rules and regulations thereunder for shelf registrations, and the Company and the Guarantor agree to furnish to the Holders of Registrable Securities covered by such Shelf Registration Statement copies of any such supplement or amendment promptly after its being used or filed with the SEC. (c) Expenses. The Company and the Guarantor shall pay all Registration Expenses in connection with any Registration Statement filed pursuant to Section 2(a) and/or 2(b) hereof and will reimburse the Initial Purchasers for the reasonable fees and disbursements of Brown & Wood LLP incurred in connection with the Exchange Offer. Except as provided herein, each Holder shall pay all expenses of its counsel, underwriting discounts and commissions and transfer taxes, if any, relating to the sale or disposition of such Holder's Registrable Securities pursuant to the Shelf Registration Statement. (d) Effective Registration Statement. An Exchange Offer Registration Statement pursuant to Section 2(a) hereof or a Shelf Registration Statement pursuant to Section 2(b) hereof will not be deemed to have become effective unless it has been declared effective by the SEC; provided, however, that if, after it has been declared effective, the 5 6 offering of Registrable Securities pursuant to such Exchange Offer Registration Statement or Shelf Registration Statement is interfered with by any stop order, injunction or other order or requirement of the SEC or any other governmental agency or court, such Exchange Offer Registration Statement or Shelf Registration Statement will be deemed not to have been effective during the period of such interference, until the offering of Registrable Securities pursuant to such Registration Statement may legally resume. The Company and the Guarantor will be deemed not to have used their reasonable best efforts to cause the Exchange Offer Registration Statement or the Shelf Registration Statement, as the case may be, to become, or to remain, effective during the requisite period if they voluntarily take any action that would result in any such Registration Statement not being declared effective or that would result in the Holders of Registrable Securities covered thereby not being able to exchange or offer and sell such Registrable Securities during that period, unless such action is required by applicable law. (e) Special Interest Premium. In the event that: (i) the Exchange Offer Registration Statement is not filed with the SEC on or prior to the 150th day after the Issue Date, then, commencing on the 151st day after the Issue Date, a special interest premium (the "Special Interest Premium") shall accrue on the principal amount of the Notes at a rate of 0.25% per annum; (ii) the Exchange Offer Registration Statement is not declared effective by the SEC on or prior to the 210th day after the Issue Date, then, commencing on the 211st day after the Issue Date, a Special Interest Premium shall accrue on the principal amount of the Notes at a rate of 0.25% per annum; (iii) (A) the Company has not exchanged Exchange Notes for all Notes validly tendered, or the Guarantor has not executed the Exchange Guarantees in respect of the Exchange Notes, in accordance with the terms of the Exchange Offer on or prior to the 240th day after the Issue Date or (B) if the Shelf Registration Statement is required to be filed pursuant to Section 2(b) but is not declared effective by the SEC on or prior to the 240th day after the Issue Date, then, commencing on the 241st day after the Issue Date, a Special Interest Premium shall accrue on the principal amount of the Notes at the rate of 0.25% per annum; or (iv) the Shelf Registration Statement has been declared effective and such Shelf Registration Statement ceases to be effective or the Prospectus ceases to be usable for resales (A) at any time prior to the expiration of the Effectiveness Period or (B) if related to corporate developments, public filings or similar events or to correct a material misstatement or omission in the Prospectus, for more than 60 days (whether or not consecutive) in any twelve-month period, then a Special Interest Premium shall accrue on the principal amount of the Notes at a rate of 0.25% per annum commencing on the day (in the case of (A) above), or the 61st day after (in the case of (B) above), such Shelf Registration Statement ceases to be effective or the Prospectus ceases to be usable for resales; provided, however, that the aggregate amount of the Special Interest Premium in respect of the Notes may not exceed 0.25% per annum; provided, further, however, that (1) upon the filing of the Exchange Offer Registration Statement (in the case of clause (i) above), (2) upon the effectiveness of the Exchange Offer Registration Statement (in the case of clause (ii) above), (3) upon the exchange of Exchange Notes for all Notes validly tendered and execution of the Exchange Guarantees (in the case of clause (iii)(A) above) or upon the effectiveness of the Shelf Registration Statement (in the case of clause (iii) (B) above) or (4) the earlier of (y) such time as the Shelf Registration Statement which had ceased to remain effective or the Prospectus which had ceased to be usable for resales again becomes effective and usable for resales and (z) the expiration of the Effectiveness Period (in the case of clause (iv) above), the Special Interest Premium on the principal amount of the Notes as a result of such clause (or the relevant subclause thereof) shall cease to accrue; provided, further, however, that if the Exchange Offer Registration Statement is not declared effective by the SEC on or prior to the 240th day after the Issue Date and the Company and the Guarantor shall request Holders to provide the information required by the SEC for inclusion in the Shelf Registration Statement, the Notes owned by Holders who do not provide such information when required pursuant to Section 2(b) will not be entitled to any Special Interest Premium for any day after the 240th day after the Issue Date. Any Special Interest Premium due pursuant to Section 2(e)(i), (ii), (iii) or (iv) above will be payable in cash on the next succeeding February 15 or August 15, as the case may be, to Holders on the relevant record dates for the payment of interest pursuant to the Indenture. 6 7 (f) Specific Enforcement. Without limiting the remedies available to the Holders, the Company and the Guarantor acknowledge that any failure by the Company and the Guarantor to comply with its respective obligations under Section 2(a) and Section 2(b) hereof may result in material irreparable injury to the Holders for which there is no adequate remedy at law, that it would not be possible to measure damages for such injuries precisely and that, in the event of any such failure, any Holder may obtain such relief as may be required to specifically enforce the Company's and the Guarantor's obligations under Section 2(a) and Section 2(b) hereof. 3. Registration Procedures. In connection with the obligations of the Company and the Guarantor with respect to the Registration Statements pursuant to Sections 2(a) and 2(b) hereof, the Company and the Guarantor shall use their reasonable best efforts to: (a) prepare and file with the SEC a Registration Statement or Registration Statements as prescribed by Sections 2(a) and 2(b) hereof within the relevant time period specified in Section 2 hereof on the appropriate form under the Securities Act, which form shall (i) be selected by the Company and the Guarantor, (ii) in the case of a Shelf Registration, be available for the sale of the Registrable Securities by the selling Holders thereof and, in the case of an Exchange Offer, be available for the exchange of Registrable Securities, and (iii) comply as to form in all material respects with the requirements of the applicable form and include all financial statements required by the SEC to be filed therewith; the Company and the Guarantor shall use their reasonable best efforts to cause such Registration Statement to become effective and remain effective (and, in the case of a Shelf Registration Statement, the Prospectus to be usable for resales) in accordance with Section 2 hereof; provided, however, that if (1) such filing is pursuant to Section 2(b), or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Securities, before filing any Registration Statement or Prospectus or any amendments or supplements thereto, the Company shall furnish to and afford the Holders of the Registrable Securities and each such Participating Broker-Dealer, as the case may be, covered by such Registration Statement, their counsel and the managing underwriters, if any, a reasonable opportunity to review copies of all such documents (including copies of any documents to be incorporated by reference therein and all exhibits thereto) proposed to be filed; and the Company and the Guarantor shall not file any Registration Statement or Prospectus or any amendments or supplements thereto in respect of which the Holders must be afforded an opportunity to review prior to the filing of such document if the Majority Holders of the Registrable Securities, depending solely upon which Holders must be afforded the opportunity of such review, or such Participating Broker-Dealer, as the case may be, their counsel or the managing underwriters, if any, shall reasonably object in a timely manner; (b) prepare and file with the SEC such amendments and post-effective amendments to each Registration Statement as may be necessary to keep such Registration Statement effective for the Effectiveness Period or the Applicable Period, as the case may be, and cause each Prospectus to be supplemented, if so determined by the Company and the Guarantor or requested by the SEC, by any required prospectus supplement and as so supplemented to be filed pursuant to Rule 424 (or any similar provision then in force) under the Securities Act, and comply with the provisions of the Securities Act, the Exchange Act and the rules and regulations promulgated thereunder applicable to it with respect to the disposition of all securities covered by each Registration Statement during the Effectiveness Period or the Applicable Period, as the case may be, in accordance with the intended method or methods of distribution by the selling Holders thereof described in this Agreement (including sales by any Participating Broker-Dealer); (c) in the case of a Shelf Registration, (i) notify each Holder of Registrable Securities included in the Shelf Registration Statement, at least three Business Days prior to filing, that a Shelf Registration Statement with respect to the Registrable Securities is being filed and advising such Holder that the distribution of Registrable Securities will be made in accordance with the method selected by the Majority Holders of the Registrable Securities, (ii) furnish to each Holder of Registrable Securities included in the Shelf Registration Statement and to each underwriter of an 7 8 underwritten offering of Registrable Securities, if any, without charge, as many copies of each Prospectus, including each preliminary prospectus, and any amendment or supplement thereto, and such other documents as such Holder or underwriter may reasonably request, in order to facilitate the public sale or other disposition of the Registrable Securities and (iii) consent to the use of the Prospectus or any amendment or supplement thereto by each of the selling Holders of Registrable Securities included in the Shelf Registration Statement in connection with the offering and sale of the Registrable Securities covered by the Prospectus or any amendment or supplement thereto; (d) in the case of a Shelf Registration, register or qualify the Registrable Securities under all applicable state securities or "blue sky" laws of such jurisdictions by the time the applicable Registration Statement is declared effective by the SEC as any Holder of Registrable Securities covered by a Registration Statement and each underwriter of an underwritten offering of Registrable Securities shall reasonably request in writing in advance of such date of effectiveness, and do any and all other acts and things which may be reasonably necessary or advisable to enable such Holder and underwriter to consummate the disposition in each such jurisdiction of such Registrable Securities owned by such Holder; provided, however, that the Company and the Guarantor shall not be required to (i) qualify as a foreign corporation or as a dealer in securities in any jurisdiction where it would not otherwise be required to qualify but for this Section 3(d), (ii) file any general consent to service of process in any jurisdiction where it would not otherwise be subject to such service of process or (iii) subject itself to taxation in any such jurisdiction if it is not then so subject; (e) (1) in the case of a Shelf Registration or (2) if Participating Broker-Dealers from whom the Company and the Guarantor have received prior written notice that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in Section 3(s) hereof, are seeking to sell Exchange Securities and are required to deliver Prospectuses, promptly notify each Holder of Registrable Securities, or such Participating Broker-Dealers, as the case may be, their counsel and the managing underwriters, if any, and promptly confirm such notice in writing (i) when a Registration Statement has become effective and when any post-effective amendments thereto become effective, (ii) of any request by the SEC or any state securities authority for amendments and supplements to a Registration Statement or Prospectus or for additional information after the Registration Statement has become effective, (iii) of the issuance by the SEC or any state securities authority of any stop order suspending the effectiveness of a Registration Statement or the qualification of the Registrable Securities or the Exchange Securities to be offered or sold by any Participating Broker-Dealer in any jurisdiction described in Section 3(d) hereof or the initiation of any proceedings for that purpose, (iv) in the case of a Shelf Registration, if, between the effective date of a Registration Statement and the closing of any sale of Registrable Securities covered thereby, the representations and warranties of the Company contained in any purchase agreement, securities sales agreement or other similar agreement cease to be true and correct in all material respects, (v) of the happening of any event or the failure of any event to occur or the discovery of any facts, during the Effectiveness Period, which makes any statement made in such Registration Statement or the related Prospectus untrue in any material respect or which causes such Registration Statement or Prospectus to omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading, as well as any other corporate developments, public filings with the SEC or similar events causing such Registration Statement not to be effective or the Prospectus not to be useable for resales and (vi) of the reasonable determination of the Company and the Guarantor that a post-effective amendment to the Registration Statement would be appropriate; (f) obtain the withdrawal of any order suspending the effectiveness of a Registration Statement at the earliest possible moment; (g) in the case of a Shelf Registration, furnish to each Holder of Registrable Securities included within the coverage of such Shelf Registration Statement, without charge, at least one conformed 8 9 copy of each Registration Statement relating to such Shelf Registration and any post-effective amendment thereto (without documents incorporated therein by reference or exhibits thereto, unless requested); (h) in the case of a Shelf Registration, cooperate with the selling Holders of Registrable Securities to facilitate the timely preparation and delivery of certificates representing Registrable Securities to be sold and not bearing any restrictive legends (except any customary legend borne by securities held through The Depository Trust Company or any similar depository) and in such denominations (consistent with the provisions of the Indenture and the officers' certificate establishing the forms and the terms of the Notes pursuant to the Indenture) and registered in such names as the selling Holders or the underwriters may reasonably request at least two Business Days prior to the closing of any sale of Registrable Securities pursuant to such Shelf Registration Statement; (i) in the case of a Shelf Registration or an Exchange Offer Registration, promptly after the occurrence of any event specified in Section 3(e)(ii), 3(e)(iii), 3(e)(v) (subject to a 60-day grace period within any twelve-month period) or 3(e)(vi) hereof, prepare a supplement or post-effective amendment to such Registration Statement or the related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of the Registrable Securities, such Prospectus will not include any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; and the Company shall notify each Holder to suspend use of the Prospectus as promptly as practicable after the occurrence of such an event, and each Holder hereby agrees to suspend use of the Prospectus until the Company and the Guarantor have amended or supplemented the Prospectus to correct such misstatement or omission; (j) obtain a CUSIP number for the Exchange Securities or the Registrable Securities, as the case may be, not later than the effective date of a Registration Statement, and provide the Trustee with certificates for the Exchange Securities or the Registrable Securities, as the case may be, in a form eligible for deposit with the Depositary; (k) cause the Indenture to be qualified under the Trust Indenture Act of 1939, as amended (the "TIA"), in connection with the registration of the Exchange Securities or Registrable Securities, as the case may be, and effect such changes to such documents as may be required for them to be so qualified in accordance with the terms of the TIA and execute, and cause the Trustee to execute, all documents as may be required to effect such changes, and all other forms and documents required to be filed with the SEC to enable such documents to be so qualified in a timely manner; (l) in the case of a Shelf Registration, enter into such agreements (including underwriting agreements) as are customary in underwritten offerings and take all such other appropriate actions in connection therewith as are reasonably requested by the Holders of at least 25% in aggregate principal amount of the Registrable Securities in order to expedite or facilitate the registration or the disposition of the Registrable Securities; (m) in the case of a Shelf Registration, whether or not an underwriting agreement is entered into and whether or not the registration is an underwritten registration, if requested by (x) an Initial Purchaser, in the case where such Initial Purchaser holds Notes acquired by it as part of its initial placement and Holders of at least 25% in aggregate principal amount of the Registrable Securities covered thereby: (i) make such representations and warranties to Holders of such Registrable Securities and the underwriters (if any), with respect to the business of the Company, the Guarantor, the subsidiaries of the Guarantor, and if applicable, Quest Communications International Inc. as then conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be incorporated by reference therein, in each case, as are customarily made by issuers to underwriters in underwritten offerings, and confirm the same if and when requested; (ii) obtain opinions of counsel to the Company and the Guarantor and updates thereof (which may be in the form of a reliance letter) in form and substance reasonably satisfactory to the managing underwriters (if any) and the Holders of a majority in amount of the Registrable Securities being 9 10 sold, addressed to each selling Holder and the underwriters (if any) covering the matters customarily covered in opinions requested in underwritten offerings and such other matters as may be reasonably requested by such underwriters (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions); (iii) obtain "cold comfort" letters and updates thereof in form and substance reasonably satisfactory to the managing underwriters from the independent certified public accountants of the Company, the Guarantor, and the subsidiaries of the Guarantor (and, if necessary, any other independent certified public accountants of any business acquired or to be acquired by the Guarantor for which financial statements and financial data are, or are required to be, included in the Registration Statement), addressed to each of the underwriters, such letters to be in customary form and covering matters of the type customarily covered in "cold comfort" letters in connection with underwritten offerings and such other matters as reasonably requested by such underwriters in accordance with Statement on Auditing Standards No. 72; and (iv) if an underwriting agreement is entered into, the same shall contain indemnification provisions and procedures no less favorable than those set forth in Section 4 hereof (or such other provisions and procedures acceptable to Holders of a majority in aggregate principal amount of Registrable Securities covered by such Registration Statement and the managing underwriters) customary for such agreements with respect to all parties to be indemnified pursuant to said Section (including, without limitation, such underwriters and selling Holders); and in the case of an underwritten registration, the above requirements shall be satisfied at each closing under the related underwriting agreement or as and to the extent required thereunder; (n) if (1) a Shelf Registration is filed pursuant to Section 2(b) or (2) a Prospectus contained in an Exchange Offer Registration Statement filed pursuant to Section 2(a) is required to be delivered under the Securities Act by any Participating Broker-Dealer who seeks to sell Exchange Securities during the Applicable Period, make reasonably available for inspection by any selling Holder of Registrable Securities or Participating Broker-Dealer, as applicable, who certifies to the Company and the Guarantor that it has a current intention to sell Registrable Securities pursuant to the Shelf Registration, any underwriter participating in any such disposition of Registrable Securities, if any, and any attorney, accountant or other agent retained by any such selling Holder, Participating Broker-Dealer, as the case may be, or underwriter (collectively, the "Inspectors"), at the offices where normally kept, during the Company's and the Guarantor's normal business hours, all financial and other records, pertinent organizational and operational documents and properties of the Company, the Guarantor and the Guarantor's subsidiaries (collectively, the "Records") as shall be reasonably necessary to enable them to conduct due diligence activities, and cause the officers, trustees and employees of the Company, the Guarantor and the Guarantor's subsidiaries to supply all relevant information in each case reasonably requested by any such Inspector in connection with such Registration Statement; records and information which the Company and the Guarantor determine, in good faith, to be confidential and any Records and information which it notifies the Inspectors are confidential shall not be disclosed to any Inspector except where (i) the disclosure of such Records or information is necessary to avoid or correct a material misstatement or omission in such Registration Statement, (ii) the release of such Records or information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or is necessary in connection with any action, suit or proceeding or (iii) such Records or information previously has been made generally available to the public; each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to agree in writing that Records and information obtained by it as a result of such inspections shall be deemed confidential and shall not be used by it as the basis for any market transactions in the securities of the Company and the Guarantor unless and until such is made generally available to the public through no fault of an Inspector or a selling Holder; and each selling Holder of such Registrable Securities and each such Participating Broker-Dealer will be required to further agree in writing that it will, upon learning that disclosure of such Records or information is sought in a court of competent jurisdiction, or in connection with 10 11 any action, suit or proceeding, give notice to the Company and the Guarantor and allow the Company and the Guarantor at their expense to undertake appropriate action to prevent disclosure of the Records and information deemed confidential; (o) comply with all applicable rules and regulations of the SEC so long as any provision of this Agreement shall be applicable and make generally available to its securityholders earning statements satisfying the provisions of Section 11(a) of the Securities Act and Rule 158 thereunder (or any similar rule promulgated under the Securities Act) no later than 50 days after the end of any 12-month period (or 105 days after the end of any 12-month period if such period is a fiscal year) (i) commencing at the end of any fiscal quarter in which Registrable Securities are sold to underwriters in a firm commitment or best efforts underwritten offering and (ii) if not sold to underwriters in such an offering, commencing on the first day of the first fiscal quarter of the Company and the Guarantor after the effective date of a Registration Statement, which statements shall cover said 12-month periods, provided that the obligations under this paragraph (o) shall be satisfied by the timely filing of quarterly and annual reports on Forms 10-Q and 10-K under the Exchange Act; (p) if an Exchange Offer is to be consummated, upon delivery of the Registrable Securities by Holders to the Company and the Guarantor (or to such other Person as directed by the Company and the Guarantor), in exchange for the Exchange Securities, the Company shall mark, or cause to be marked, on such Notes delivered by such Holders that such Notes are being cancelled in exchange for the Exchange Securities; it being understood that in no event shall such Notes be marked as paid or otherwise satisfied; (q) cooperate with each seller of Registrable Securities covered by any Registration Statement and each underwriter, if any, participating in the disposition of such Registrable Securities and their respective counsel in connection with any filings required to be made with the NASD; (r) take all other steps necessary to effect the registration of the Registrable Securities covered by a Registration Statement contemplated hereby; (s) (A) in the case of the Exchange Offer Registration Statement (i) include in the Exchange Offer Registration Statement a section entitled "Plan of Distribution," which section shall be reasonably acceptable to the Initial Purchasers or another representative of the Participating Broker-Dealers, and which shall contain a summary statement of the positions taken or policies made by the staff of the SEC with respect to the potential "underwriter" status of any broker-dealer that holds Registrable Securities acquired for its own account as a result of market-making activities or other trading activities (a "Participating Broker-Dealer") and that will be the beneficial owner (as defined in Rule 13d-3 under the Exchange Act) of Exchange Securities to be received by such broker-dealer in the Exchange Offer, whether such positions or policies have been publicly disseminated by the staff of the SEC or such positions or policies, in the reasonable judgment of the Initial Purchasers or such other representative, represent the prevailing views of the staff of the SEC, including a statement that any such broker-dealer who receives Exchange Securities for Registrable Securities pursuant to the Exchange Offer may be deemed a statutory underwriter and must deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of such Exchange Securities, (ii) furnish to each Participating Broker-Dealer who has delivered to the Company and the Guarantor the notice referred to in Section 3(e), without charge, as many copies of each Prospectus included in the Exchange Offer Registration Statement, including any preliminary Prospectus, and any amendment or supplement thereto, as such Participating Broker-Dealer may reasonably request (the Company and the Guarantor hereby consent to the use of the Prospectus forming part of the Exchange Offer Registration Statement or any amendment or supplement thereto by any Person subject to the prospectus delivery requirements of the Securities Act, including all Participating Broker-Dealers, in connection with the sale or transfer of the Exchange Securities covered by the Prospectus or any amendment or supplement thereto), (iii) use its reasonable best efforts to keep the Exchange Offer Registration Statement effective and to 11 12 amend and supplement the Prospectus contained therein in order to permit such Prospectus to be lawfully delivered by all Persons subject to the prospectus delivery requirements of the Securities Act for such period of time as such Persons must comply with such requirements under the Securities Act and applicable rules and regulations in order to resell the Exchange Securities; provided, however, that such period shall not be required to exceed 240 days (or such longer period if extended pursuant to the last sentence of Section 3 hereof) (the "Applicable Period"), and (iv) include in the transmittal letter or similar documentation to be executed by an exchange offeree in order to participate in the Exchange Offer (x) the following provision: "If the exchange offeree is a broker-dealer holding Registrable Securities acquired for its own account as a result of market-making activities or other trading activities, it will deliver a prospectus meeting the requirements of the Securities Act in connection with any resale of Exchange Securities received in respect of such Registrable Securities pursuant to the Exchange Offer"; and (y) a statement to the effect that by a broker-dealer making the acknowledgment described in clause (x) and by delivering a Prospectus in connection with the exchange of Registrable Securities, the broker-dealer will not be deemed to admit that it is an underwriter within the meaning of the Securities Act; and (B) in the case of any Exchange Offer Registration Statement, the Company and the Guarantor agree to deliver to the Initial Purchasers or to another representative of the Participating Broker-Dealers, if reasonably requested by an Initial Purchaser or such other representative of Participating Broker-Dealers, on behalf of the Participating Broker-Dealers upon consummation of the Exchange Offer (i) an opinion of counsel in form and substance reasonably satisfactory to such Initial Purchaser or such other representative of the Participating Broker-Dealers, covering the matters customarily covered in opinions requested in connection with Exchange Offer Registration Statements and such other matters as may be reasonably requested (it being agreed that the matters to be covered by such opinion may be subject to customary qualifications and exceptions), (ii) an officers' certificate substantially similar to that specified in Section 6(d) and (e) of the Purchase Agreement and such additional certifications as are customarily delivered in a public offering of debt securities and (iii) upon the effectiveness of the Exchange Offer Registration Statement, comfort letters, in each case, in customary form if permitted by Statement on Auditing Standards No. 72. The Company and the Guarantor may require each seller of Registrable Securities as to which any registration is being effected to furnish to the Company and the Guarantor such information regarding such seller as may be required by the staff of the SEC to be included in a Registration Statement. The Company and the Guarantor may exclude from such registration the Registrable Securities of any seller who unreasonably fails to furnish such information within a reasonable time after receiving such request. The Company and the Guarantor shall have no obligation to register under the Securities Act the Registrable Securities of a seller who so fails to furnish such information. In the case of a Shelf Registration Statement, or if Participating Broker-Dealers who have notified the Company and the Guarantor that they will be utilizing the Prospectus contained in the Exchange Offer Registration Statement as provided in this Section 3(s) are seeking to sell Exchange Securities and are required to deliver Prospectuses, each Holder agrees that, upon receipt of any notice from the Company and the Guarantor of the occurrence of any event specified in Section 3(e)(ii), 3(e)(iii), 3(e)(v) or 3(e)(vi) hereof, such Holder will forthwith discontinue disposition of Registrable Securities pursuant to a Registration Statement until such Holder's receipt of the copies of the supplemented or amended Prospectus contemplated by Section 3(i) hereof or until it is advised in writing (the "Advice") by the Company and the Guarantor that the use of the applicable Prospectus may be resumed, and, if so directed by the Company and the Guarantor, such Holder will deliver to the Company and the Guarantor (at the Company's and the Guarantor's expense) all copies in such Holder's possession, other than permanent file copies then in such Holder's possession, of the Prospectus covering such Registrable Securities or Exchange Securities, as the case may be, current at the time of receipt of such notice. If the Company and the Guarantor shall 12 13 give any such notice to suspend the disposition of Registrable Securities or Exchangeable Securities, as the case may be, pursuant to a Registration Statement, the Company and the Guarantor shall use its reasonable best efforts to file and have declared effective (if an amendment) as soon as practicable after the resolution of the related matters an amendment or supplement to the Registration Statement and shall extend the period during which such Registration Statement is required to be maintained effective and the Prospectus usable for resales pursuant to this Agreement by the number of days in the period from and including the date of the giving of such notice to and including the date when the Company and the Guarantor shall have made available to the Holders (x) copies of the supplemented or amended Prospectus necessary to resume such dispositions or (y) the Advice. 4. Indemnification and Contribution. (a) In connection with any Registration Statement, the Company and the Guarantor shall jointly and severally indemnify and hold harmless the Initial Purchasers, each Holder, each underwriter who participates in an offering of the Registrable Securities, each Participating Broker-Dealer, each Person, if any, who controls any of such parties within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act and each of their respective directors, officers, employees and agents, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement (or any amendment or supplement thereto), covering Registrable Securities or Exchange Securities, as applicable, or the omission or alleged omission therefrom of a material fact required to be stated or necessary in order to make this statement therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in any Prospectus, or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission; provided that any such settlement is effected with the prior written consent of the Company and the Guarantor; and (iii) against any and all expenses whatsoever, as incurred (including the reasonable fees and disbursements of counsel chosen by such Holder, such Participating Broker-Dealer, or any underwriter (except to the extent otherwise expressly provided in Section 4(c) hereof)), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under subparagraph (i) or (ii) of this Section 4(a); provided, however, that this indemnity does not apply to any loss, liability, claim, damage or expense to the extent arising out of an untrue statement or omission or alleged untrue statement or omission made in reliance upon and in conformity with written information furnished in writing to the Company and the Guarantor by the Initial Purchasers or such Holder, underwriter or Participating Broker-Dealer for use in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto). (b) Each of the Initial Purchasers and each Holder, underwriter or Participating Broken-Dealer agrees, severally and not jointly, to indemnify and hold harmless the Company and the Guarantor and each Person, if any, who controls the Company or the Guarantor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any and all loss, liability, claim, damage and expense whatsoever described in the indemnity contained in Section 4(a) hereof, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in a Registration Statement (or any amendment thereto) or any Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company and the Guarantor by such Initial Purchaser, Holder, underwriter or Participating Broker-Dealer expressly for use in such Registration Statement (or any amendment thereto), or any such Prospectus (or any 13 14 amendment or supplement thereto); provided, however, that in the case of a Shelf Registration Statement, no such Holder shall be liable for any claims hereunder in excess of the amount of net proceeds received by such Holder from the sale of Registrable Securities pursuant to such Shelf Registration Statement. (c) Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability which it may have under this Section 4 to the extent that it is not materially prejudiced by such failure as a result thereof, and in any event shall not relieve it from liability which it may have otherwise on account of this Agreement. In the case of parties indemnified pursuant to Section 4(a) or (b) above, counsel to the indemnified parties shall be selected by such parties. An indemnifying party may participate at its own expense in the defense of such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for the fees and expenses of more than one counsel (in addition to local counsel), separate from their own counsel, for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances. No indemnifying party shall, without the prior written consent of the indemnified parties, settle or compromise or consent to the entry of any judgment with respect to any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever in respect of which indemnification or contribution could be sought under this Section 4 (whether or not the indemnified parties are actual or potential parties thereto), unless such settlement, compromise or consent (i) includes an unconditional written release of each indemnified party from all liability arising out of such litigation, investigation, proceeding or claim and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (d) In order to provide for just and equitable contribution in circumstances under which any of the indemnity provisions set forth in this Section 4 is for any reason held to be unenforceable by an indemnified party although applicable in accordance with its terms, the Company, the Guarantor and the Holders shall contribute to the aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by such indemnity agreement incurred by the Company, the Guarantor and the Holders, as incurred; provided, however, that no Person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any Person that was not guilty of such fraudulent misrepresentation. As between the Company and the Guarantor and the Holders, such parties shall contribute to such aggregate losses, liabilities, claims, damages and expenses of the nature contemplated by this Agreement in such proportion as shall be appropriate to reflect the relative fault of the Company and the Guarantor, on the one hand, and the Holders, on the other hand, with respect to the statements or omissions which resulted in such loss, liability, claim, damage or expense, or action in respect thereof, as well as any other relevant equitable considerations. The relative fault of the Company and the Guarantor, on the one hand, and of the Holders, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company and the Guarantor, on the one hand, or by or on behalf of the Holders, on the other, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Guarantor and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 4 were to be determined by pro rata allocation or by any other method of allocation that does not take into account the relevant equitable considerations. For purposes of this Section 4, each Affiliate of a Holder, and each director, officer and employee and Person, if any, who controls a Holder or such Affiliate within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as such Holder and each Person, if any, who controls the Company and the Guarantor within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act shall have the same rights to contribution as the Company and the Guarantor. 5. Participation in an Underwritten Registration. No Holder may participate in an underwritten registration hereunder unless such Holder (a) agrees to sell such Holder's Registrable Securities on the basis provided in the underwriting arrangement approved by the Persons entitled hereunder to approve such arrangements and 14 15 (b) completes and executes all reasonable questionnaires, powers of attorney, indemnities, underwriting agreements, lock-up letters and other documents reasonably required under the terms of such underwriting arrangements. 6. Selection of Underwriters. The Holders of Registrable Securities covered by the Shelf Registration Statement who desire to do so may sell the Securities covered by such Shelf Registration in an underwritten offering, subject to the provisions of Section 3(l) hereof. In any such underwritten offering, the underwriter or underwriters and manager or managers that will administer the offering will be selected by the Holders of a majority in aggregate principal amount of the Registrable Securities included in such offering; provided, however, that such underwriters and managers must be reasonably satisfactory to the Company and the Guarantor. 7. Miscellaneous. (a) Rule 144 and Rule 144A. For so long as the Company and the Guarantor are subject to the reporting requirements of Section 13 or 15 of the Exchange Act and any Registrable Securities remain outstanding, the Company and the Guarantor will file the reports required to be filed by it under the Securities Act and Section 13(a) or 15(d) of the Exchange Act and the rules and regulations adopted by the SEC thereunder; provided, however, that if the Company and the Guarantor ceases to be so required to file such reports, it will, upon the request of any Holder of Registrable Securities, (a) make publicly available such information as is necessary to permit sales of its securities pursuant to Rule 144 under the Securities Act, (b) deliver such information to a prospective purchaser as is necessary to permit sales of its securities pursuant to Rule 144A under the Securities Act, and (c) take such further action that is reasonable in the circumstances, in each case, to the extent required from time to time to enable such Holder to sell its Registrable Securities without registration under the Securities Act within the limitation of the exemptions provided by (i) Rule 144 under the Securities Act, as such rule may be amended from time to time, (ii) Rule 144A under the Securities Act, as such rule may be amended from time to time, or (iii) any similar rules or regulations hereafter adopted by the SEC. Upon the request of any Holder of Registrable Securities, the Company and the Guarantor will deliver to such Holder a written statement as to whether it has complied with such requirements. (b) No Inconsistent Agreements. The Company and the Guarantor have not entered into, nor will the Company or the Guarantor on or after the date of this Agreement enter into, any agreement which is inconsistent with the rights granted to the Holders of Registrable Securities in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of the Company's and the Guarantor's other issued and outstanding securities under any such agreements. (c) Amendments and Waivers. The provisions of this Agreement, including the provisions of this sentence, may not be amended, modified or supplemented, and waivers or consents to departures from the provisions hereof may not be given, unless the Company and the Guarantor has obtained the written consent of Holders of a majority in aggregate principal amount of the outstanding Registrable Securities affected by such amendment, modification, supplement, waiver or departure; provided that no amendment, modification or supplement or waiver or consent to the departure with respect to the provisions of Section 4 hereof shall be effective as against any Holder of Registrable Securities unless consented to in writing by such Holder of Registrable Securities. Notwithstanding the foregoing sentence, (i) this Agreement may be amended, without the consent of any Holder of Registrable Securities, by written agreement signed by the Company, the Guarantor and the Initial Purchasers, to cure any ambiguity, correct or supplement any provision of this Agreement that may be inconsistent with any other provision of this Agreement or to make any other provisions with respect to matters or questions arising under this Agreement which shall not be inconsistent with other provisions of this Agreement, (ii) this Agreement may be amended, modified or supplemented, and waivers and consents to departures from the provisions hereof may be given, by written agreement signed by the Company, the Guarantor and the Initial Purchasers to the extent that any such amendment, modification, supplement, waiver or consent is, in their reasonable judgment, necessary or appropriate to comply with applicable law (including any interpretation of the Staff of the SEC) or any change therein and (iii) to the extent any provision of this Agreement relates to an Initial Purchaser, such provision may be amended, modified or supplemented, and waivers or consents to departures from such provisions may be given, by 15 16 written agreement signed by such Initial Purchaser, the Guarantor and the Company. (d) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, registered first-class mail, telex, telecopier, or any courier guaranteeing overnight delivery (i) if to a Holder, at the most current address given by such Holder to the Company and the Guarantor by means of a notice given in accordance with the provisions of this Section 7(d), which address initially is, with respect to each Initial Purchaser, the address set forth in the Purchase Agreement; and (ii) if to the Company or the Guarantor, initially at the Company's and Guarantor's address set forth in the Purchase Agreement and thereafter at such other address, notice of which is given in accordance with the provisions of this Section 7(d). All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when answered back, if telexed; when receipt is acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery. Copies of all such notices, demands, or other communications shall be concurrently delivered by the Person giving the same to the Trustee, at the address specified in the Indenture. (e) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors, assigns and transferees of the Initial Purchasers, including, without limitation and without the need for an express assignment, subsequent Holders; provided, however, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Registrable Securities in violation of the terms of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Registrable Securities in any manner, whether by operation of law or otherwise, such Registrable Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Registrable Securities, such Person shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement and such Person shall be entitled to receive the benefits hereof. (f) Third Party Beneficiaries. Each Holder and any Participating Broker-Dealer shall be third party beneficiaries of the agreements made hereunder among the Initial Purchasers, the Guarantor and the Company, and the Initial Purchasers shall have the right to enforce such agreements directly to the extent it deems such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder. (g) 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. (h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. (i) GOVERNING LAW. THIS AGREEMENT SHALL BE DEEMED TO HAVE BEEN MADE IN THE STATE OF NEW YORK. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT, AND THE TERMS AND CONDITIONS SET FORTH HEREIN, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY PROVISIONS RELATING TO CONFLICTS OF LAWS. (j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby. (k) Securities Held by the Company or its Affiliates. Whenever the consent or approval of Holders of a specified percentage of Registrable Securities is required hereunder, Registrable Securities held by the Company, the Guarantor or their Affiliates shall not be counted in determining whether such consent or approval was given by the Holders of such required percentage. 16 17 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. QWEST COMMUNICATIONS INTERNATIONAL INC. By: ------------------------------- Name: Title: QWEST CAPITAL FUNDING, INC. By: ------------------------------- Name: Title: Confirmed and accepted as of the date first above written: BANC OF AMERICA SECURITIES LLC CHASE SECURITIES INC. By: BANC OF AMERICA SECURITIES LLC By: ------------------------------ Authorized Signatory By: CHASE SECURITIES INC. By: ------------------------------ Authorized Signatory For themselves and as Representatives of the several Initial Purchasers 17 EX-10.36 9 d84707ex10-36.txt DEFERRED COMPENSATION PLAN 1 EXHIBIT 10.36 QWEST COMMUNICATIONS INTERNATIONAL INC. DEFERRED COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS EFFECTIVE AS OF JULY 1, 2000 2 QWEST COMMUNICATIONS INTERNATIONAL INC. DEFERRED COMPENSATION PLAN FOR NONEMPLOYEE DIRECTORS PREAMBLE QWEST COMMUNICATIONS INTERNATIONAL INC., a Delaware corporation, hereby adopts the Qwest Communications International Inc. Deferred Compensation Plan for Nonemployee Directors (the "Plan"), effective as of July 1, 2000 (the "Effective Date"), to permit certain nonemployee members of its Board of Directors to defer receipt of all or a portion of their anticipated Director's Fees. ARTICLE I DEFINITIONS Whenever used herein, the following terms shall have the respective meanings set forth below, unless the context clearly indicates otherwise. In addition, unless some other meaning or intent is apparent from the context, the plural shall include the singular and vice versa; and masculine, feminine and neuter words shall be used interchangeably. 1.1 "Account" means, with respect to each Participant, the Phantom Unit Account established pursuant to Article IV below. 1.2 "Administrator" means the Executive Vice President - Human Resources or his successor or designee. 1.3 "Beneficiary" means the person, trust or other entity designated by the Participant in accordance with Section 6.7 below to receive payment under the Plan in the event of the Participant's death. If the Participant fails to designate a Beneficiary, or if all of the Participant's designated Beneficiaries predecease the Participant, then the Participant's Beneficiary shall be his or her estate. 1.4 "Board" means the Board of Directors of the Company. 1.5 "Code" means the Internal Revenue Code of 1986, as now or hereafter amended and in effect. 1.6 "Common Stock" means the Company's $.01 par value common stock. 1.7 "Company" means Qwest Communications International Inc., a Delaware corporation. 1.8 "Company Matching Deferrals" means the amounts allocated to a Participant's Account as a matching deferral in accordance with the provisions of Article III. 1.9 "Committee" means the Compensation Committee of the Board or such other committee, officer or person as the Board may designate from time to time. 1 3 1.10 "Director" means a member of the Board of the Company. 1.11 "Director's Fees" means any retainer, attendance fees, committee membership fees, or other compensation, paid in cash or stock by the Company to a Director for services as a Director. 1.12 "Eligible Director" means a Director who (a) is not an employee of the Company or any subsidiary of the Company and (b) does not own, directly or indirectly, 5% or more of the outstanding shares of the Company's Common Stock. 1.13 "Participant" means an Eligible Director who has elected to defer payment of Director's Fees under the Plan. A person remains a Participant so long as he or she has an Account balance under the Plan, whether or not such person remains an Eligible Director. 1.14 "Phantom Units" shall mean units held in a notational account in which each unit represents a value equivalent to one share of Common Stock of the Company. 1.15 "Plan" means the Qwest Communications International Inc. Deferred Compensation Plan for Nonemployee Directors, as set forth herein, together with all amendments hereto. 1.16 "Unforeseeable Emergency" means a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant, of the Participant's spouse or of a dependent (as defined in Code section 152(a)) of the Participant, loss of the Participant's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant. The need to pay college tuition and the desire to purchase a home will not be considered to constitute Unforeseeable Emergencies. ARTICLE II PARTICIPANT DEFERRALS 2.1 Deferral Elections. An Eligible Director may elect to irrevocably defer all or any portion of the Director's Fees that he or she anticipates earning. Such election shall be made and filed with the Company no later than (i) the last day of the calendar year prior to the calendar year in which such Director's Fees would otherwise be payable, if the Director initiates the election, or (ii) three months prior to the date the Director's Fees would otherwise be payable if a deferral election is solicited from all Directors by the Company. Such elections shall be made by filing a written notice with the Company in such form, in such manner and by such time as the Administrator shall specify. Notwithstanding the foregoing, a Director who first becomes an Eligible Director during a calendar year may, within thirty days following the date on which he or she becomes an Eligible Director, elect to defer Director's Fees that he or she has not yet earned (as of the date such Director files a deferral election with the Company) but that are payable in such calendar year. 2.2 Changes in Deferral Elections. A Participant's deferral election shall remain in effect until terminated or modified by the Participant pursuant to this Section 2.3. A Participant 2 4 may terminate or modify his or her deferral election by filing a new deferral election with the Company in accordance with the provisions of Section 2.1 above. New deferral elections shall become effective on the later of (i) the date specified in the election, or (ii) three months after the election if the change is solicited by the Company. 2.3 Suspension of Deferrals. A Participant may suspend his or her deferrals under the Plan during a calendar year if the Committee determines that the Participant has experienced (or would experience, if suspension were not permitted) an Unforeseeable Emergency that cannot be relieved through reimbursement or compensation by insurance or otherwise or by liquidation of the Participant's assets (to the extent the liquidation would not itself cause severe financial hardship). Any Participant who wishes to suspend his or her deferrals during a calendar year pursuant to this Section must file a written request for such suspension, together with such supporting documentation as the Committee may require, with the Committee for review and approval. Such suspension shall become effective as soon as administratively practicable after it is approved by the Committee. A Participant who has suspended his or her deferrals under this Section may not recommence those deferrals until the first day of the following calendar year. 2.4 Accounting. The Company shall credit a Participant's deferrals during a calendar year to the Account established for such Participant for such year, pursuant to Article IV below, as of the date on which the amount deferred would otherwise have been paid or made available to the Participant. ARTICLE III COMPANY MATCHING DEFERRALS At the time that Participant deferrals are credited to a Participant's Account under the Plan, the Company shall also credit an amount equal to 50% of the Participant deferrals to the Account as a Company Matching Deferral. The Company Matching Deferral shall be fully vested and shall be accounted for in the same manner as all other amounts allocated to a Participant's Account. ARTICLE IV ACCOUNTS 4.1 Establishment and Nature of Participant Accounts. The Company shall establish and maintain, in the name of each Participant, Accounts to reflect the Participant's interest under the Plan. A separate Account shall be established and maintained for each Participant for each year in which such Participant makes deferrals under the Plan. The maintenance of such Accounts is for recordkeeping purposes only. No funds or other assets of the Company shall be segregated or attributable to the amounts that may be credited to a Participant's Accounts from time to time, but rather benefit payments under the Plan shall be made solely from the general assets of the Company at the time any such payments become due and payable. 4.2 Account Earnings. Deferrals credited to a Participant's Account will be credited in Phantom Units in accordance with standard recordkeeping procedures. Additional Phantom Units shall be credited each quarter to the Participant's Accounts to reflect dividends paid on Company 3 5 Common Stock. The number of additional Phantom Units credited shall be calculated by multiplying the number of Phantom Units held in the Participant's Accounts as of the record date by the dividend payable per share and then dividing the result by the fair market value of Company Common Stock. The fair market value is determined by averaging the closing price of Company Common Stock over the three trading days ending on the payment date of the applicable dividend. 4.3 Change in Outstanding Shares. In the event of any change in outstanding Company shares by reason of any stock dividend or split, recapitalization, merger, consolidation or exchange of shares or other similar corporate change, the number of Phantom Units then credited to the Participant's Accounts shall be increased, decreased or changed in like manner as if such Phantom Units were actual shares of Company Common Stock and had been issued and outstanding, fully paid and nonassessable at the time of such occurrence. In addition, in the event of any such corporate changes, the Board shall make such other adjustments, if any, that it deems appropriate in the number or other features of Phantom Units then credited to the Participants' Accounts. Any and all such adjustments shall be conclusive and binding upon all parties concerned. 4.4 Account Statements. After the close of each calendar year, or more frequently as the Administrator, in its sole discretion, determines, the Company shall furnish each Participant with a statement of the value of his or her Accounts. ARTICLE V VESTING A Participant shall be fully vested in his or her Accounts at all times, subject only to his or her status as a general unsecured creditor of the Company in the event of the Company's insolvency or bankruptcy. ARTICLE VI DISTRIBUTIONS 6.1 Timing and Form of Distribution. (a) Except as provided otherwise in this Article VI, each of the Participant's Accounts shall be distributed or commence to be distributed to the Participant on, or as soon as administratively practicable after, the earlier of the distribution date specified for such Account by the Participant or the termination of the Plan. Subject to subsection 6.1(c) below, the Participant shall specify the date on which each of his or her Accounts shall be distributed or shall commence to be distributed at the time he or she makes, and as a part of, an election to defer the Director's Fees credited to that Account. The Participant may make a separate election with respect to each of his or her Accounts. (b) Except as provided otherwise in this Article VI, each of the Participant's Accounts shall be distributed to the Participant in the form elected for such Account by the Participant. The Participant may elect to have an Account distributed in either a cash lump sum, annual cash installments over a period not to exceed ten (10) years or such other form as the Administrator may approve. Subject to subsection 6.1(c) below, the Participant shall specify the form in which 4 6 each of his or her Accounts is to be distributed at the time such Participant makes, and as a part of, an election to defer the Director's Fees credited to that Account. The Participant may make a separate election with respect to each of his or her Accounts. (c) A Participant may change the timing and/or form of distribution for one or more of his or her Accounts at any time, so long as such change is requested in writing (and such request is filed with the Company) at least six months prior to the date on which any of the Accounts to which it relates is scheduled to be distributed or to commence to be distributed; provided, however, that the Participant may not make more than one such change with respect to his or her Accounts in any sixty consecutive month period. Any change that is requested by a Participant within six months of the date on which any of the Accounts to which it relates is scheduled to be distributed or to commence to be distributed, or within sixty months of a previous change to the timing and/or form of distribution for any of the Participant's Accounts, shall be null and void. 6.2 Disability. Notwithstanding Section 6.1 above, if a Participant becomes disabled and ceases to be a Director as a result, or if the Participant becomes disabled after he or she ceases to be a Director, then the Committee may, in its sole discretion, direct that his or her undistributed Account balances be distributed to such Participant in a lump sum on, or at any time after, the later of the date on which he or she ceases to be a Director and the date on which a determination of disability is made by the Committee. For purposes of the Plan, a Director shall be considered to be disabled if, as a result of an illness, injury or similar incapacity, such Director is unable to perform those daily activities that he or she was performing immediately prior to the illness, injury or other incapacity, and such condition is expected to last for a period of at least six (6) months. The existence of a disability shall be determined by the Committee, and shall be based upon such medical and other evidence as the Committee deems appropriate; provided, however, that a Participant shall be considered to be disabled if he or she is totally and permanently disabled within the meaning of Code section 22(e)(3). 6.3 Competition. Notwithstanding Section 6.1 above, if a Participant ceases to be a Director and becomes a proprietor, officer, partner or employee of, or otherwise becomes affiliated with, any business that is in competition with the Company or any of its subsidiaries, or becomes employed by a governmental agency having jurisdiction over the activities of the Company or any of its subsidiaries, as determined by the Committee in its sole discretion, then such Participant's undistributed Account balances shall be distributed to him or her in a cash lump sum on, or as soon as administratively practicable after, the date on which he or she ceases to be a Director. 6.4 Change of Control. (a) Notwithstanding Section 6.1 above, upon a "Change of Control," as defined in subsection 6.4(b) below, the Participant's undistributed Account balances shall be funded into a trust or distributed to the Participant in a lump sum within thirty days after such Change of Control. (b) For purposes of this Section 6.4, a "Change of Control" shall be deemed to have occurred if either (i) any individual, entity, or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the 1934 Act), other than Anschutz Company, The Anschutz Corporation, any entity or organization controlled by Philip F. Anschutz (collectively, the "Anschutz Entities") or a trustee or other fiduciary holding securities under an employee benefit plan of the Company, acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of fifty percent (50%) or more of either (A) the then-outstanding shares of Stock ("Outstanding Shares") or (B) the combined voting power of the then-outstanding voting securities of the Company 5 7 entitled to vote generally in the election of directors ("Voting Power") or (ii) at any time during any period of three consecutive years (not including any period prior to the Effective Date), individuals who at the beginning of such period constitute the Board (and any new director whose election by the Board or whose nomination for election by the Company's stockholders was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of such period or whose election or nomination for election was previously so approved) cease for any reason to constitute a majority thereof. 6.5 Unforeseeable Emergency. Any Participant, who the Committee determines has experienced (or would experience, if a withdrawal were not permitted) an Unforeseeable Emergency, shall be entitled to withdraw such amount from his or her Accounts as reasonably is needed to satisfy the emergency need. A Participant shall be required to submit a written request for such a withdrawal, together with such supporting documentation as the Committee may require, to the Committee for review and approval. Such request may specify the Account(s) from which the Participant wishes to make the withdrawal. If the request fails to do so, or if the balances in the specified Account(s) are insufficient to cover such withdrawal, then any amounts for which no designation has been made (or which are in excess of the designated balances) shall be withdrawn from the Participant's Accounts, from oldest to newest, until the withdrawal amount is satisfied. Upon the approval of a Participant's request for such a withdrawal, the Participant's deferrals under the Plan shall be suspended and the Participant shall be precluded from making further deferrals under the Plan until the first day of the following calendar year. A distribution under this Section 6.5 shall occur as soon as administratively practicable after the Committee approves the Participant's request. Notwithstanding the foregoing, distribution under this Section 6.5 may not be made to the extent that the hardship is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant's assets (to the extent the liquidation would not itself cause severe financial hardship) or by cessation of deferrals under the Plan. 6.6 Other In-Service Distributions. A Participant shall be entitled to withdraw all or any portion of his or her undistributed Account balances under the Plan at any time; provided, however, that there shall be deducted from any such withdrawal and forfeited to the Company an amount equal to ten percent of the amount withdrawn. A Participant shall be required to submit a written request for any such in-service withdrawal to the Administrator for review and approval. Such request may specify the Account(s) from which the Participant wishes to make the withdrawal. If the request fails to do so, or if the balances in the specified Account(s) are insufficient to cover such withdrawal, then any amounts for which no designation has been made (or which are in excess of the designated balances) shall be withdrawn from the Participant's Accounts, from oldest to newest, until the withdrawal amount is satisfied. Upon the approval of the Participant's request for such a withdrawal, the Participant's deferrals under the Plan shall be suspended and the Participant shall be precluded from making further deferrals under the Plan until the first day of the second calendar year beginning after the calendar year in which the withdrawal occurs. A distribution under this Section 6.6 shall occur as soon as administratively practicable after the Administrator approves the Participant's request. 6.7 Payment of Benefits Following Death. (a) Upon the death of a Participant, any undistributed balances in the Participant's Accounts shall be distributed or commence to be distributed to the Participant's Beneficiary(ies) as soon as administratively practicable in the form specified by the Participant. A Participant shall designate a Beneficiary(ies) and the form(s) in which his or her undistributed Account balances shall be distributed to such Beneficiary(ies) on 6 8 such form (filed with the Company) as the Administrator shall prescribe. The Participant may change a Beneficiary designation at any time by filing a new Beneficiary designation with the Company. Any such change shall be effective only if the Participant is alive at the time the Company receives such change. The most recent Beneficiary designation on file with the Company shall be controlling. (b) The forms of distribution that may be designated by a Participant pursuant to this Section 6.7 are as follows: (i) For any Accounts with respect to which distributions have commenced prior to the Participant's death, the Participant may specify either that the form(s) in which such Accounts are being distributed to him or her at the time of death shall continue with respect to his or her Beneficiary(ies) or that any undistributed Account balances shall be accelerated and distributed to such Beneficiary(ies) in a cash lump sum. (ii) For any Accounts with respect to which distributions have not commenced prior to the Participant's death, the Participant may specify that the balances in such Accounts shall be distributed either in a cash lump sum or in such other form of distribution as the Administrator may approve. If a Participant fails to specify in his or her Beneficiary designation the form(s) in which his or her undistributed Account balances are to be distributed upon his or her death, then such Account balances shall be distributed to the Participant's Beneficiary(ies) in a cash lump sum. 6.8 Distribution in Event of Taxation. Notwithstanding any provision in the Plan to the contrary, if the Internal Revenue Service or a court determines that any amounts credited to a Participant's Accounts under the Plan are currently taxable under the Code, the Committee may, in its discretion, cause such taxable amounts to be distributed to the Participant during the year in which such amounts are taxable or during any subsequent year. ARTICLE VII ADMINISTRATION 7.1 Plan Administration. (a) The Administrator shall have and exercise all discretionary and other authority to control and manage the operation and administration of the Plan, except such authority as is specifically allocated otherwise by or under the terms hereof, and shall have the power to take any action necessary or appropriate to carry out such responsibilities. Without limiting the foregoing, and in addition to the authority and duties specified elsewhere herein, the Administrator shall have the discretionary authority to construe, interpret and apply the terms and provisions of the Plan; to prescribe such rules and regulations, and issue such directives, as it deems necessary or appropriate for the administration of the Plan; and to make all other determinations and decisions as it deems necessary or appropriate for the administration of the Plan. The Administrator may correct any defect or supply any omission or reconcile any inconsistency in the Plan in the manner and to the extent it deems expedient. Decisions of the Administrator shall be final and binding upon the Participants, and their legal representatives and beneficiaries. 7 9 (b) No Director may decide, determine or act on any matter that affects the distribution, nature or method of settlement of solely his or her Accounts under the Plan, except in exercising an election available to that Director in his or her capacity as a Participant. 7.2 Claims Procedure. A Participant or Beneficiary, as applicable, shall file any claim for payments under the Plan with the Administrator, which shall consider such claim and notify the claimant of its decision with respect thereto within ninety (90) days (or within such longer period, not to exceed one hundred eighty (180) days, as the Administrator determines is necessary to review the claim; provided that the Administrator notifies the claimant of the extension within the original ninety (90) day period). If the claim is denied, in whole or in part, the claimant may appeal such denial to the Committee, provided he or she does so within sixty (60) days of receiving the Administrator's determination. The Committee shall consider the appeal and notify the claimant of its decision with respect thereto within sixty (60) days (or within such longer period, not to exceed one hundred twenty (120) days, as the Committee determines is necessary to review the appeal; provided that the Committee notifies the claimant of the extension within the original sixty (60) day period). The Committee's decision upon any appeal shall be final and binding on all parties. 7.3 Expenses. All expenses and costs incurred in connection with the administration and operation of the Plan shall be borne by the Company. ARTICLE VIII AMENDMENT, MODIFICATION AND TERMINATION This Plan may be amended, modified or terminated at any time by the Committee; provided, however, that no such amendment, modification or termination may adversely affect the rights of any Participant, without his or her consent, to any benefit under the Plan to which he or she was entitled prior to the effective date (or, if later, the adoption date) of such amendment, modification or termination. In the event of the termination of this Plan pursuant to this Article VIII, a Participant's Accounts shall be distributed to the Participant pursuant to Article VI above. ARTICLE IX MISCELLANEOUS 9.1 Unfunded Plan. The Plan shall be unfunded and all benefits under the Plan shall be paid solely from the Company's general assets. The Plan constitutes a mere promise by the Company to make benefit payments in the future. No Participant or Beneficiary shall have any preferred claim to the amounts credited to a Participant's Accounts or to any assets of the Company on account of a Participant's participation in the Plan prior to the time such amounts are actually paid to the Participant or Beneficiary, and then only to the extent of any such payment. Participants and Beneficiaries shall have the status of general unsecured creditors of the Company. 9.2 Withholding for Taxes and Other Deductions. The Company shall have the right to deduct from any deferral to be made or any distribution or withdrawal to be paid under the Plan 8 10 any applicable taxes that it is required by law to withhold and any amounts owed by the Participant to the Company. 9.3 No Right to Directorship. Nothing contained in the Plan or in any Deferral Agreement executed by a Participant in connection herewith shall be construed to (a) confer upon any Director any right to continue as a Director, (b) restrict in any way any right the Company may have to terminate or change the terms or conditions of any Director's directorship at any time, or (c) confer upon any Director or any other person any claim or right to any distribution under the Plan except in accordance with its terms. 9.4 Alienation Prohibited. Neither the Participant nor any Beneficiary shall have any right or ability to alienate, sell, transfer, assign, pledge or encumber, either voluntarily or involuntarily, any amount due or expected to become due under the Plan. Nor shall any such amounts be subject to garnishment, execution, levy or other seizure by any creditor of a Participant or Beneficiary. 9.5 General Limitation of Liability. Subject to applicable law and the Certificate of Incorporation and Bylaws of the Company, as in effect from time to time, neither the Company, the Board, the Committee, the Administrator nor any other person shall be liable, either jointly or severally, for any act or failure to act or for anything whatsoever in connection with the Plan, or the administration thereof, except, and only to the extent of, liability imposed because of willful misconduct, gross negligence or bad faith. All benefit payments shall be made solely from the Company's general assets. 9.6 Applicable Law. The Plan shall be construed and its validity determined in accordance with the laws of the State of Colorado to the extent such laws are not preempted by federal law. 9.7 Successors and Assigns. The terms and conditions of the Plan, as amended and in effect from time to time, shall be binding upon the Company's successors and assigns, including without limitation any entity into which the Company may be merged or with which the Company may be consolidated. Dated: , 2000. ------------------------ QWEST COMMUNICATIONS INTERNATIONAL INC. By: --------------------------------------------- 9 EX-10.37 10 d84707ex10-37.txt AMENDED AND RESTATED QWEST DIGITAL MEDIA 1 EXHIBIT 10.37 QWEST DIGITAL MEDIA, LLC GROWTH SHARE PLAN (AS AMENDED AND RESTATED EFFECTIVE JUNE 1, 2000) 2 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 5 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 6 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 Number of Growth Shares; Adjustments 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 Section 8 - Initial Public Offering 9 8.1 Value of Growth Shares Capped Upon Initial Public Offering 9 8.2 Issuance of Non-Qualified Stock Options 9 Section 9 - PAYMENTS TO PARTICIPANTS 9 9.1 Value of Growth Shares 9 9.2 Payments to Participants - In General 9 9.3 Form of Payment 10 9.4 Use of Common Stock for Payment 10 9.5 Exceptional Payments 11 Section 10 - RIGHTS OF EMPLOYEES 11
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Page ---- Section 11 - DESIGNATION OF BENEFICIARIES 12 Section 12 - CHANGES IN ACCOUNTING RULES 12 Section 13 - OTHER EMPLOYEE BENEFITS 12 Section 14 - PLAN AMENDMENT, MODIFICATION AND TERMINATION 13 Section 15 - SETOFF 13 Section 16 - PLAN FUNDING 13 Section 17 - NON-ASSIGNABILITY OF RIGHTS 13 Section 18 - WITHHOLDING TAXES 14 Section 19 - REQUIREMENTS OF LAW 14 19.1 Requirements of Law 14 19.2 Governing Law 14 Section 20 - SEVERABILITY 14
ii 4 QWEST DIGITAL MEDIA, LLC GROWTH SHARE PLAN SECTION 1 INTRODUCTION 1.1 Establishment. Qwest Digital Media, LLC, a Delaware limited liability company, (as defined in subsection 2.1(j), the "Company") adopted the Qwest Digital Media, LLC Growth Share Plan (the "Plan") effective as of March 23, 1999. The Plan is hereby amended and restated in its entirety as set forth below, effective as of June 1, 2000. The Plan permits the grant of Growth Shares (as defined in subsection 2.1(n)) to certain key employees of the Company and its Affiliated Entities (as defined in subsection 2.1(a)) or to other individuals selected by the Board. 1.2 Purposes. The purposes of the Plan are to provide the persons selected for participation in the Plan with added incentives to continue in the service of the Company and to create in such persons a more direct interest in the future success of the operations of the Company by relating incentive compensation to 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 persons 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 increase in value of the LLC Interests (as defined in subsection 2.1(p)) or the Common Stock (as defined in subsection 2.1(i)), as applicable, of the Company, as described in Section 9. Except as otherwise provided in Sections 9.3 and 9.4, 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. Regardless of any difference in the attributes of the various classes of Membership Interests (as defined in subsection 2.1(s)) in the Company, all such classes of membership interests shall be treated as equivalent for purposes of the Plan. SECTION 2 DEFINITIONS 2.1 Definitions. The following terms shall have the meanings set forth below: (a) "Affiliated Entity" means any corporation, partnership, limited liability company or other entity 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, or is otherwise designated as an Affiliated Entity by the Board. (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. 1 5 (c) "Appraised Value" means the fair market value of the Company, which shall be the cash price that would be paid for the Company by an arm's length purchaser, or the Company's assets less its liabilities, determined by appraisal in accordance with the following provisions, divided by the number of LLC Interests or shares of Common Stock outstanding, determined on a fully diluted basis. If the Company is converted into a corporation and if the LLC Interests are converted into a class of Common Stock of such new corporation, the "Appraised Value" shall be determined based upon the outstanding shares of such Common Stock. When Appraised Value is to be used to determine the Ending Value, the Appraised Value shall be initially determined by an independent investment banking firm nationally recognized in the telecommunications or media 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 Entity 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 as so determined, the Participant or Participants may engage an independent investment banking firm nationally recognized in the telecommunications or media industry to conduct a second appraisal (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 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 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 Value. If the Second Appraisal produces an Appraised Value 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 or media industry shall be selected by the first appraiser and the second appraiser to determine the Appraised Value (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 be used to determine the Ending Value with respect to the Participants who requested the Second Appraisal shall be the average of the two Appraised Values, as determined pursuant to the First Appraisal, the Second Appraisal and the Third Appraisal, that are closest in value. The costs and 2 6 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 Value" means such value per LLC Interest or share of Common Stock as shall be specified by the Board for any grant of Growth Shares. The Beginning Value with respect to a grant of Growth Shares shall be specified in the Plan Agreement with each Eligible Employee. (f) "Board" means the Management Committee or other equivalent body, including but not limited to a 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 Entity 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 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 (i) Qwest Communications International Inc. ("Qwest"), (ii) any entity or organization controlled by Qwest, or (iii) any entity or organization affiliated with Qwest, acquires beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of more than fifty percent (50%) of either (i) the then-outstanding Membership Interests or 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"). A "Change of Control" shall not occur if Qwest is merged with or into any other company or all of the stock of Qwest is acquired by any other company. (i) "Common Stock" means the common stock of the Company that is issued in replacement or substitution for the LLC Interests at such time as the Company is converted into a corporation. (j) "Company" means Qwest Digital Media, LLC, a Delaware limited liability company, or any entity which is a successor thereto as a result of merger, consolidation, liquidation or other reorganization, and, where the context requires, any Affiliated Entity. (k) "Effective Date" means the effective date of the Plan, March 23, 1999. (l) "Eligible Employees" means those key employees (including, without limitation, officers and directors who are also employees) of the Company or an Affiliated Entity, non-employee members of the Board or an Affiliated Entity, and any other individuals selected by the Board who are designated for participation in the Plan pursuant to Section 4. 3 7 (m) "Ending Value" means the per share value (determined on a fully diluted basis) of the LLC Interests or the Common Stock, as the case may be, 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 Value will be the Appraised Value 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 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 Value will be the Appraised Value immediately after the date of the Change of Control. Notwithstanding the foregoing, if the Common Stock is traded on an established securities market as of the time Ending Value is to be determined and the Company is subject to the reporting and disclosure requirements of the Exchange Act, the Ending Value will be equal to the per share Market Value of such Common Stock on the date of the Triggering Event, subject to the provisions of Section 8. (n) "Growth Share" means a unit of value as determined under the provisions of Section 9 of the Plan. (o) "Internal Revenue Code" means the Internal Revenue Code of 1986, as it may be amended from time to time. (p) "LLC Interests" means all of the various Membership Interests in the Company outstanding from time to time. For purposes of this Plan, all Membership Interests in the Company shall be treated as equivalent. (q) "Market Value" means the average of the mean between the bid and the asked prices of the Common Stock, 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. (r) "Measuring Period" means the time period between the date as of which Beginning Value is determined with respect to the grant of a Growth Share to a Participant and the date as of which Ending Value is determined. (s) "Membership Interests" means all classes of outstanding Membership Interests in the Company. 4 8 (t) "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. (u) "Performance Cycle" means the period established by the Board at the time of each grant of Growth Shares at the end of which Ending 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. (v) "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. (w) "Plan" means the Qwest Digital Media, LLC Growth Share Plan as set forth in this document. (x) "Retirement" means termination of employment with the Company and all Affiliated Entities on or after reaching the normal retirement age of sixty-five. (y) "Triggering Event" means any event that triggers the redemption of and payment for the Growth Shares and the determination of Ending Value, as follows: (i) end of the Performance Cycle; (ii) termination of the Plan; or (iii) Change of Control. (z) "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 Entities 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 Entities 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. A Participant who is not an employee of the Company or an Affiliated Entity shall have Vesting determined in accordance with the provisions established by that Participant's Plan Agreement. 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. 5 9 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 to those Eligible Employees of the Company and Affiliated Entities who, in the opinion of the Board, have the opportunity to significantly enhance the long-term financial success of the Company. The Board shall have the power and authority to designate any individual, whether or not an employee of the Company or an Affiliated Entity, as an "Eligible Employee" for purposes of participation in the Plan. 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. 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 Value shall be calculated, and the amount of Beginning Value, for purposes of calculating the value of the Growth Shares, the Performance Cycle associated with 6 10 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 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 Number of Growth Shares; Adjustments. Each Growth Share shall represent the equivalent of one LLC Interest or the equivalent number of shares of Common Stock into which one LLC Interest is converted upon conversion of the Company into a corporation. The maximum number of Growth Shares that may be awarded under the Plan shall not exceed an aggregate of 12,750,000. If the outstanding LLC Interests or shares of Common Stock of the Company, as the case may be, are changed as a result of a stock dividend or any other distribution upon such shares payable in Common Stock, or through a stock split, subdivision, consolidation, combination, reclassification, recapitalization or other similar change in the LLC Interests or the Common Stock, the number of Growth Shares then held by Participants and covered by the Plan, the Beginning Value with respect to such Growth Shares and the number of Growth Shares that may be awarded under the Plan, shall be correspondingly adjusted by the Board to equitably reflect such change and any such adjustment shall be conclusive and binding for all purposes of the Plan. If the total number of outstanding LLC Interests or shares of Common Stock, as the case may be, are increased after the Effective Date as a result of a merger, 7 11 acquisition, consolidation, reorganization or similar corporate transaction, or through the sale of additional LLC Interests or shares of Common Stock, no adjustment shall be made with respect to outstanding Growth Shares or the Growth Shares available for issuance under the Plan, unless the Board determines that the Company has not received at least equivalent value for the additional LLC Interests or shares of Common Stock in which case the Board shall make appropriate adjustments to the outstanding Growth Shares to equitably reflect any dilution in value of the outstanding LLC Interests or Common Stock. 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 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 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 Entity (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. 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(y)(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. 8 12 SECTION 8 INITIAL PUBLIC OFFERING 8.1 Value of Growth Shares Capped Upon Initial Public Offering. Notwithstanding the provisions of subsection 2.1(m), in the event that the Company sells shares of its Common Stock to the public in an underwritten public offering under the Securities Act of 1933, or any equivalent applicable law (an "IPO"), the Ending Value of a Participant's Growth Shares shall not exceed the price to the public per share in such IPO established by the pricing committee at the pricing meeting held to establish such price, or the equivalent event (the "Initial Public Price"). The IPO shall not accelerate the Vesting with respect to any Growth Shares nor accelerate the payment for such Growth Shares, and the provisions of this Plan shall remain applicable to all such Growth Shares. 8.2 Issuance of Non-Qualified Stock Options. In the event of an IPO as described in Section 8.1, each Participant then holding Growth Shares shall receive a non-qualified stock option from the Company entitling the Participant to purchase an equivalent number of shares of the Company's Common Stock at a price per share equal to the Initial Public Price and with a vesting schedule identical to the vesting schedule then in place with respect to such Participant's Growth Shares. The non-qualified stock option shall become effective at the time of the IPO. The non-qualified stock option shall contain such other customary terms and conditions as may be determined by the Board in its sole discretion. SECTION 9 PAYMENTS TO PARTICIPANTS 9.1 Value of Growth Shares. The value of a Participant's Growth Shares will be calculated according to the following formula: (A - B - C + D) x E, as follows: (A) Ending Value, less (B) Beginning Value, less (C) an amount equal to 9% of each capital contribution or addition to the capital of the Company, divided by the number of outstanding LLC Interests or shares of Common Stock determined on a fully diluted basis at the time of such capital contribution or addition to the capital, 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) total distributions made with respect to all LLC Interests or 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 the number of LLC Interests or shares of Common Stock outstanding at the time (determined on a fully diluted basis), multiplied by (E) the number of Growth Shares granted to the Participant for which value is being determined. 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. 9.2 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 9.1 above. If a Participant is not 100% Vested at 9 13 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 9.2 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. The amount of any payment that is delayed in accordance with the foregoing provision 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 as provided in Sections 9.3 and 9.4) 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. 9.3 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. Notwithstanding the foregoing, if at the time of the Triggering Event the shares of the Company's Common Stock satisfy the requirements of Section 9.4(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 9.1. 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 9.2, 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. 9.4 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, state and foreign 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, state or foreign 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, provided, however, that the amount of shares of Common Stock withheld shall not exceed the minimum applicable withholding rate. 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 9.4(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. 10 14 (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, provided, however, that the amount of shares of Common Stock withheld shall not exceed the minimum applicable withholding rate. 9.5 Exceptional Payments. Notwithstanding the foregoing provisions of this Section 9, the Board may cause any payments due hereunder to be made in two equal annual installments. As provided in Section 9.2 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 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 10 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 Entity, or interfere in any way with the right of the Company or Affiliated Entity, 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. 11 15 SECTION 11 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 12 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. SECTION 13 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. 12 16 SECTION 14 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 15 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 16 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 17 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 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. 13 17 SECTION 18 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 19 REQUIREMENTS OF LAW 19.1 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. 19.2 Governing Law. The Plan and all agreements hereunder shall be construed in accordance with and governed by the laws of the State of Colorado without the application of any conflicts of laws or principles otherwise applicable under Colorado law. SECTION 20 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 DIGITAL MEDIA, LLC ATTEST: - ------------------------------ By: ------------------------------------ Dated: ------------------------ 14 18 QWEST DIGITAL MEDIA, LLC GROWTH SHARE PLAN AGREEMENT THIS AGREEMENT is made and entered into as of _________________, 19___, by and between Qwest Digital Media, LLC (the "Company") and ___________________________ (the "Participant"). WHEREAS, the Company has adopted the Qwest Digital Media, LLC Growth Share Plan (as Amended and Restated effective June 1, 2000) (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 Value per LLC Interest or share of Common Stock, as the case may be, 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: 19
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 DIGITAL MEDIA, LLC By: --------------------------------- PARTICIPANT ------------------------------------ 20 DESIGNATION OF BENEFICIARY FOR PAYMENTS DUE UNDER QWEST DIGITAL MEDIA, LLC GROWTH SHARE PLAN The undersigned is a Participant in the Qwest Digital Media, LLC Growth Share Plan (as Amended and Restated effective June 1, 2000) (the "Plan") established by Qwest Digital Media, LLC (the "Company"). Pursuant to Section 11 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: - -------------------------- ----------------------- --------------- ----------------------- 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. 21 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 11 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. EX-12 11 d84707ex12.txt COMPUTATION OF RATIOS OF EARNINGS 1 EXHIBIT 12 QWEST COMMUNICATIONS INTERNATIONAL INC. RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
YEAR ENDED DECEMBER 31, ------------------------------------------ 2000 1999 1998 1997 1996 ------ ------ ------ ------ ------ Income before taxes............................... $ 126 $1,902 $2,419 $2,429 $2,377 Interest expense (net of amounts capitalized)..... 1,041 736 543 405 448 Interest factor on rentals ( 1/3)................. 137 92 70 91 79 ------ ------ ------ ------ ------ Earnings available for fixed charges.............. $1,304 $2,730 $3,032 $2,925 $2,904 ------ ------ ------ ------ ------ Interest expense.................................. $1,094 $ 763 $ 568 $ 425 $ 479 Interest factor on rentals ( 1/3)................. 137 92 70 91 79 ------ ------ ------ ------ ------ Fixed charges..................................... $1,231 $ 855 $ 638 $ 516 $ 558 ------ ------ ------ ------ ------ Ratio of earnings to fixed charges................ 1.06 3.19 4.75 5.67 5.20 ------ ------ ------ ------ ------
1 EX-13 12 d84707ex13.txt 1999 ANNUAL REPORT TO STOCKHOLDERS 1 EXHIBIT 13 SELECTED PORTIONS OF QWEST'S 2000 ANNUAL REPORT TO SHAREHOLDERS Following is the financial section of Qwest's 2000 Annual Report. Our 2000 Annual Report will be available on the Internet beginning March 20, 2001. To view the annual report online, visit our website at www.qwest.com/shareholder2001. You may also request that a printed copy be mailed to you in one of two ways: (1) by completing the literature request form at www.qwest.com/about/investor and then select "request materials" or (2) by writing to Investor Relations, Qwest Communications International Inc., 1801 California Street, 51st Floor, Denver, Colorado 80202. FINANCIAL CONTENTS
F-1 F-2 F-12 F-13 F-14 F-18 F-41 SELECTED MANAGEMENT'S QUANTITATIVE INDEPENDENT FINANCIAL NOTES TO MARKET FOR FINANCIAL DISCUSSION AND AND QUALITATIVE AUDITORS' REPORT STATEMENTS CONSOLIDATED REGISTRANT'S COMMON DATA ANALYSIS OF DISCLOSURES ABOUT FINANCIAL STOCK AND RELATED FINANCIAL MARKET RISK STATEMENTS STOCKHOLDER MATTERS CONDITION AND RESULTS OF OPERATIONS
2 SELECTED FINANCIAL DATA The merger between Qwest Communications International Inc. ("Qwest" or the "Company") and U S WEST, Inc. ("U S WEST") (the "Merger") was effective June 30, 2000. Amounts reflected below for the years ended December 31, 1996, 1997, 1998 and 1999 represent the results of operations for U S WEST only (the accounting acquirer). For the year ended December 31, 2000, the amounts reflect the results of operations for (i) U S WEST from January 1, 2000 through June 29, 2000 and (ii) the merged Qwest entity from June 30, 2000 through the end of the year.
YEAR ENDED DECEMBER 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- -------- -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues............................... $ 16,610 $ 13,182 $ 12,395 $ 11,521 $ 11,168 Operating expenses..................... 14,787 9,845 9,346 8,745 8,356 Operating income....................... 1,823 3,337 3,049 2,776 2,812 (Loss) income before extraordinary item and cumulative effect of change in accounting principle................. (81) 1,102 1,508 1,527 1,501 Net (loss) income(1)(2)................ (81) 1,342 1,508 1,524 1,535 (Loss) earnings per share:(3) Basic................................ (0.06) 1.54 1.76 1.83 1.86 Diluted.............................. (0.06) 1.52 1.75 1.79 1.82 Average common shares outstanding (thousands):(3) Basic................................ 1,272,088 872,309 854,967 834,831 825,835 Diluted.............................. 1,272,088 880,753 862,581 849,497 844,930 Dividends per common share............. $ 0.31 $ 1.36 $ 1.24 $ 1.24 $ 1.24 EBITDA(4).............................. 6,917 5,704 5,248 4,939 4,970 Total assets........................... 73,501 23,272 18,407 17,667 17,279 Total debt............................. 19,066 13,071 9,919 5,715 6,545 Debt to total capital ratio............ 31.6% 91.2% 92.9% 56.7% 61.6% Capital expenditures................... $ 6,968 $ 4,218 $ 2,905 $ 2,672 $ 2,831
- --------------- (1) 2000 net loss includes a charge of $1.096 billion ($0.86 per diluted share) of Merger-related costs, a charge of $560 million ($0.44 per diluted share) on the decline in the market value of certain financial instruments and a net gain of $182 million ($0.14 per diluted share) on the sales of investments. 1999 net income includes expenses of $282 million ($0.32 per diluted share) related to a terminated merger, a loss of $225 million ($0.26 per diluted share) on the sale of common stock and a charge of $34 million ($0.04 per diluted share) on the decline in the market value of derivative financial instruments. 1998 net income includes expenses of $68 million ($0.08 per diluted share) associated with the June 12, 1998 separation of U S WEST's former parent company into two independent companies (the "Separation") and an asset impairment charge of $21 million ($0.02 per diluted share). 1997 net income includes a $152 million regulatory charge ($0.18 per diluted share) related primarily to the 1997 Washington State Supreme Court ruling that upheld a Washington rate order, a gain of $32 million ($0.04 per diluted share) on the sale of U S WEST's one-seventh interest in Bell Communications Research, Inc. and a gain of $48 million ($0.06 per diluted share) on the sales of local telephone exchanges. 1996 net income includes a gain of $36 million ($0.04 per diluted share) on the sale of local telephone exchanges and the current effect of $15 million ($0.02 per diluted share) from adopting Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." As described in note 3 below, the per share amounts assume the conversion of U S WEST common stock into Qwest common stock for all periods presented. (2) 1999 net income includes $240 million ($0.27 per diluted share) for the cumulative effect of a change in accounting principle related to recognizing directory publishing revenues and expenses on the "point of publication" method. 1997 net income was reduced by an extraordinary charge of $3 million ($0.00 per diluted share) for the early extinguishment of debt. 1996 net income includes a gain of $34 million ($0.04 per diluted share) for the cumulative effect of the adoption of SFAS No. 121. (3) In connection with the Merger, each outstanding share of U S WEST common stock was converted into the right to receive 1.72932 shares of Qwest common stock (and cash in lieu of fractional shares). The average common shares outstanding assume the 1-for-1.72932 conversion of U S WEST shares for Qwest shares for all periods presented. In addition, average common shares outstanding also assume a one-for-one conversion of U S WEST Communications Group ("Communications Group") common shares outstanding into shares of U S WEST as of the Separation date. The 1998 average common shares outstanding include the issuance of approximately 28,786,000 shares of common stock attributable to the contribution to U S WEST by its former parent company ("Parent") of the businesses of the Communications Group and the domestic directories business of U S WEST Dex, Inc. ("Dex"). F-1 3 (4) Earnings before interest, income taxes, depreciation and amortization ("EBITDA") does not include non-recurring and non-operating items such as Merger costs, asset write-offs and impairments, gains/losses on the sale of investments and fixed assets, changes in the market values of investments, one-time legal charges, in-region long-distance activity, Qwest construction activity, Separation charges, regulatory accruals and sales of local telephone exchanges. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Certain statements set forth below under this caption constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 ("Reform Act"). See "Special Note Regarding Forward-Looking Statements" on page 1 of this Form 10-K for additional factors relating to such statements. RESULTS OF OPERATIONS 2000 Compared with 1999 The Merger has been accounted for as a reverse acquisition under the purchase method of accounting with U S WEST being deemed the accounting acquirer and Qwest the acquired entity. As U S WEST was deemed the accounting acquirer, its historical financial statements have been carried forward as those of the newly combined company. In connection with the Merger, each outstanding share of U S WEST common stock was converted into the right to receive 1.72932 shares of Qwest common stock. In addition, all outstanding U S WEST stock options were converted into options to acquire Qwest common stock. All share and per share amounts have been restated to give retroactive effect to the exchange ratio. F-2 4 The results of operations for Qwest (the acquired entity for accounting purposes) prior to the Merger with U S WEST on June 30, 2000, are not reflected in the accompanying consolidated statements of operations. However, the following unaudited consolidated pro forma results of operations are presented assuming the Merger had been completed on January 1, 1999 and have been adjusted to eliminate the impacts of non-recurring items such as Merger costs, asset write-offs and impairments, gains/losses on the sale of investments and fixed assets, changes in the market values of investments, one-time legal charges, in-region long-distance activity and Qwest construction activity.
ACTUAL YEAR ENDED PRO FORMA YEAR ENDED DECEMBER 31, DECEMBER 31, ---------------------------------------- ----------------- INCREASE % 2000 1999 2000 1999 (DECREASE) CHANGE ------- ------- ------- ------- ---------- ------- (DOLLARS IN MILLIONS) Revenues: Commercial services............... $ 7,424 $ 4,689 $ 9,425 $ 7,388 $2,037 27.6% Consumer and small business services....................... 6,372 5,571 6,715 6,284 431 6.9 Directory services................ 1,530 1,436 1,530 1,436 94 6.6 Switched access services.......... 1,284 1,486 1,284 1,486 (202) (13.6) ------- ------- ------- ------- ------ ------- Total revenues............ 16,610 13,182 18,954 16,594 2,360 14.2 ------- ------- ------- ------- ------ ------- Operating expenses: Cost of services.................. 5,433 3,990 6,757 5,906 851 14.4 Selling, general and administrative................. 4,260 3,488 4,829 4,406 423 9.6 ------- ------- ------- ------- ------ ------- EBITDA............................ 6,917 5,704 7,368 6,282 1,086 17.3 ------- ------- ------- ------- ------ ------- Depreciation...................... 2,617 2,348 2,706 2,520 186 7.4 Amortization...................... 725 19 1,359 1,287 72 5.6 Merger-related and other charges........................ 1,752 -- -- -- -- -- ------- ------- ------- ------- ------ ------- Total operating expenses................ 14,787 9,845 15,651 14,119 1,532 10.9 ------- ------- ------- ------- ------ ------- Operating income.................... 1,823 3,337 3,303 2,475 828 33.5 Other expense (income): Interest expense -- net........... 1,041 736 1,116 887 229 25.8 Decline in market value of financial instruments.......... 917 56 -- -- -- -- Expenses related to terminated merger......................... -- 282 -- -- -- -- (Gain) loss on sale of investments.................... (327) 367 -- -- -- -- Other expense (income) -- net..... 66 (6) 43 (3) 46 1,533.3 ------- ------- ------- ------- ------ ------- Total other expense -- net.......... 1,697 1,435 1,159 884 275 31.1 ------- ------- ------- ------- ------ ------- Income before income taxes and cumulative effect of change in accounting principle.............. 126 1,902 2,144 1,591 553 34.8 Provision for income taxes.......... 207 800 1,149 943 206 21.9 ------- ------- ------- ------- ------ ------- (Loss) income before cumulative effect of change in accounting principle......................... (81) 1,102 995 648 347 53.6 Cumulative effect of change in accounting principle -- net of tax............................... -- 240 -- -- -- -- ------- ------- ------- ------- ------ ------- Net (loss) income................... $ (81) $ 1,342 $ 995 $ 648 $ 347 53.6% ======= ======= ======= ======= ====== =======
Because of the significance of the Merger, the comparison of 2000 results to 1999 results will be based upon the above pro forma results except for goodwill and other intangible amortization expense, Merger-related and other charges and net (loss) income. F-3 5 REVENUES The Company's revenues are generated from a variety of services and products. Commercial, consumer and small business services revenues are derived from retail and wholesale services such as Internet and data products and services, including Web hosting and Internet access, frame relay and digital subscriber line ("DSL"). Also included in this category are voice services such as basic monthly fees for telephone service, wireless services, fees for calling services such as voice messaging and caller identification, special access and private line revenues from end-users buying local exchange capacity to support their private networks and inter- and intraLATA (local access and transport area) long-distance services. To a lesser extent, the Company sells capacity under indefeasible rights of use contracts. Revenues from these contracts are included in commercial services and were not significant in either fiscal 2000 or 1999. Directory services revenues are generated primarily from selling advertising in the Company's published directories. Switched access services revenue is derived principally from charges to interexchange carriers ("IXCs") for use of the Company's local network to connect customers to their long-distance networks. Total pro forma revenues for 2000 grew by 14.2 percent as compared to 1999, due to increases in commercial revenue driven by Internet Protocol ("IP") and data including sales of Internet access, frame relay and virtual private network services. Data and IP revenues represented over 22 percent of total pro forma revenues for 2000 up from 16 percent in 1999 as this segment of the business grew by more than 60 percent in 2000. The Company expects the data services business to become a greater portion of overall Company revenues in the future. Also contributing to the increase was residential wireless and DSL growth. Wireless revenues grew by 110 percent in 2000 over 1999 and DSL revenues grew by over 150 percent during the same period, primarily due to an increase in customers. Local voice revenues grew despite the fact that access line growth slowed to approximately 2 percent year-over-year. Total access lines increased by 341,000 with business lines comprising the majority of the change. The decline in access line growth was partially attributable to businesses converting single access lines to a lower number of high-speed, high-capacity lines allowing for transport of data at higher rates of speed. On a voice-grade equivalent basis, the Company's business access lines grew by 30.5 percent as compared to 1999. Directory services revenues for 2000 increased by almost $100 million due principally to higher advertising rates, an increase in the number of directories published and an increase in the number of premium quality advertisements. Partially offsetting the increase in total revenues was the decline in switched access revenue, primarily due to rate reductions mandated by the Federal Communications Commission ("FCC") as part of access reform, as well as rate reductions mandated by state public utility commissions ("PUCs"). IntraLATA and consumer long-distance service voice revenues also declined due to price cuts caused by regulatory rate reductions, a de-emphasis of out-of-region consumer services and greater competition. The Company believes it will continue to experience further declines in intraLATA long-distance revenues as competition increases. To compete more effectively and provide better value, Qwest continued to sell bundled products and services at prices lower than they could be sold individually in exchange for longer-term customer commitments and higher overall per customer revenue. As a result, Qwest has added 730,000 subscribers to its CustomChoice(SM) package (which includes a home phone line and the choice of 20 calling features) in 2000, with total subscribers exceeding 2,000,000 as of year end. Total subscribers to the Company's other significant bundled offering, Total Package(SM) (bundled wireless, wireline and Internet services package), exceeded 121,000 at December 31, 2000. During 1999 and 2000, the Company committed to sell approximately 800,000 access lines within the 14-state local service area. In 1999, definitive sales agreements were reached for the sale of 570,000 lines for approximately $1.8 billion in cash, subject to adjustment. In 2000, the sale of 20,000 access lines in North Dakota and South Dakota were consummated resulting in proceeds of $19 million and gains of $11 million. The transfer of ownership of the remaining access lines, which will occur on a state-by-state basis, is expected to be completed by the first quarter of 2002. The pending sales are subject to regulatory approvals and other customary closing conditions. In addition, on February 26, 2001, the Company announced that it does not have plans to sell F-4 6 a significant number of additional access lines at the present time. Sales of these rural access lines will exert downward pressure on revenue growth as these sales are finalized. EXPENSES Cost of services. Cost of services includes the following costs directly attributable to a product or service: salaries and wages, materials and supplies, contracted engineering services, network access costs, computer systems support, and the cost of products sold. Cost of services as a percent of revenue was 35.6 percent on a pro forma basis for both 2000 and 1999. Higher sales of early life cycle data products, increased competition and mandatory regulatory rate reductions on access products all impacted the gross margin. Although the gross margin remained flat year-over-year, total cost of services rose in 2000. Continued investments in early life cycle Web hosting, wireless and local broadband access products and customer service increased costs. These increases in costs were offset by network efficiencies gained through the elimination of redundant capacity and workforce and an increase in capitalized salaries and wages associated with higher capital investment. In addition, cost of services was also impacted by a reduction in the other post-retirement benefit costs and an increase in the pension credit in 2000 (which resulted primarily from higher than expected returns on plan assets). On January 5, 2001, Qwest announced an agreement with its major unions, the Communications Workers of America and the International Brotherhood of Electrical Workers, to extend the existing union contracts for another two years, through August of 2003. The extensions include a 3.5 percent wage increase in 2001, a 5 percent wage increase in 2002, a 6 percent pension increase in 2002, and a 10 percent pension increase in 2003. Excluding anticipated future cost synergies, these scheduled changes will increase cost of services in future years. Selling, general and administrative expenses. Selling, general and administrative ("SG&A") expenses include salaries and wages not directly attributable to a product or service, sales commissions, bad debt charges, rent for administrative space, advertising, professional service fees and taxes other than income taxes. Pro forma SG&A, as a percentage of revenue, improved to 25.5 percent in 2000 compared to 26.6 percent in 1999. SG&A expenses decreased as a percentage of revenues because of Merger-related reductions in staff resulting from the separation of more than 4,500 employees, other post-employment expense reductions, and an increase in the pension credit. These decreases were partially offset by increases in bad debts and property taxes. EBITDA. Because of the factors described above, pro forma EBITDA improved from 37.9 percent of revenues in 1999 to 38.9 percent in 2000. Depreciation expense. Depreciation expense increased 7.4 percent as compared to 1999 primarily due to higher overall property, plant and equipment resulting from continued investment in the Company's network to meet service demands. In addition, Qwest continues to invest in growth areas such as Internet and data services, Web hosting, wireless, and broadband access. Additional capital investments were also made to improve customer service levels. Goodwill and other intangible amortization expense. Substantially all of the goodwill and other intangible amortization resulted from the Merger. The preliminary purchase price allocation to these assets was $4.1 billion to identified intangibles and $27.9 billion to goodwill. The amounts allocated to tradenames and goodwill are being amortized over 40 years. The remaining intangible assets are being amortized over periods ranging from 3 to 10 years. The allocation of purchase price is preliminary and may change upon completion of an appraisal currently being performed on the acquired assets and liabilities of Qwest (the acquired entity for accounting purposes). The effect of any such change is not expected to be material. F-5 7 Merger-related and other charges. Qwest incurred Merger-related and other charges totaling $1.752 billion. A breakdown of these costs is as follows:
YEAR ENDED DECEMBER 31, 2000 ----------------- (DOLLARS IN MILLIONS) Contractual settlements and terminations........... $ 654 Merger bonuses and severance costs................. 443 Write-off of access lines.......................... 226 Termination of software development projects....... 114 Post-retirement benefit plan curtailment gain...... (106) Other Merger-related costs and charges............. 421 ------ Total Merger-related and other charges... $1,752 ======
Contractual settlements and termination losses of $654 million represents the costs incurred to cancel various commitments no longer deemed necessary as a result of the Merger and to settle various claims related to the Merger. In connection with the Merger, management identified a workforce reduction of over 4,500 employees primarily to eliminate duplicate functions. These employees were terminated prior to December 31, 2000. Of these, 1,078 employees voluntarily separated without receiving benefit packages. A severance charge of $341 million relates to employees involuntarily separated during fiscal 2000. Merger bonuses of $102 million represents bonus payments triggered by the successful completion of the Merger. The Company leases dedicated special-purpose access lines to Competitive Local Exchange Carriers ("CLECs"). Given current industry conditions and regulatory changes affecting CLECs, the Company evaluated those leased assets for impairment. The Company concluded that the fair value of those assets was minimal and took a $226 million charge. The assets are operated by the Company's wholesale services segment. Following the Merger, management reviewed all internal software projects in process, and determined that certain projects should no longer be pursued. Because the projects were incomplete and abandoned, the fair value of such incomplete software was determined to be zero and $114 million of capitalized software costs were written off. The abandoned projects included a significant billing system replacement and a customer database system. Other costs of $421 million include legal charges related to the Merger, professional fees, re-branding costs, relocation costs and other costs related to the integration of the two companies. Offsetting the Merger-related costs was a $106 million post-retirement benefit plan curtailment gain. This gain resulted from the post-Merger termination of retiree medical benefits for all former U S WEST employees who did not have 20 years of service by December 31, 2000 or would not be service pension eligible by December 31, 2003. Other expense -- net. Interest expense on a pro forma basis was $1.116 billion for 2000, compared to $887 million for 1999. Increased interest expense resulted from higher debt levels [incurred as a result of increased capital expenditures and the acquisition of 39 million shares of Global Crossing Ltd. ("Global Crossing") common stock in June 1999] and overall higher interest rates on commercial paper borrowings. Partially offsetting the increase in interest expense was an increase in pro forma capitalized interest in 2000 to $155 million from $83 million in 1999. The increase in capitalized interest was due to an increase in construction projects. During 1999, U S WEST acquired approximately 39 million shares in Global Crossing at a per share price of $62.75 in connection with the proposed merger of U S WEST and Global Crossing. Later that year, U S WEST and Qwest announced plans for the Merger thereby terminating the U S WEST -- Global Crossing combination. Upon termination of the merger in 1999, U S WEST incurred a one-time charge of $282 million to dissolve the proposed merger with Global Crossing. The charge included a cash payment of $140 million to F-6 8 Global Crossing, the transfer to Global Crossing of $140 million of Global Crossing common stock previously purchased by the Company and $2 million of miscellaneous costs. In late 1999, U S WEST incurred a $367 million loss on the sale of 24 million shares of Global Crossing common stock. In connection with that sale, U S WEST entered into an equity return swap that expires in 2001. The swap is reflected at market value in the accompanying consolidated financial statements. The market value of the swap declined by $470 million and $56 million in 2000 and 1999, respectively. The Company also recorded a loss of $447 million in the second quarter of 2000, when it determined the decline in its remaining investment in Global Crossing common stock was other than temporary. The Company disposed of its remaining investment in the third quarter of 2000, recognizing a gain of $50 million. In 2000, Qwest sold the majority of its non-strategic equity investments resulting in a net gain of $277 million. There were no such dispositions in 1999. Qwest also completed the sale of 20,000 access lines in North Dakota and South Dakota generating proceeds of $19 million and gains of approximately $11 million. These gains were reduced by a net loss on the sale of fixed assets of $39 million. Provision for income taxes. The effective tax rate for 2000 decreased to 53.6 percent on a pro forma basis compared to 59.3 percent in 1999. The decrease in 2000 from the 1999 effective tax rate resulted primarily from fixed, non-deductible goodwill charges being amortized over pro forma pre-tax income of $2.144 billion in 2000 versus pro forma pre-tax income of $1.591 billion in 1999. Net income (loss). Income before the cumulative effect of the change in accounting for directory revenues in 1999 decreased from $1.102 billion in 1999 to a net loss of $81 million in 2000 principally because of Merger-related charges of $1.752 billion. On a pro forma basis, net income increased from 3.9 percent of revenues to 5.2 percent of revenues in 2000 because of the effect of the items described above. F-7 9 1999 Compared with 1998 In connection with the Merger, U S WEST was deemed the accounting acquirer and its historical results for fiscal 1999 and 1998 have been carried forward as those of the newly combined company. Following are the historical results of U S WEST for fiscal 1999 and 1998.
YEAR ENDED DECEMBER 31, ----------------- INCREASE % 1999 1998 (DECREASE) CHANGE ------- ------- ----------- -------- (DOLLARS IN MILLIONS) Revenues: Commercial services................................. $ 4,689 $ 4,390 $ 299 6.8 Consumer and small business services................ 5,571 5,146 425 8.3 Directory services.................................. 1,436 1,318 118 9.0 Switched access services............................ 1,486 1,541 (55) (3.6) ------- ------- ----- -------- Total revenues.............................. 13,182 12,395 787 6.3 ------- ------- ----- -------- Operating expenses: Cost of services.................................... 3,990 3,564 426 12.0 Selling, general and administrative expenses........ 3,488 3,583 (95) (2.7) ------- ------- ----- -------- EBITDA.............................................. 5,704 5,248 456 8.7 ------- ------- ----- -------- Depreciation........................................ 2,348 2,198 150 6.8 Amortization........................................ 19 1 18 1,800.0 ------- ------- ----- -------- Total operating expenses.................... 9,845 9,346 499 5.3 ------- ------- ----- -------- Operating income...................................... 3,337 3,049 288 9.4 ------- ------- ----- -------- Other expense (income): Interest expense -- net............................. 736 543 193 35.5 Decline in market value of financial instruments.... 56 -- 56 -- Expenses related to terminated merger............... 282 -- 282 -- Loss on sale of investments......................... 367 -- 367 -- Other (income) expense -- net....................... (6) 87 (93) (106.9) ------- ------- ----- -------- Total other expense -- net.................. 1,435 630 805 127.8 ------- ------- ----- -------- Income before income taxes and cumulative effect of change in accounting principle...................... 1,902 2,419 (517) (21.4) Provision for income taxes............................ 800 911 (111) (12.2) ------- ------- ----- -------- Income before cumulative effect of change in accounting principle................................ 1,102 1,508 (406) (26.9) Cumulative effect of change in accounting principle -- net of tax............................. 240 -- 240 -- ------- ------- ----- -------- Net income............................................ $ 1,342 $ 1,508 $(166) (11.0) ======= ======= ===== ========
REVENUES Total revenues for 1999 increased by 6.3 percent as a result of growing demand for data services which increased private line and special access services revenues, greater sales of residential wireless, an increase in sales of vertical features, growth in inside wire maintenance plans, local number portability charges, interconnection charges, subscriber line charges and increases in the subscriber base of the Company's DSL data services. Also contributing to the growth in revenue were increased sales of Qwest.net(R), the national expansion of the Company's data business and increased sales of customer equipment. In addition, revenues derived from the directory publishing business increased by $118 million primarily as a result of growing sales of premium advertisements, price changes and the impact of a change in accounting principle. Effective in 1999, Qwest Dex, Inc. ("Qwest Dex") changed to the "point of publication method" of accounting, under which the Company F-8 10 recognizes revenues and expenses at the time the related directory is published. Previously, revenues and expenses were recognized under the "deferral method" under which revenues and expenses were recognized over the lives of the directories, generally one year. The methodology was changed to align Qwest Dex's revenue and expense policy with the earnings process and to better reflect the operating activity of the business. Directory services for 1998 do not include the effect of the directory publishing change in accounting principle. Adjusting 1998 revenues for the effects of the change in accounting principle, directory services revenues increased by $87 million, or 6.4 percent. Other areas of revenue growth include increased consumer and carrier access charges. At December 31, 1999, the Company had added 408,000 residential and business access lines, an increase of 2.5 percent over the end of 1998. Of this increase, residential second line installations accounted for 187,000 lines, an increase of 11.8 percent as compared with 1998. Second line additions by residential and small business customers increased primarily as a result of the growing demand for Internet access and data transport capabilities. Increasing demand to use the Company's networks by IXCs drove access minutes of use up by 5 percent during 1999. Partially offsetting the revenue increases were decreases in long-distance services and mandated rate reductions. The Company's long-distance services declined by $211 million. Increased competition, strategic price reductions, and expansion in the number and size of extended service areas accounted for the majority of the decrease. Also contributing to the decline were mandatory rate reductions of $40 million in 1999. As of December 31, 1999, customers in all 14 states in which the Company provides local service were able to choose an alternative provider for intraLATA calls without dialing a special access code when placing a call. Federal and state mandated rate changes also offset a portion of the revenue increase. Excluding the long-distance rate changes discussed above, the remaining rate changes totaled $180 million. Most of these rate reductions were directly attributable to the implementation of the FCC's access reform order relating to the Telecommunications Act of 1996 dealing with interstate access pricing. Although Qwest's revenues continued to grow in 1999, some areas of service experienced a decline in growth rates from 1998, particularly retail and wholesale basic monthly services and calling services. The drop in the growth rate was primarily attributable to increased competition as well as the Company's customer retention strategy of offering bundles of services to customers at lower prices in return for entering into longer-term contracts. During 1999, the Company committed to sell approximately 800,000 access lines within the 14-state local service area. In 1999, definitive sales agreements were reached for the sale of 570,000 lines for approximately $1.8 billion in cash, subject to adjustment. The transfer of ownership of the access lines, which will occur on a state-by-state basis, is expected to be completed by the first quarter of 2002. The pending sales are subject to regulatory approvals and other customary closing conditions. In addition, on February 26, 2001, the Company announced that it does not have plans to sell a significant number of additional lines at the present time. EXPENSES Cost of services. The cost of services increase year-over-year was attributable to several items. First, growing sales in the Company's wireless, data and directory businesses contributed to the increased costs of product sales. Second, the Company experienced higher access and interconnection expenses resulting from regulatory rulings that require Qwest to pay access charges to carriers for calls that originate on the Company's network and terminate on other carriers' networks. Part of the access expense increase was offset by reductions in access expense due to end-users dialing toll calls directly to IXCs and bypassing the Company's network. Third, labor costs grew due to an increase in the number of employees as the result of a concerted effort by the Company to improve customer service. Finally, directory publishing costs were greater as a result of the directory publishing change in accounting principle. The effects of the change in accounting principle were not reflected in 1998 results. Partially offsetting some of these increases was the impact of net pension credits. In addition, cost of sales was further reduced by the 1999 capitalization of certain costs associated with developing internal use software due to the adoption of the American Institute of Certified Public Accountants' Statement of Position ("SOP") 98- F-9 11 1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." In accordance with the SOP, $188 million of costs formerly expensed were capitalized in 1999. Selling, general and administrative expenses. Included in 1998 were $129 million of Separation costs and asset impairment charges. Additionally, 1998 results did not include the effects of the directory publishing change in accounting principle. Including the effects of the change in accounting principle in 1998 and excluding the Separation costs and asset impairment charges, SG&A expenses increased $27 million or 0.8 percent in 1999 over 1998. Offsetting increases in SG&A expenses was the effect of capitalizing $226 million of software costs in 1999 primarily associated with developing internal use software in accordance with SOP 98-1. EBITDA. The EBITDA margin increased from 42.3 percent of revenues in 1998 to 43.3 percent in 1999 because of the effects of the items discussed above. Depreciation expense. Depreciation expense increased 6.8 percent primarily due to higher overall property, plant and equipment balances resulting from continued investment in the Company's network. Additionally, the Company incurred amortization costs related to the capitalization of internal use software in accordance with SOP 98-1 and reduced the useful lives of certain assets due to changes in technology, both of which caused greater depreciation expense. Partially offsetting the increases was the cessation of depreciation associated with access lines that the Company plans to sell. Other expense -- net. Interest expense was $736 million for 1999 compared to $543 million for 1998. The increase in interest expense in 1999 was primarily attributable to debt incurred to acquire 39 million shares of Global Crossing common stock and the $3.9 billion in debt assumed in the Separation. The Company incurred a one-time charge in 1999 of $282 million to dissolve the proposed merger of U S WEST with Global Crossing. The charge included a cash payment of $140 million to Global Crossing, the transfer to Global Crossing of $140 million of Global Crossing common stock previously purchased by U S WEST and $2 million of miscellaneous costs. The Company incurred a $367 million loss in 1999 on the sale of 24 million shares of Global Crossing common stock. In connection with this transaction, Qwest entered into an equity return swap that is reflected at market value in the accompanying consolidated financial statements. In 1999, the market value of the swap declined by $56 million. Also included in other expense-net was other income of $6 million in 1999, compared to other expense of $87 million in 1998. The decrease in other expense-net was due to a reduction in regulatory interest expense, a reduction in interest expense on a federal income tax audit, gains on sales of real estate, net gains on sales of marketable securities, reduced contributions to an affiliated foundation and interest earned on a gross receipts tax settlement. Provision for income taxes. The effective tax rate in 1999 was 42.1 percent compared to 37.7 percent in 1998. The increase in the effective tax rate in 1999 was primarily attributable to the exclusion of the tax benefit for terminated merger-related expenses. Excluding the effects of terminated merger-related expenses, the effective tax rate in 1999 was 36.6 percent compared to 37.7 percent in 1998. The decrease from the 1998 effective tax rate resulted primarily from certain non-deductible Separation costs in 1998 and the increase in tax-exempt dividend income in 1999. Net income. Income before the cumulative effect of the change in accounting principle decreased from 12.2 percent of revenues in 1998 to 8.4 percent in 1999 because of the effect of the items discussed above. Prior to 1999, Qwest Dex recognized revenues and expenses related to publishing directories using the "deferral method," under which revenues and expenses were recognized over the lives of the directories, generally one year. Effective in the fourth quarter of 1999, Qwest Dex changed to the "point of publication method" of accounting, which recognizes revenues and expenses at the time the directory is published. This change in methodology was made to better align Qwest Dex's revenue and expense recognition with the earnings process and to better reflect the operating activity of the business. The accounting change resulted in a one-time increase in net income of $240 million (net of income tax of $153 million), or $0.27 per diluted share, which is reported as the cumulative effect (as of January 1, 1999) of a change in accounting principle. The Company F-10 12 restated its 1999 quarterly results of operations to give effect to the point of publication method which increased net income by $13 million, or $0.01 per diluted share. On a restated basis, use of the point of publication method would have increased 1998 net income by $12 million, or $0.01 per diluted share. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. Cash provided by operations was $3.681 billion, $4.546 billion and $3.927 billion in 2000, 1999 and 1998, respectively. The decrease in operating cash flow in 2000 was primarily caused by Merger-related costs of $995 million. Merger-related costs of $523 million remained accrued at December 31, 2000. The majority of these costs are expected to be paid in the first two quarters of fiscal 2001. Accounts receivable increased as a result of higher sales, the customer profile of accounts receivable at year end reflecting the combined entity and an increase in days outstanding from 58 in 1999 to 74 in 2000. Increases in other working capital also reduced cash flows from operations. Investing Activities. Capital expenditures were $6.597 billion, $3.944 billion and $2.672 billion, in 2000, 1999 and 1998, respectively. Capital expenditures have been focused on modernization and expansion of the telecommunications network, expansion of the wireless, local broadband and the data communications networks, as well as construction of CyberCenters(SM) in major markets. The Company plans to invest $9.5 billion in capital expenditures in the same areas during 2001. The Company expects that cash needs will be funded through operations and additional borrowings. In January 2001, Qwest re-acquired 22.22 million shares of its common stock from BellSouth Corporation ("BellSouth") for $1.0 billion in cash. The repurchased shares will be available to satisfy the Company's obligations under its employee benefits and options programs. As part of the transaction, BellSouth agreed to purchase $250 million in services from Qwest over the next five years. BellSouth will pay for these services with shares of Qwest common stock. Financing Activities. Cash provided by financing activities was $1.189 billion and $1.945 billion in 2000 and 1999, respectively. Cash used for financing activities was $1.136 billion in 1998. Net borrowings of approximately $1.4 billion were incurred in 2000 principally to fund the Company's construction activities described above. The net proceeds from short-term and long-term borrowings in 1999 of approximately $3.3 billion were, in part, utilized to finance the Global Crossing tender offer. In 1998, net borrowings increased by $4.2 billion to $9.9 billion at December 31, 1998, of which approximately $3.9 billion was attributable to the debt assumed at the Separation date. The Company paid dividends on its common shares totaling $542 million, $1.187 billion and $1.056 billion in 2000, 1999 and 1998, respectively. The decrease in 2000 was due to a change in the Company's dividend policy after the Merger. The Company currently anticipates annual dividends of approximately $0.05 per common share. Qwest maintains commercial paper programs to finance purchases of telecommunications equipment. As of December 31, 2000, the Company had a syndicated credit facility with a total borrowing capacity of $4.0 billion. In March 2001, the Company completed a cash tender for certain outstanding debt. The Company repurchased all but approximately $40 million of the $1.2 billion in principal subject to the tender. The tender offers were conducted to retire the bonds because of their high coupon rates and to reduce interest cost to the Company. In connection with these tender offers, the indentures were amended to remove restrictive covenants and certain default provisions. Also in February 2001, the Company issued $2.25 billion of notes due in 2011 at 7.25 percent per annum, and $1.0 billion of notes due in 2031 at 7.75 percent per annum. The proceeds of these notes were used to repay outstanding commercial paper. F-11 13 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is exposed to market risks arising from changes in interest rates. The objective of Qwest's interest rate risk management program is to manage the level and volatility of its interest expense. The Company may employ derivative financial instruments to manage its interest rate risk exposure. Qwest has also employed financial derivatives to hedge foreign currency exposures associated with particular debt issues. As of December 31, 2000 and 1999, approximately $2.4 billion and $2.3 billion, respectively, of floating-rate debt was exposed to changes in interest rates. This exposure was primarily linked to commercial paper rates and changes in 3-month London Interbank Offered Rates ("LIBOR"). A hypothetical increase of one-percentage point in commercial paper rates and 3-month LIBOR would increase annual pre-tax interest expenses by $24 million. As of December 31, 2000 and 1999, the Company also had approximately $1.2 billion and $522 million, respectively, of long-term fixed rate debt obligations maturing in the following 12 months. Any new debt obtained to refinance this debt would be exposed to changes in interest rates. A hypothetical 10 percent change in the interest rates on this debt would not have had a material effect on the Company's 2000 earnings. As of December 31, 2000 and 1999, Qwest had outstanding cross-currency swaps with notional amounts of $133 million. The cross-currency swaps synthetically transform 93 million and 94 million of Swiss Franc borrowings at December 31, 2000 and 1999, respectively, into U.S. dollar obligations. Any gains (losses) on the cross-currency swaps would be offset by losses (gains) on the Swiss Franc debt obligations. As of December 31, 2000 and 1999, Qwest had entered into equity swaps with a notional amount of $761 million and $1.140 billion, respectively, relating to 24 million shares of Global Crossing common stock previously owned by the Company. In connection with the equity swaps, the Company entered into equity collars on 12 million shares and swaps without collars on the remaining 12 million shares. The equity collars restrict the magnitude of any gains or losses generated by the equity swaps on the collared shares. A hypothetical 10 percent reduction in the market price of Global Crossing common shares, based upon a market value per share of $14.25 on December 31, 2000, would decrease the market value of the Company's net position by $17 million. A hypothetical increase of one-percentage point in interest rates would decrease the market value of the Company's net position by $2 million. The swaps mature in three equal increments in February, May and August 2001. Other assets at December 31, 2000 included marketable equity securities recorded at a fair value of $58 million net of unrealized losses of $32 million. The securities have exposure to price risk. The estimated potential loss in fair value resulting from a hypothetical 10 percent decrease in prices quoted by stock exchanges would decrease the fair value of the Company's marketable equity securities by $6 million. NEW ACCOUNTING STANDARD In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires, among other things, that all derivative instruments be recognized at fair value as assets or liabilities on the balance sheet and that changes in fair value generally be recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 on January 1, 2001 did not have a material impact on the Company's consolidated financial statements. F-12 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Qwest Communications International Inc.: We have audited the accompanying consolidated balance sheets of Qwest Communications International Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting 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 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, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Denver, Colorado January 24, 2001. F-13 15 QWEST COMMUNICATIONS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, -------------------------------- 2000 1999 1998 ---------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues: Commercial services....................................... $ 7,424 $ 4,689 $ 4,390 Consumer and small business services...................... 6,372 5,571 5,146 Directory services........................................ 1,530 1,436 1,318 Switched access services.................................. 1,284 1,486 1,541 ---------- -------- -------- Total revenues.................................... 16,610 13,182 12,395 ---------- -------- -------- Operating expenses: Cost of services.......................................... 5,433 3,990 3,564 Selling, general and administrative....................... 4,260 3,488 3,583 Depreciation.............................................. 2,617 2,348 2,198 Amortization.............................................. 725 19 1 Merger -- related and other charges....................... 1,752 -- -- ---------- -------- -------- Total operating expenses.......................... 14,787 9,845 9,346 ---------- -------- -------- Operating income............................................ 1,823 3,337 3,049 ---------- -------- -------- Other expense (income): Interest expense -- net................................... 1,041 736 543 Decline in market value of financial instruments.......... 917 56 -- Expenses related to terminated merger..................... -- 282 -- (Gain) loss on sale of investments........................ (327) 367 -- Other expense (income) -- net............................. 66 (6) 87 ---------- -------- -------- Total other expense -- net........................ 1,697 1,435 630 ---------- -------- -------- Income before income taxes and cumulative effect of change in accounting principle................................... 126 1,902 2,419 Provision for income taxes.................................. 207 800 911 ---------- -------- -------- (Loss) income before cumulative effect of change in accounting principle...................................... (81) 1,102 1,508 Cumulative effect of change in accounting principle -- net of tax.................................................... -- 240 -- ---------- -------- -------- Net (loss) income........................................... $ (81) $ 1,342 $ 1,508 ========== ======== ======== Basic (loss) earnings per share: (Loss) income before cumulative effect of change in accounting principle................................... $ (0.06) $ 1.26 $ 1.76 Cumulative effect of change in accounting principle....... -- 0.28 -- ---------- -------- -------- Basic (loss) earnings per share............................. $ (0.06) $ 1.54 $ 1.76 ========== ======== ======== Diluted (loss) earnings per share: (Loss) income before cumulative effect of change in accounting principle................................... $ (0.06) $ 1.25 $ 1.75 Cumulative effect of change in accounting principle....... -- 0.27 -- ---------- -------- -------- Diluted (loss) earnings per share........................... $ (0.06) $ 1.52 $ 1.75 ========== ======== ======== Basic weighted average shares outstanding (in 000's)........ 1,272,088 872,309 854,967 ========== ======== ======== Diluted weighted average shares outstanding (in 000's)...... 1,272,088 880,753 862,581 ========== ======== ========
The accompanying notes are an integral part of these consolidated financial statements. F-14 16 QWEST COMMUNICATIONS INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS
DECEMBER 31, --------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) ASSETS Current assets: Cash and cash equivalents................................. $ 154 $ 78 Accounts receivable, net of allowances of $301 and $88, respectively........................................... 4,235 2,455 Receivable from sale of investments....................... -- 1,140 Inventories and supplies.................................. 275 272 Deferred tax assets....................................... 72 46 Prepaids and other........................................ 640 201 ------- ------- Total current assets........................................ 5,376 4,192 Property, plant and equipment -- net........................ 25,583 16,404 Goodwill and other intangible assets -- net................. 32,327 501 Investments................................................. 8,186 1,290 Other assets................................................ 2,029 885 ------- ------- Total assets...................................... $73,501 $23,272 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current borrowings........................................ $ 3,645 $ 2,882 Accounts payable.......................................... 2,049 1,700 Accrued expenses and other current liabilities............ 3,806 1,840 Advance billings and customer deposits.................... 393 344 ------- ------- Total current liabilities................................... 9,893 6,766 Long-term borrowings........................................ 15,421 10,189 Post-retirement and other post-employment benefit obligations............................................... 2,735 2,890 Deferred income taxes....................................... 1,768 1,191 Deferred credits and other.................................. 2,380 981 Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock -- $1.00 par value, 200,000,000 shares authorized, none issued and outstanding................ -- -- Common stock -- $0.01 par value, 5 billion shares authorized, 1,672,218,763 and 875,995,661 issued, 1,672,218,763 and 875,469,943 outstanding.............. 17 9 Additional paid-in capital................................ 41,289 647 Retained earnings......................................... 24 377 Accumulated other comprehensive (loss) income............. (26) 222 ------- ------- Total stockholders' equity........................ 41,304 1,255 ------- ------- Total liabilities and stockholders' equity........ $73,501 $23,272 ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-15 17 QWEST COMMUNICATIONS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS) OPERATING ACTIVITIES Net (loss) income......................................... $ (81) $ 1,342 $ 1,508 Adjustments to net (loss) income: Depreciation and amortization.......................... 3,342 2,367 2,199 Loss on investments and derivatives.................... 590 423 -- Provision for bad debts................................ 484 158 141 Asset impairment charge................................ 340 -- 35 Cumulative effect of change in accounting principle.... -- (240) -- Deferred income taxes.................................. 219 225 106 Changes in operating assets and liabilities: Accounts receivable.................................... (899) (284) (167) Inventories, supplies and other current assets......... (184) (106) (12) Accounts payable, accrued expenses and advance billings............................................. 106 345 (13) Other.................................................. (236) 316 130 ------- ------- ------- Cash provided by operating activities..................... 3,681 4,546 3,927 ------- ------- ------- INVESTING ACTIVITIES Expenditures for property, plant and equipment............ (6,597) (3,944) (2,672) Cash acquired in connection with Merger................... 407 -- -- Proceeds from sale of equity securities................... 868 -- -- Proceeds from 1999 sale of Global Crossing securities..... 1,140 -- -- Purchases of securities................................... (510) (2,464) -- Other..................................................... (102) (54) (97) ------- ------- ------- Cash used for investing activities........................ (4,794) (6,462) (2,769) ------- ------- ------- FINANCING ACTIVITIES Net (repayments of) proceeds from current borrowings...... (2,200) 1,304 887 Proceeds from long-term borrowings........................ 4,266 2,062 3,781 Repayments of long-term borrowings........................ (655) (336) (442) Dividends paid on common stock............................ (542) (1,187) (1,056) Proceeds from issuance of common stock.................... 320 102 88 Cash paid in connection with Separation................... -- -- (4,348) Purchases of treasury stock............................... -- -- (46) ------- ------- ------- Cash provided by (used for) financing activities.......... 1,189 1,945 (1,136) ------- ------- ------- CASH AND CASH EQUIVALENTS Increase (decrease)....................................... 76 29 22 Beginning balance......................................... 78 49 27 ------- ------- ------- Ending balance............................................ $ 154 $ 78 $ 49 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements. F-16 18 QWEST COMMUNICATIONS INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
QWEST PRE- OTHER COMMON SEPARATION COMMON RETAINED COMPREHENSIVE STOCK EQUITY STOCK EARNINGS INCOME TOTAL ---------- ---------- ------- -------- ------------- ------- (SHARES IN (DOLLARS IN MILLIONS) THOUSANDS) BALANCE, DECEMBER 31, 1997........ 837,881 $ 4,367 $ -- $ -- $ 4,367 Net income from January 1, 1998 to June 12, 1998................... -- 747 -- -- $ 747 747 Dividends declared on common stock........................... -- (528) -- -- (528) Pre-Separation transfers to Parent.......................... -- (146) -- -- (146) Common stock issuances............ 1,902 55 -- -- 55 Treasury stock purchases.......... (992) (32) -- -- (32) Other............................. -- 2 -- -- 2 June 12, 1998 Separation.......... -- (4,465) 4,465 -- -- Dex Indebtedness.................. -- -- (3,829) -- (3,829) Issuance of common stock at Separation...................... 28,786 -- 850 -- 850 Distribution to MediaOne stockholders for Dex............ -- -- (850) -- (850) Cost of debt refinancing upon Separation...................... -- -- (140) -- (140) Common stock issuances............ 2,630 -- 58 -- 58 Treasury stock purchases.......... (527) -- (15) -- (15) Net income from June 13, 1998 to December 31, 1998............... -- -- -- 761 761 761 ------ Total comprehensive income........ -- -- -- -- $1,508 -- ====== Dividends declared on common stock........................... -- -- -- (538) (538) Other............................. -- -- (7) -- (7) --------- ------- ------- ------- ------ ------- BALANCE, DECEMBER 31, 1998........ 869,680 -- 532 223 755 Net income........................ -- -- -- 1,342 $1,342 1,342 Other comprehensive income, net of taxes........................... -- -- -- 222 222 222 ------ Total comprehensive income........ -- -- -- -- $1,564 -- ====== Dividends declared on common stock........................... -- -- -- (1,188) (1,188) Common stock issuances............ 5,790 -- 124 -- 124 --------- ------- ------- ------- ------ ------- BALANCE, DECEMBER 31, 1999........ 875,470 -- 656 599 1,255 Net loss.......................... -- -- -- (81) $ (81) (81) Other comprehensive loss, net of taxes........................... -- -- -- (248) (248) (248) ------ Total comprehensive loss.......... -- -- -- -- $ (329) -- ====== Issuance of shares in connection with Merger..................... 775,175 -- 40,020 -- 40,020 Dividends declared on common stock........................... -- -- -- (272) (272) Common stock issuances............ 21,574 -- 630 -- 630 --------- ------- ------- ------- ------ ------- BALANCE, DECEMBER 31, 2000........ 1,672,219 $ -- $41,306 $ (2) $41,304 ========= ======= ======= ======= ====== =======
The accompanying notes are an integral part of these consolidated financial statements. F-17 19 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999, AND 1998 NOTE 1: BUSINESS AND BACKGROUND Qwest Communications International Inc. ("Qwest" or the "Company") is a leading broadband Internet communications company incorporated under the laws of the State of Delaware. Merger. On June 30, 2000, Qwest completed its merger (the "Merger") with U S WEST, Inc. ("U S WEST"). U S WEST was deemed the accounting acquirer and its historical financial statements have been carried forward as those of the newly combined company. In connection with the Merger, each outstanding share of U S WEST common stock was converted into the right to receive 1.72932 shares of Qwest common stock. In addition, all outstanding U S WEST stock options were converted into options to acquire Qwest common stock. All share and per share amounts have been restated to give retroactive effect to the exchange ratio. The Merger has been accounted for as a reverse acquisition under the purchase method of accounting with U S WEST being deemed the accounting acquirer and Qwest the acquired entity. The total value of the consideration was approximately $40 billion, which has been allocated to the identifiable tangible and intangible assets and liabilities of Qwest. The preliminary purchase price allocation was as follows: (i) $8.0 billion to tangible assets and liabilities, net; (ii) $4.1 billion to identified intangibles, including product technology, customer lists, tradenames and assembled workforce; and (iii) $27.9 billion to goodwill. The amounts allocated to identifiable intangible assets and goodwill are being amortized over periods ranging from 3 to 40 years. The allocation of purchase price is preliminary and may change upon completion of an appraisal currently being performed on the acquired assets and liabilities of Qwest. The effect of any such change is not expected to be material. The results of operations for Qwest prior to the Merger are not reflected in the accompanying consolidated statements of operations. Following is the results of operations for Qwest for the periods prior to the Merger:
YEAR ENDED DECEMBER 31, JANUARY 1, THRU --------------- JUNE 30, 1998 1999 2000 ------ ------ --------------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNT) Revenues.............................................. $2,243 $3,928 $2,499 Operating expenses: Operating expenses.................................. 1,948 3,168 2,007 Depreciation and amortization....................... 202 404 247 Merger costs........................................ 847 32 87 ------ ------ ------ Total operating expenses.................... 2,997 3,604 2,341 ------ ------ ------ (Loss) earnings from operations....................... (754) 324 158 Other expense (income) -- net......................... 96 (260) 36 ------ ------ ------ (Loss) earnings before income taxes................... (850) 584 122 Income tax (benefit) expense.......................... (6) 125 102 ------ ------ ------ Net (loss) income..................................... $ (844) $ 459 $ 20 ====== ====== ====== (Loss) earnings per share: Basic............................................... $(1.51) $ 0.63 $ 0.03 Diluted............................................. $(1.51) $ 0.60 $ 0.03
F-18 20 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following unaudited pro forma results of operations are presented assuming the Merger had been completed on January 1, 1999:
YEAR ENDED DECEMBER 31, ---------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Revenues.................................................... $18,954 $16,594 Net (loss) income........................................... (531) 492 Diluted (loss) earnings per share........................... $ (0.32) $ 0.30
Pro forma diluted loss per share for the year ended December 31, 2000 excludes approximately 38 million incremental shares attributable to options due to their anti-dilutive effect as a result of the pro forma loss for that period. For the year ended December 31, 2000, Qwest incurred Merger-related and other charges totaling $1.752 billion. A breakdown of these costs is as follows:
2000 --------------------- (DOLLARS IN MILLIONS) Contractual settlements and terminations........... $ 654 Merger bonuses and severance costs................. 443 Write-off of access lines.......................... 226 Termination of software development projects....... 114 Post-retirement benefit plan curtailment gain...... (106) Other Merger-related costs and charges............. 421 ------ Total Merger-related and other charges... $1,752 ======
Contractual settlements and termination losses of $654 million represent the costs incurred to cancel various commitments no longer deemed necessary as a result of the Merger and to settle various claims related to the Merger. In connection with the Merger, management identified a workforce reduction of over 4,500 employees primarily to eliminate duplicate functions. These employees were terminated prior to December 31, 2000. Of these, 1,078 employees voluntarily separated without receiving benefit packages. A severance charge of $341 million relates to the employees involuntarily separated during fiscal 2000. Merger bonuses of $102 million represent bonus payments triggered by the successful completion of the Merger. The Company leases dedicated special-purpose access lines to Competitive Local Exchange Carriers ("CLECs"). Given current industry conditions and regulatory changes affecting CLECs, the Company evaluated those leased assets for impairment. The Company concluded that the fair value of those assets was minimal and took a $226 million charge. The assets are operated by the Company's wholesale services segment. Following the Merger, management reviewed all internal software projects in process, and determined that certain projects should no longer be pursued. Because the projects were incomplete and abandoned, the fair value of such incomplete software was determined to be zero and $114 million of capitalized software costs were written off. The abandoned projects included a significant billing system replacement and a customer database system. Other costs of $421 million include legal charges related to the Merger, professional fees, re-branding costs, relocation costs and other costs related to the integration of the two companies. F-19 21 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Offsetting the Merger-related costs was a $106 million post-retirement benefit plan curtailment gain. This gain resulted from the post-Merger termination of retiree medical benefits for all former U S WEST employees that did not have 20 years of service by December 31, 2000, or would not be service pension eligible by December 31, 2003. A summary of Merger-related costs accrued at June 30, 2000, and subsequent charges against those accruals follows:
JANUARY 1, DECEMBER 31, 2000 CURRENT CURRENT 2000 BALANCE PROVISION UTILIZATION BALANCE ---------- --------- ----------- ------------ (DOLLARS IN MILLIONS) Contractual settlements and terminations...... $-- $ 654 $359 $295 Merger bonuses and severance costs............ 443 313 130 Other accrued costs........................... -- 185 87 98 --- ------ ---- ---- Total accrued costs at Merger date.............................. $-- 1,282 $759 $523 === ==== ==== Asset impairment charges...................... 340 Charges incurred subsequent to the Merger..... 130 ------ Total Merger-related and other charges........................... $1,752 ======
Management anticipates that the majority of the Merger-related accruals will be paid by June 30, 2001. In connection with the Merger, U S WEST and Global Crossing Ltd. ("Global Crossing") agreed to terminate their merger agreement. In consideration for terminating the merger agreement, U S WEST paid Global Crossing $140 million in cash and 2,231,076 shares (that U S WEST previously purchased in the open market) of Global Crossing common stock for which U S WEST paid $140 million. These termination payments, together with costs of approximately $2 million, were charged to other expense in 1999. Qwest also agreed to purchase $140 million in services from Global Crossing over four years at the best commercially available prices offered by Global Crossing. As of December 31, 2000, Qwest had purchased $135 million in services under this agreement. U S WEST Separation. On June 12, 1998, U S WEST's former parent company (the "Parent"), separated into two independent companies (the "Separation"). Prior to the Separation, the Parent conducted its business through two groups: (i) the U S WEST Communications Group (the "Communications Group"), which included the communications businesses of U S WEST, and (ii) the U S WEST Media Group (the "Media Group"), which included the multimedia and directories businesses. As part of the Separation, the Parent contributed to U S WEST the businesses of the Communications Group and the domestic directories business of the Media Group known as U S WEST Dex, Inc. ("Dex"). The Parent continued to operate as an independent public company comprised of the businesses of the Media Group other than Dex and was renamed MediaOne, Inc. In connection with the transfer of Dex to U S WEST: (i) the Parent distributed to holders of Media Group common stock, approximately 28,786,000 shares of U S WEST common stock with an aggregate value of $850 million; and (ii) U S WEST refinanced $3.9 billion of debt formerly allocated to the Media Group (the "Dex Indebtedness"). Certain financial effects of the Separation, including interest expense associated with refinancing the Dex Indebtedness and the dilutive effect of the issuance of shares to Media Group shareholders for Dex, are not reflected in the accompanying historical consolidated statements of operations prior to the Separation. In addition, for the period from January 1, 1998 to June 12, 1998, the consolidated financial statements include an allocation of certain costs, expenses, assets and liabilities from the Parent to U S WEST. The amount of costs allocated were not necessarily indicative of the costs that would have been incurred if U S WEST had operated as a stand-alone company. F-20 22 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation. The accompanying consolidated financial statements include the accounts of the Company and all material majority-owned subsidiaries. All significant intercompany amounts and transactions have been eliminated. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts and disclosures reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Reclassifications. Certain prior year balances have been reclassified to conform to the current year presentation. Change in Accounting Principle. Prior to 1999, Qwest Dex, Inc. ("Qwest Dex") recognized revenues and expenses related to publishing directories using the "deferral method," under which revenues and expenses were recognized over the lives of the directories, generally one year. Effective in the fourth quarter of 1999, Qwest Dex changed to the "point of publication method" of accounting, under which the Company recognizes revenues and expenses at the time the directory is published. This change in methodology was made to better align Qwest Dex's revenue and expense recognition with the earnings process and to better reflect the operating activity of the business. The change in accounting principle resulted in a one-time increase in net income of $240 million (net of income tax of $153 million), or $0.27 per diluted share, which is reported as the cumulative effect (as of January 1, 1999) of a change in accounting principle. The Company restated its 1999 quarterly results of operations to give effect to the point of publication method which increased net income by $13 million, or $0.01 per diluted share. On a restated basis, use of the point of publication method would have increased net income in 1998 by $12 million, or $0.01 per diluted share. Revenue Recognition. Revenues are recognized when services are provided. Payments received in advance are deferred until the service is provided. Up-front fees received are deferred and recognized over the longer of the contractual period or the expected customer relationship, generally 2 to 10 years. The fees include activation fees and installation charges. Occasionally, the Company sells capacity on its network to other telecommunication providers. Sales of capacity are accounted for as either sales-type leases, operating leases or service agreements depending upon the terms of the transaction. Revenues related to sales of capacity that meet the criteria of a sales-type lease are recognized at the time of delivery of the capacity to the customer. If title is not transferred or if the other requirements for sales-type lease accounting are not met, revenue is recognized ratably over the term of the agreement. Advertising Costs. Costs related to advertising are generally expensed as incurred. Advertising expense was $470 million, $308 million and $263 million in 2000, 1999 and 1998, respectively. Income Taxes. The provision for income taxes consists of an amount for taxes currently payable and an amount for tax consequences deferred to future periods. Unrealized Holding Gain (Loss) on Equity Securities. The Company's equity investments in certain publicly traded companies are recorded at fair market value. Realized gains and losses on securities are determined on the specific identification method. Cash and Cash Equivalents. Cash and cash equivalents include highly liquid investments with original maturities of three months or less that are readily convertible into cash and are not subject to significant risk from fluctuations in interest rates. Fair values of cash, cash equivalents and current amounts receivable and payable approximate carrying values due to their short-term nature. F-21 23 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Inventories. Inventories held for sale (primarily wireless handsets) are carried at the lower of cost or market on a first-in, first-out basis. Inventories used internally are carried at average cost, except for significant individual items that are valued based upon specific costs. Property, Plant and Equipment. Property, plant and equipment is carried at cost and is depreciated using straight-line group methods. Generally, under the group method, when an asset is sold or retired, the cost is deducted from property, plant and equipment and charged to accumulated depreciation without recognition of a gain or loss. 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. Valuation of Long-Lived Assets. The Company assesses the impairment of long-lived assets whenever changes in circumstances indicate that their carrying value may not be recoverable. If the total expected future cash flows or salvage value is less than the carrying value of the asset, the asset is written down to its fair value. Customer Acquisition Costs. The Company defers the initial direct cost of obtaining a customer to the extent there is sufficient revenue guaranteed under the arrangement to ensure the realizability of the capitalized costs. Deferred customer acquisition costs are amortized over the expected life of the customer relationship. Intangibles. Intangible assets arising from business combinations are amortized on a straight-line basis over their estimated useful lives. The components of intangibles are as follows:
DECEMBER 31, -------------- ESTIMATED LIFE 2000 1999 -------------- ------- ---- (DOLLARS IN MILLIONS) Goodwill.............................................. 40 years $27,923 $ -- Product technology.................................... 10 years 2,200 -- Customer list......................................... 10 years 1,200 -- Assembled workforce................................... 3 years 100 -- Tradename............................................. 40 years 600 -- Other................................................. 5 to 40 years 950 533 ------- ---- 32,973 533 Less: accumulated amortization........................ (646) (32) ------- ---- Goodwill and other intangible assets -- net........... $32,327 $501 ======= ====
Computer Software. Internally used software, whether purchased or developed, is capitalized and amortized over an estimated useful life of 5 years. Capitalized computer software costs of $1.173 billion and $618 million at December 2000 and 1999, respectively, are recorded in Other Assets. Amortization of capitalized computer software costs totaled $269 million, $108 million and $84 million in 2000, 1999 and 1998, respectively. During 2000, $114 million of capitalized computer software costs were written-off due primarily to the abandonment of a significant billing system replacement project and a customer database system project. This charge is included in Merger-related and other charges. F-22 24 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Accrued Expenses and Other Current Liabilities. Accrued expenses and other current liabilities consist of the following:
DECEMBER 31, --------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS) Accrued interest............................................ $ 318 $ 207 Employee compensation....................................... 644 439 Accrual for Merger-related costs............................ 523 -- Dividends payable........................................... -- 271 Accrued property taxes...................................... 79 218 Other....................................................... 2,242 705 ------ ------ Total accrued expenses and other current liabilities..................................... $3,806 $1,840 ====== ======
Derivative Instruments. The Company, from time to time, enters into derivative financial instruments. The objective of the Company's interest rate risk management program is to obtain the minimum total cost of debt over time consistent with an acceptable level of interest rate volatility. This objective was achieved in 2000 through the type of debt issued and cross-currency swaps that convert foreign-denominated debt to U.S. dollar-denominated debt. Under a cross-currency swap, the Company agrees with another party to exchange U.S. dollars for foreign currency based on a notional amount, at specified intervals over a defined term. Cross-currency swaps are accounted for using synthetic instrument accounting if the index, maturity and amount of the instruments match the terms of the underlying debt. Under synthetic instrument accounting, the cross-currency swaps and the foreign currency debt are combined and accounted for as if U.S. dollar-denominated debt was issued directly. Beginning January 1, 2001, the Company began accounting for cross-currency swaps under Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." Under SFAS No. 133, the Company will carry the swap at fair market value on the balance sheet. Future changes in the fair value of the cross-currency swaps that meet the criteria for hedge accounting will be recorded in accumulated other comprehensive income. The Company also entered into equity swaps to modify its risk exposure to changes in the market price of the Global Crossing common stock previously owned by the Company. Under these equity swaps, the Company agreed with another party to exchange payments based on a notional amount at specific intervals over a defined term. In exchange for making payments based upon an interest rate index, the Company received (rendered) payments based upon increases (decreases) in the market price of Global Crossing common stock. Qwest sold its remaining shares of Global Crossing in 2000; however, the equity swaps remained outstanding as of December 31, 2000. These swaps, which mature in 2001, are carried at fair value on the balance sheet with any change in fair value recognized in earnings. F-23 25 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the terms of outstanding cross-currency and equity swaps at December 31, 2000 and 1999. Cross-currency swaps are tied to the Swiss Franc and have a fair value (liability) of $(40) million and $(36) million at December 31, 2000 and 1999, respectively. Amounts received on the equity swaps are tied to changes in the market price of Global Crossing common shares and paid rates are tied to one- and three-month London Interbank Offered Rates. Equity collars have also been entered into in conjunction with the equity swaps to limit the magnitude of any gains or losses on the equity swaps.
DECEMBER 31, 2000 DECEMBER 31, 1999 ----------------------------------------- ----------------------------------------- WEIGHTED AVERAGE WEIGHTED AVERAGE RATE RATE NOTIONAL ----------------- NOTIONAL ----------------- AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE PAY -------- ---------- -------- ------ -------- ---------- -------- ------ (DOLLARS IN MILLIONS) Cross-currency........... $133 2001 -- 6.51% $ 133 2001 -- 6.51% Equity................... 761 2001 -- 7.17% 1,140 2001 -- 6.41%
In the event Qwest is owed money under the swap agreements, the Company could be exposed to risk in the event of nonperformance by counterparties. Qwest does not require any collateral from these counterparties. The Company manages this exposure by monitoring the credit standing of the counterparties and establishing dollar and term limitations that correspond to the respective credit rating of each counterparty. At December 31, 2000, deferred credits of $7 million and deferred charges of $48 million on closed forward contracts are included as part of the carrying value of the underlying debt. The deferred credits and charges are recognized as yield adjustments over the life of the debt that matures at various dates through 2043. Stock Options. Stock incentive plans are accounted for using the intrinsic value method under which no compensation expense is recognized for options granted to employees with a strike price that equals or exceeds the value of the underlying security on the measurement date. Comprehensive Income. Comprehensive income includes the following components:
YEAR ENDED DECEMBER 31, ------------- 2000 1999 ----- ----- (DOLLARS IN MILLIONS) Unrealized (losses) gains on marketable securities, net of reclassification adjustments.............................. $(397) $ 366 Foreign translation losses.................................. (7) -- Income tax benefit (provision) related to items of other comprehensive income...................................... 156 (144) ----- ----- Other comprehensive (loss) income........................... $(248) $ 222 ===== =====
Reclassification adjustments for gains and losses included in income consisted of the following:
YEAR ENDED DECEMBER 31, ------------- 2000 1999 ----- ----- (DOLLARS IN MILLIONS) Realized net gains (losses) included in income.............. $ 292 $(454) Other than temporary loss charged to income................. (480) -- Income tax benefit related to items reclassified into income.................................................... 66 176 ----- ----- Total reclassification adjustments................ $(122) $(278) ===== =====
F-24 26 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Earnings Per Share. The following reflects the computation of diluted shares outstanding for 2000, 1999 and 1998. Diluted shares outstanding for the year ended December 31, 2000 excludes approximately 21 million incremental shares related to stock options. These shares were excluded due to their anti-dilutive effect as a result of Qwest's net loss for the year ended December 31, 2000.
YEAR ENDED DECEMBER 31, ----------------------------- 2000 1999 1998 --------- ------- ------- (SHARES IN THOUSANDS) Basic weighted average shares.......................... 1,272,088 872,309 854,967 Stock options.......................................... -- 8,444 7,614 --------- ------- ------- Diluted weighted average shares........................ 1,272,088 880,753 862,581 ========= ======= =======
New Accounting Standards. On June 15, 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 requires, among other things, that all derivative instruments be recognized at fair value as assets or liabilities in the consolidated balance sheets with changes in fair value recognized currently in earnings unless specific hedge accounting criteria are met. The adoption of SFAS No. 133 on January 1, 2001 did not have a material impact on the Company's financial statements. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." SAB No. 101 requires, in certain cases, nonrefundable up-front fees for services to be deferred and recognized over the expected period of performance. SAB No. 101 also permits the direct costs incurred in obtaining the customer to be deferred and recognized over the expected life of the customer relationship. The Company adopted SAB No. 101 in the fourth quarter of fiscal 2000, with effect from January 1, 2000. There was no cumulative effect on earnings from the adoption of SAB No. 101. NOTE 3: INVESTMENTS Investment in Qwest Digital Media, LLC. In September 1999, Qwest and Anschutz Digital Media, Inc. ("ADMI"), an affiliate of Qwest's principal stockholder, Anschutz Company, entered into an agreement to form a venture named Qwest Digital Media, LLC ("QDM," formerly known as Slingshot Networks, LLC) to provide advanced digital production, post-production and transmission facilities, digital media storage and distribution services, telephony-based data storage and enhanced services, access and routing services. Qwest has contributed an $85 million promissory note payable over nine years at an annual interest rate of 6 percent and purchased a 25 percent interest in QDM from ADMI for a $43 million, 8 percent note payable in January 2001. In January 2001, Qwest repaid the $43 million note and obtained control over QDM. Qwest will consolidate QDM beginning in fiscal 2001. Investment in KPNQwest, N.V. In April 1999, Qwest and KPN Telecom B.V. ("KPN") formed a joint venture ("KPNQwest") to create a pan-European IP-based fiber optic network, linked to Qwest's network in North America, for data and multimedia services. Qwest and KPN each initially owned 50 percent of KPNQwest. On November 12, 1999, KPNQwest consummated an initial public offering ("KPNQwest's IPO") whereby 50.6 million shares of common stock were issued generating approximately $1.0 billion in proceeds. As a result of KPNQwest's IPO, the public owns approximately 11 percent of KPNQwest's shares and the remainder are owned equally by Qwest and KPN. Qwest's investment in KPNQwest is accounted for under the equity method. F-25 27 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Below are the summarized financial results for KPNQwest as of and for the year ended December 31, 2000 and as of and for the nine months ended December 31, 1999.
DECEMBER 31, ---------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS) Total assets................................................ $2,717 $2,575 Total liabilities........................................... 1,506 1,170 Revenue..................................................... 425 199 Loss from operations........................................ 201 76 Net loss.................................................... $ 128 $ 62
The Company's share of KPNQwest's losses was $34 million in 2000. At December 31, 2000, KPNQwest had a market capitalization of $8.55 billion. Other. The Company's equity investments in other publicly traded companies consisted of the following (dollars in millions):
DECEMBER 31, 2000 DECEMBER 31, 1999 ------------------------------------------- ------------------------------------------- UNREALIZED UNREALIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE ---- ---------- ---------- ---------- ---- ---------- ---------- ---------- $90 $30 $(62) $58 $842 $533 $(167) $1,208 === === ==== === ==== ==== ===== ======
NOTE 4: PROPERTY, PLANT AND EQUIPMENT The components of property, plant and equipment are as follows:
DECEMBER 31, DEPRECIABLE --------------------- LIVES 2000 1999 ----------- --------- --------- (DOLLARS IN MILLIONS) Land and buildings.......................................... 30-38 years $ 3,473 $ 2,535 Communications equipment.................................... 2-14 years 18,319 15,828 Other network equipment..................................... 8-57 years 19,273 15,021 General purpose computers and other......................... 5-11 years 3,755 3,396 Construction in progress.................................... -- 3,498 1,346 -------- -------- 48,318 38,126 Less: accumulated depreciation.............................. (22,735) (21,722) -------- -------- Property, plant and equipment -- net........................ $ 25,583 $ 16,404 ======== ========
Capitalized Interest. Interest related to qualifying construction projects is capitalized and included in the depreciable basis of the asset being built. Amounts capitalized were $151 million, $27 million and $25 million in 2000, 1999 and 1998, respectively. Leasing Arrangements. Certain office facilities, real estate and equipment are subject to operating leases. Rent expense under operating leases for 2000, 1999 and 1998 was $528 million, $269 million and $210 million, respectively. At December 31, 2000, the future minimum rental payments under noncancelable operating leases for the years 2001 through 2005 and thereafter are $316 million, $242 million, $219 million, $227 million, $195 million and $959 million, respectively. Assets Held for Sale. During 1999 and 2000, the Company committed to sell approximately 800,000 access lines within the 14-state local service area. In 1999, definitive sales agreements were reached for the sale of 570,000 lines for approximately $1.8 billion in cash, subject to adjustment. In 2000, the sale of 20,000 access F-26 28 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) lines in North Dakota and South Dakota were consummated resulting in proceeds of $19 million and gains of $11 million. The transfer of ownership of the remaining access lines, which will occur on a state-by-state basis, is expected to be completed by the first quarter of 2002. The pending sales are subject to regulatory approvals and other customary closing conditions. The Company has also identified bandwidth capacity on its existing network that is held for sale or lease to telecommunications providers and others. This capacity was recorded at fair value, less estimated costs to sell, in connection with the Merger. NOTE 5: BORROWINGS Current Borrowings Current borrowings consist of:
DECEMBER 31, ---------------------- 2000 1999 --------- --------- (DOLLARS IN MILLIONS) Commercial paper............................................ $2,106 $1,265 Short-term notes and current portion of long-term borrowings................................................ 1,539 1,617 ------ ------ Total current borrowings.......................... $3,645 $2,882 ====== ======
The weighted average interest rate on commercial paper was 7.33 percent and 6.53 percent at December 31, 2000 and 1999, respectively. Qwest maintains commercial paper programs to finance the purchase of telecommunications assets. The Company also enters into lines of credit as backup facilities in issuing commercial paper. At December 31, 2000, Qwest had a $4.0 billion syndicated credit facility that expires in May of 2001. As of December 31, 2000, there was no outstanding balance. The syndicated credit facility agreement requires Qwest to pay a quarterly fee based upon the Company's long-term debt agency ratings. The facility fee on the total credit facility available ranges from 0.07 percent to 0.08 percent. Long-term Borrowings Long-term borrowings consist principally of debentures and medium-term notes with the following interest rates and maturities at December 31:
MATURITIES ------------------------------------------ INTEREST RATES 2002 2003 2004 2005 THEREAFTER TOTAL 2000 TOTAL 1999 - -------------- ------ ------ ---- ---- ---------- ---------- ---------- (DOLLARS IN MILLIONS) Up to 5%......................... $ 100 $ 50 $ -- $ -- $ -- $ 150 $ 150 Above 5% to 6%................... -- -- 100 41 390 531 579 Above 6% to 7%................... 750 43 -- 899 3,579 5,271 6,611 Above 7% to 8%................... 299 1,062 750 -- 5,979 8,090 2,367 Above 8% to 9%................... -- -- -- -- 630 630 243 Above 9% to 10%.................. -- -- -- -- 473 473 -- Above 10% to 11%................. -- -- -- -- 162 162 -- ------ ------ ---- ---- ------- ------- ------- $1,149 $1,155 $850 $940 $11,213 15,307 9,950 ====== ====== ==== ==== ======= Capital lease obligations........ 224 115 Other............................ (110) 124 ------- ------- Total.................. $15,421 $10,189 ======= =======
F-27 29 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company's borrowings have a fair value of $18.4 billion and $12.1 billion at December 31, 2000 and 1999, respectively. The fair values of the Company's borrowings are based on quoted market prices where available or, if not available, based on discounting future cash flows using current interest rates. Interest paid by the Company, net of amounts capitalized, was $964 million, $595 million and $640 million in 2000, 1999 and 1998, respectively. Indentures for certain notes contain covenants that, among other things, limit the ability of the Company and certain of its subsidiaries (the "Restricted Subsidiaries") to issue preferred stock, pay dividends or make other distributions, repurchase capital stock or subordinated indebtedness, create liens, enter into transactions with affiliates, sell assets of the Company or its Restricted Subsidiaries, issue or sell capital stock of the Company's Restricted Subsidiaries or enter into mergers and consolidations. NOTE 6: EMPLOYEE BENEFITS Pension, Post-retirement and Other Post-employment Benefits Qwest has a noncontributory defined benefit pension plan (the "Pension Plan") for substantially all management and occupational employees and post-retirement healthcare and life insurance plans for retirees. The Company also provides post-employment benefits for certain former employees. Prior to the Separation, U S WEST participated in the defined benefit pension plan and post-retirement healthcare and life insurance plans sponsored by its Parent. Accordingly, the Company's financial statements for periods prior to the Separation reflect an allocation of costs from the Parent for its employees and retirees. On June 12, 1998, U S WEST assumed sponsorship of the Parent's benefit plans. In conjunction with the Merger, the Company made the following changes to its employee benefit plans. Effective September 7, 2000, employees will not be eligible to receive retiree medical and life benefits unless they had either at least 20 years of service by December 31, 2000 or will be service pension eligible by December 31, 2003. The elimination of the retiree medical benefits decreased the other post-employment benefits expense for 2000 by approximately $17 million. In addition, the elimination is accounted for as a plan curtailment, resulting in a one-time gain of approximately $106 million. This gain was recorded as an offset to Merger-related costs. The plan was also changed for all future retirees. Employees who retained the benefits will begin paying contributions in 2004 except for those employees who retired prior to September 7, 2000. Qwest also modified the pension plan benefits, effective January 1, 2001, for all former U S WEST management employees who did not have 20 years of service by December 31, 2000, or who will not be service pension eligible by December 31, 2003. For employees who do not meet this criteria, the years of service credited under the defined lump sum formula were frozen; the benefit will be adjusted for future compensation levels. Future benefits will equal 3 percent of pay, plus a return as defined in the plan. All management employees, other than those who remain eligible under the previous formulas, will be eligible to participate in the 3-percent-of-pay plan. Effective August 11, 2000, the Pension Plan was amended to provide additional pension benefits to plan participants who are involuntarily separated from the Company between August 11, 2000, and June 30, 2001. The amount of the benefit is based on pay and service and ranges from a minimum of four months up to a maximum of one year of an employee's base pay. Pension benefits for management employees prior to January 1, 2001 were based upon their salary and years of service while occupational employee benefits were generally based upon job classification and years of service. Pension and post-retirement costs are recognized over the period in which the employee renders services and becomes eligible to receive benefits as determined by using the projected unit credit method. Qwest's funding policy is to make contributions with the objective of accumulating sufficient assets to pay all benefits when due. No pension funding was required in 2000, 1999 or 1998. F-28 30 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The components of the pension and post-retirement benefit (credit) cost are as follows:
PENSION COST YEAR POST-RETIREMENT BENEFIT COST ENDED DECEMBER 31, YEAR ENDED DECEMBER 31, ----------------------- ------------------------------ 2000 1999 1998 2000 1999 1998 ------- ----- ----- -------- -------- -------- (DOLLARS IN MILLIONS) Service cost.......................... $ 182 $ 203 $ 189 $ 49 $ 70 $ 72 Interest cost......................... 702 658 639 337 326 319 Expected return on plan assets........ (1,068) (935) (852) (271) (229) (213) Amortization of transition asset...... (79) (79) (79) -- -- -- Amortization of prior service cost.... 2 2 2 12 20 19 Plan curtailment...................... -- -- -- (106) -- -- Recognized net actuarial gain......... (58) -- -- (107) (28) (30) ------- ----- ----- ----- ----- ----- Net (credit) cost..................... $ (319) $(151) $(101) $ (86) $ 159 $ 167 ======= ===== ===== ===== ===== =====
The actuarial assumptions used to compute the pension and post-retirement benefit (credit) cost are as follows:
PENSION POST-RETIREMENT YEAR ENDED BENEFITS YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------ --------------------- 2000 1999 1998 2000 1999 1998 ---- ---- ---- ----- ----- ----- (IN PERCENT) Weighted average discount rate................ 8.00% 6.75% 7.00% 8.00% 6.75% 7.00% Weighted average rate of compensation increase.................................... 4.65% 4.65% 5.50% N/A N/A N/A Expected long-term rate of return on plan assets...................................... 9.40% 8.80% 8.50% 9.40% 8.80% 8.50%
Following is a reconciliation of the benefit obligation for the pension and post-retirement plans:
POST-RETIREMENT PENSION COST YEAR BENEFIT COST YEAR ENDED DECEMBER 31, ENDED DECEMBER 31, ------------------ ------------------ 2000 1999 2000 1999 ------ ------ ------ ------ (DOLLARS IN MILLIONS) Benefit obligation at beginning of year..... $8,877 $9,622 $4,344 $4,825 Service cost................................ 182 203 49 70 Interest cost............................... 702 658 337 326 Actuarial loss (gain)....................... 513 (884) 301 (690) Plan amendments............................. -- -- (169) 4 Special termination benefits................ 27 -- -- -- Plan curtailment............................ -- -- (106) -- Benefits paid............................... (831) (722) (256) (191) ------ ------ ------ ------ Benefit obligation at end of year........... $9,470 $8,877 $4,500 $4,344 ====== ====== ====== ======
F-29 31 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a reconciliation of the change in the fair value of plan assets for the pension and post-retirement plans:
POST-RETIREMENT PENSION YEAR ENDED BENEFIT YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------ 2000 1999 2000 1999 -------- -------- ------- ------- (DOLLARS IN MILLIONS) Fair value of plan assets at beginning of year.......................................... $14,593 $12,925 $2,886 $2,604 Actual return on plan assets.................... (78) 2,509 (68) 575 Net employer withdrawals........................ -- -- (245) (212) Divestitures.................................... -- (8) -- (1) Section 420 transfer............................ (90) (111) 90 111 Benefits paid................................... (831) (722) (256) (191) ------- ------- ------ ------ Fair value of plan assets at year end........... $13,594 $14,593 $2,407 $2,886 ======= ======= ====== ======
In December 2000 and 1999, under provisions of Section 420 of the Internal Revenue Code, $90 million and $111 million, respectively, of pension assets were transferred to the post-retirement benefit plan to pay for current year retiree health care benefits. In 2000 and 1999, $300 million and $230 million, respectively, of Life Insurance and Welfare Trust assets were transferred to the Company to pay for employee welfare benefits. The following table represents the funded status of the pension and post-retirement plans:
POST-RETIREMENT PENSION YEAR ENDED BENEFIT YEAR ENDED DECEMBER 31, DECEMBER 31, ------------------- ------------------- 2000 1999 2000 1999 -------- -------- -------- -------- (DOLLARS IN MILLIONS) Funded (unfunded) status........................ $ 4,124 $ 5,716 $(2,093) $(1,458) Unrecognized net actuarial gain................. (2,922) (4,640) (730) (1,479) Unamortized prior service (benefit) cost........ -- 2 (58) 125 Balance of unrecognized transition asset........ (308) (387) -- -- ------- ------- ------- ------- Prepaid (accrued) benefit cost.................. $ 894 $ 691 $(2,881) $(2,812) ======= ======= ======= =======
The actuarial assumptions used to compute the funded (unfunded) status for the plans are as follows:
POST-RETIREMENT PENSION YEAR BENEFIT YEAR ENDED ENDED DECEMBER 31, DECEMBER 31, ------------ ---------------- 2000 1999 2000 1999 ---- ---- ------ ------ (IN PERCENT) Weighted average discount rate.......................... 7.75% 8.00% 7.75% 8.00% Weighted average rate of compensation increase.......... 4.65% 4.65% N/A N/A
F-30 32 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For measurement purposes, an 8 percent annual rate of increase in the healthcare cost trend rate for 2000 is assumed. The healthcare cost trend rate is assumed to gradually decline to an ultimate rate of 5 percent in 2011. A one percent change in the assumed healthcare cost trend rate would have had the following effects in 2000:
ONE PERCENT CHANGE --------------------- INCREASE DECREASE --------- --------- (DOLLARS IN MILLIONS) Effect on the aggregate of the service and interest cost components of net periodic post-retirement benefit cost... $ 30 $ (26) Effect on accumulated post-retirement benefit obligation.... 257 (240)
On January 5, 2001, Qwest announced an agreement with its major unions, the Communications Workers of America and the International Brotherhood of Electrical Workers, to extend the existing union contracts for another two years, through August of 2003. The extensions include a 3.5 percent wage increase in 2001, a 5 percent wage increase in 2002, a 6 percent pension increase in 2002, and a 10 percent pension increase in 2003. These changes are not reflected in either the pension or post-retirement benefit computations for the periods December 31, 2000, 1999 and 1998 presented above. NOTE 7: INCOME TAXES The components of the provision for income taxes are as follows:
YEAR ENDED DECEMBER 31, --------------------- 2000 1999 1998 ----- ----- ----- (DOLLARS IN MILLIONS) FEDERAL: Current................................................... $(23) $530 $685 Deferred.................................................. 196 156 90 ---- ---- ---- 173 686 775 STATE AND LOCAL: Current................................................... 11 45 108 Deferred.................................................. 23 69 28 ---- ---- ---- 34 114 136 ---- ---- ---- Provision for income taxes.................................. $207 $800 $911 ==== ==== ====
Qwest paid $115 million, $472 million and $678 million for income taxes in 2000, 1999 and 1998, respectively. F-31 33 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The effective tax rate differs from the statutory tax rate as follows:
YEAR ENDED DECEMBER 31, ------------------- 2000 1999 1998 ----- ---- ---- Federal statutory tax rate.................................. 35.0% 35.0% 35.0% State income taxes -- net of federal effect................. 3.4 3.5 3.7 Goodwill amortization....................................... 107.4 -- -- Non-deductible Merger-related charges....................... 46.2 5.7 -- KPNQwest loss............................................... 10.7 -- -- ESOP dividend............................................... (9.4) (0.9) (0.6) Other....................................................... (29.0) (1.2) (0.4) ----- ---- ---- Effective tax rate.......................................... 164.3% 42.1% 37.7% ===== ==== ====
The components of the net deferred tax liability are as follows:
DECEMBER 31, --------------------- 2000 1999 -------- -------- (DOLLARS IN MILLIONS) Property, plant and equipment............................... $1,677 $1,955 Intangible assets........................................... 1,447 -- State deferred taxes -- net of federal effect............... 406 293 Investments................................................. -- 128 Revenue recognition......................................... 447 208 Other....................................................... 135 35 ------ ------ Deferred tax liabilities.................................. 4,112 2,619 ------ ------ Net operating loss carryforward............................. 933 -- Investments................................................. 25 -- Post-retirement benefits -- net of pension.................. 717 776 State deferred taxes -- net of federal effect............... 243 165 Other....................................................... 498 533 ------ ------ Deferred tax assets....................................... 2,416 1,474 ------ ------ Net deferred tax liability.................................. $1,696 $1,145 ====== ======
As of December 31, 2000, Qwest had operating loss carryforwards of $2.7 billion that will expire between 2003 and 2020. Management believes it is more likely than not that future taxable income will be sufficient to fully recover the existing net deferred tax asset associated with the net operating loss carryforward. The Company's investment in its foreign corporate joint venture, KPNQwest, is essentially permanent in duration. As a result, Qwest has not recorded deferred income taxes related to its investment in KPNQwest. The amount of unrecorded deferred income taxes at December 31, 2000, was $2.8 billion. The temporary differences would become taxable upon the sale of KPNQwest or if earnings were repatriated into the United States. The Company had unamortized investment tax credits of $154 million and $160 million as of December 31, 2000 and 1999. F-32 34 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 8: STOCKHOLDERS' EQUITY Common Stock ($0.01 par value). In conjunction with the Separation on June 12, 1998, the Parent redeemed each issued and outstanding share of Communications Group stock (other than shares of Communications Group stock held as treasury stock) for one share of U S WEST common stock. Each share of Communications Group stock held as treasury stock by the Parent was cancelled. For presentation purposes, Communications Group stock shares outstanding prior to June 12, 1998, are shown as U S WEST shares. Also for presentation purposes, in connection with the Merger, shares outstanding have been adjusted to reflect the conversion rate of 1.72932 Qwest shares for every U S WEST share. Preferred Stock. Under the Company's charter, the Board of Directors has the authority, without shareholder approval, to create one or more classes or series within a class of preferred stock, to issue shares of preferred stock in such class or series up to the maximum number of shares of the relevant class or series of preferred stock authorized, and to determine the preferences, rights, privileges and restrictions of any such class or series, including the dividend rights, voting rights, the rights and terms of redemption, the rights and terms of conversion, liquidation preferences, the number of shares constituting any such class or series and the designation of such class or series. Acting under this authority, the Company's Board of Directors could create and issue a class or series of preferred stock with rights, privileges or restrictions, and adopt a shareholder rights plan, having the effect of discriminating against an existing or prospective holder of securities as a result of such shareholder beneficially owning or commencing a tender offer for a substantial amount of the Company's common stock. One of the effects of authorized but unissued and unreserved shares of capital stock may be to render more difficult or discourage an attempt by a potential acquirer to obtain control of the Company by means of a merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of the Company's management. The issuance of such shares of capital stock may have the effect of delaying, deferring or preventing a change in control of the Company without any further action by the shareholders of the Company. The Company has no present intention to adopt a shareholder rights plan, but could do so without shareholder approval at any future time. As of December 31, 2000, there were no shares of preferred stock issued and outstanding. Dividends. Qwest declared dividends of $0.31 and $1.36 per share of common stock during 2000 and 1999, respectively. Stock Options. Prior to the Merger, U S WEST adopted stock plans under which the Company could grant awards in the form of stock options, stock appreciation rights, restricted stock and phantom units, as well as substitute stock options and restricted stock awards. In connection with the Merger, all outstanding options prior to the Merger announcement have vested. Options granted after that date and prior to June 30, 2000 continue to vest according to the vesting requirements in the plan. F-33 35 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized below is the activity of the U S WEST plans prior to the Merger:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE --------- ---------------- (IN THOUSANDS) Outstanding January 1, 1998............................... 30,469 $18.06 Granted................................................. 16,582 29.38 Exercised............................................... (4,289) 13.32 Canceled or expired..................................... (1,211) 21.39 ------ ------ Outstanding December 31, 1998............................. 41,551 22.23 Granted................................................. 21,736 31.20 Exercised............................................... (5,205) 18.62 Canceled or expired..................................... (2,056) 23.38 ------ ------ Outstanding December 31, 1999............................. 56,026 25.52 Granted................................................. 10,830 41.20 Exercised............................................... (7,586) 18.80 Canceled or expired..................................... (6,822) 36.27 ------ ------ Outstanding June 30, 2000 (Merger date)................... 52,448 $29.64 ====== ======
Options to purchase 33.9 million shares, 22.7 million shares and 10.2 million shares of U S WEST (accounting acquirer) common stock at weighted average per share exercise prices of $26.67, $19.94 and $17.43, were exercisable at June 30, 2000, December 31, 1999 and December 31, 1998, respectively. On June 23, 1997, Qwest adopted the Equity Incentive Plan, which was amended and restated on June 1, 1998. This plan permits the grant of non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, stock units and other stock grants. The maximum number of shares of common stock that may be issued under the Equity Incentive Plan at any time pursuant to awards is equal to 10% of the aggregate number of common shares issued and outstanding (determined as of the close of trading on the New York Stock Exchange on the preceding trading day). As of December 31, 2000, the maximum number of shares available was 167 million. The Company's Compensation Committee determines the exercise price for each option; however, stock options must have an exercise price that is at least equal to the fair market value of the common stock on the date the stock option is granted, subject to certain restrictions. Stock option awards generally vest in equal increments over a five-year period, and awards granted under the Equity Incentive Plan will immediately vest upon any change in control of the Company, as defined, unless provided otherwise by the Compensation Committee at the time of grant. Options granted in 2000, 1999 and 1998 have terms ranging from six to ten years. F-34 36 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Summarized below is the activity of the Qwest (acquired entity for accounting purposes) plans prior to the Merger and combined Qwest activity subsequent to the Merger:
NUMBER OF WEIGHTED AVERAGE SHARES EXERCISE PRICE -------------- ---------------- (IN THOUSANDS) Outstanding January 1, 1998............................. 27,892 $ 7.95 Granted............................................... 26,278 16.84 Assumed in connection with LCI merger................. 31,540 8.32 Exercised............................................. (23,314) 6.83 Canceled or expired................................... (2,094) 13.29 ------- ------ Outstanding December 31, 1998........................... 60,302 12.02 Granted............................................... 35,262 31.69 Exercised............................................. (13,827) 9.68 Canceled or expired................................... (12,826) 17.12 ------- ------ Outstanding December 31, 1999........................... 68,911 21.48 Granted............................................... 41,698 45.52 U S WEST options converted upon Merger................ 52,448 29.64 Exercised............................................. (20,834) 16.21 Canceled or expired................................... (12,145) 34.65 ------- ------ Outstanding December 31, 2000........................... 130,078 $32.19 ======= ======
Options to purchase 22.7 million and 10.2 million shares of Qwest common stock (the acquired entity for accounting purposes) at weighted average exercise prices of $19.94 and $17.43 were exercisable at December 31, 1999 and 1998, respectively. The outstanding options at December 31, 2000 have the following characteristics (shares in thousands):
OUTSTANDING OPTIONS EXERCISABLE OPTIONS ------------------------------------ ---------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE EXERCISE PRICES OUTSTANDING LIFE(YEARS) PRICE EXERCISABLE PRICE - --------------- ----------- ----------- -------- ----------- -------- $ 0.00-$19.00.................... 22,640 6.35 $12.06 16,470 $12.28 $19.01-$29.00.................... 27,648 7.83 25.75 14,082 23.62 $29.01-$33.00.................... 20,322 8.18 30.49 12,403 30.14 $33.01-$42.00.................... 28,605 8.90 38.73 9,536 38.09 $42.01-$49.00.................... 20,369 9.62 46.43 224 45.07 $49.01-$60.00.................... 10,494 9.50 50.40 18 49.92 ------- ---- ------ ------ ------ Total.................. 130,078 8.28 $32.19 52,733 $24.33 ======= ==== ====== ====== ======
F-35 37 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Had the Company accounted for employee stock option grants under the fair value method prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation," the pro forma results would have been as follows:
YEAR ENDED DECEMBER 31, --------------------------- 2000 1999 1998 ------- ------- ------- (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) Net (loss) income: As reported............................................... $ (81) $1,342 $1,508 Pro forma................................................. (167) 1,293 1,479 (Loss) earnings per share: As reported -- basic...................................... $(0.06) $ 1.54 $ 1.76 As reported -- diluted.................................... (0.06) 1.52 1.75 Pro forma -- basic........................................ (0.13) 1.48 1.73 Pro forma -- diluted...................................... (0.13) 1.47 1.71
Following are the weighted average assumptions used with the Black-Scholes option-pricing model to estimate the fair value of options granted during 2000, 1999 and 1998:
YEAR ENDED DECEMBER 31, ------------------------- 2000 1999 1998 ------ ------ ----- Risk-free interest rate................................... 6.0% 5.6% 5.5% Expected dividend yield................................... 1.0% 0.0% 4.2% Expected option life (years).............................. 4.7 4.0 4.0 Expected stock price volatility........................... 52.6% 57.0% 22.9% Weighted average grant date fair value.................... $23.03 $27.87 $8.75
Approximately 31 million shares of common stock were available for grant at December 31, 2000. Approximately 75 million shares of common stock were reserved for issuance at December 31, 2000. Employee Stock Purchase Plan. In October 1998, Qwest (the acquired entity for accounting purposes) instituted an Employee Stock Purchase Plan ("ESPP"). The Company is authorized to issue approximately 1.6 million shares of Qwest common stock to eligible employees. Under the terms of the ESPP, eligible employees may authorize payroll deductions of up to 15% of their base compensation, as defined, to purchase Qwest common stock at a price of 85% of the fair market value of the Qwest common stock on the last trading day of the month in which the Qwest common stock is purchased. Shares purchased prior to the Merger were 253,766 in 2000; 443,242 in 1999 and 21,134 in 1998. Shares purchased subsequent to the Merger were 349,868 in 2000. Growth Share Plan. Qwest (the acquired entity for accounting purposes) had a Growth Share Plan for certain of its employees and directors. A "Growth Share" is a unit of value based on the increase in value of Qwest over a specified measurement period. Upon vesting, settlement of each Growth Share is made in Qwest common stock. All Growth Share grants have been made based on a beginning Qwest value that was greater than or equal to the fair value of Qwest at the grant date. Prior to the Merger, Qwest recognized approximately $3.5 million, $6 million and $9 million of expense for the Growth Share Plan in 2000, 1999 and 1998, respectively. Subsequent to the Merger, the Company recognized $3.5 million of expense in 2000. F-36 38 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table summarizes the activity of the number of shares of Qwest common stock allocated for the settlement of outstanding Growth Shares:
NUMBER OF SHARES --------- December 31, 1997 outstanding balance..................... 625,426 1998 settlements........................................ (65,472) -------- December 31, 1998 outstanding balance..................... 559,954 1999 settlements........................................ (37,516) -------- December 31, 1999 outstanding balance..................... 522,438 2000 settlements........................................ (165,715) -------- December 31, 2000 outstanding balance..................... 356,723 ========
Due to the Merger, all Growth Shares were vested at December 31, 2000 and approximately $29 million was included in other liabilities related to outstanding Growth Shares. In the first quarter of 2001, the Company issued approximately 357,000 shares of Qwest common stock in settlement of all remaining vested Growth Shares. NOTE 9: COMMITMENTS AND CONTINGENCIES Commitments Take-or-Pay Contracts. In July 1999, the Company and Global Crossing entered into a purchase agreement under which Qwest agreed to purchase services from Global Crossing over a four-year period in a total amount of $140 million. This agreement was entered into in connection with the termination of the U S WEST and Global Crossing merger. At the end of the two-year period following the signing of the agreement, Qwest must pay Global Crossing an amount equal to the difference between $140 million and the amount of services purchased under the agreement at that time. The amount of the differential payment will be credited by Global Crossing against all purchases by Qwest of services from Global Crossing during the remaining two years of the agreement. Under the agreement, Qwest is entitled to purchase services on any of Global Crossing's network segments at the most favorable commercially available prices offered by Global Crossing. As of December 31, 2000, Qwest had purchased $135 million in services under this agreement. Qwest CyberCenters (SM). In March 2000, Qwest and IBM Global Services ("IBM") formed a strategic business alliance to deliver next-generation e-business services and applications through the construction and activation of CyberCenters throughout North America. IBM, as the contractor, will build and provide operational support for 28 CyberCenters for Qwest. IBM will lease hosting space in these CyberCenters and will purchase telecommunications services from Qwest, with the total revenue expected to be approximately $2.5 billion over the seven-year term of the agreement. Under this alliance, Qwest agreed to purchase equipment and services from IBM, as contractor, over a seven-year period, which combined with the construction services, is expected to be approximately $2.5 billion. As of December 31, 2000, Qwest had purchased $26 million in equipment and services under this agreement. Minimum Usage Requirements. The Company has agreements with certain telecommunications inter-exchange carriers ("IXCs") and third party vendors that require the Company to maintain minimum monthly and/or annual billings based on usage. The Company has historically met all requirements and believes the minimum usage commitments will continue to be met. Contingencies Litigation. In January 2001, an amended purported class action complaint was filed against Qwest and certain current and former officers and directors on behalf of stockholders of U S WEST. The complaint alleges F-37 39 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) that Qwest has a duty to pay a quarterly dividend to U S WEST stockholders of record as of June 30, 2000. Plaintiffs further claim that the defendants' efforts to close the Merger in advance of the record date and the defendants' failure to pay the dividend breaches fiduciary duties owed to stockholders of U S WEST. Qwest has filed a motion to dismiss the complaint, which is pending. Through December 2000, seven purported class action complaints have been filed in various state courts against Qwest and U S WEST on behalf of customers in the states of Arizona, Colorado, Minnesota, New Mexico, Oregon, Utah and Washington. The complaints allege, among other things, that from 1993 to the present, U S WEST, in violation of alleged statutory and common law obligations, willfully delayed the provision of local telephone service to the purported class members. In addition, the complaints allege that U S WEST misrepresented the date on which such local telephone service was to be provided to the purported class members. The complaints seek compensatory damages for purported class members, disgorgement of profits and punitive damages. As of November 11, 2000, the parties have signed agreements to settle the complaints. The agreements are subject to a variety of conditions, including court approval. In April 1999, CSX Transportation, Inc. filed a complaint in federal district court in Jacksonville, Florida against Qwest claiming breach of a 1995 contract. Discovery in the case is ongoing and the trial is scheduled to commence in October 2001. Through December 2000, several purported class actions have been filed in various state courts against Qwest on behalf of landowners in Georgia, Indiana, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas. The complaints challenge Qwest's right to install its fiber optic cable network in railroad rights-of-way. The complaints allege that the railroads own a limited property right-of-way that did not include the right to permit Qwest to install its fiber optic cable network on the plaintiffs' property. The Indiana action purports to be on behalf of a national class of landowners adjacent to railroad rights-of-way over which the Qwest network passes; the Georgia, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas actions purport to be on behalf of a class of such landowners in Georgia, Kansas, Louisiana, Missouri, Oregon, Tennessee and Texas, respectively. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. The Company received, and may in the future receive, additional claims and demands that may be based on similar or different legal theories. From March 2, 2000 to March 9, 2000, five purported class action complaints were filed against Qwest in state court in Delaware on behalf of Qwest stockholders. The complaints allege that Qwest and its directors breached their fiduciary duty by entering into the Merger and by agreeing not to solicit alternative transactions. Since the filing of the complaints, there has been no discovery or other activity in the cases. On March 17, 2000, and March 20, 2000, two class action complaints were filed in federal district court in Delaware against Qwest and Joseph Nacchio on behalf of U S WEST stockholders. The complaints allege, among other things, that Qwest and Mr. Nacchio made material false statements regarding Qwest's intent to solicit an alternative transaction to the Merger. Since the filing of the complaints, there has been no discovery or other activity in the cases. In 1999, 12 purported class action complaints were filed against U S WEST and its directors on behalf of U S WEST stockholders. Each of the complaints allege that the defendants breached their fiduciary duties to the class members by refusing to seek all bona fide offers for U S WEST and refusing to consider the Qwest proposal. Since the filing of the complaints, there has been no discovery or other activity in the cases. Various other litigation matters have been filed against Qwest. Management intends to vigorously defend these outstanding claims. Qwest has provided for the above matters in its financial statements as of December 31, 2000. The Company does not expect any material adverse impacts in excess of such provision as a result of the ultimate resolution of these matters. F-38 40 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Intellectual Property. Qwest frequently receives offers to take licenses for patent and other intellectual rights, including rights held by competitors in the telecommunications industry, in exchange for royalties or other substantial consideration. Qwest also regularly receives allegations that Qwest products or services infringe upon various intellectual property rights, together with demands that Qwest discontinue the alleged infringement. The Company normally investigates such offers and allegations and responds appropriately, including defending itself vigorously when appropriate. There can be no assurance that, if one or more of these allegations proved to have merit and involved significant rights or royalties, it would not have a material adverse effect on Qwest. Contingent Payment Arrangements. In connection with the Merger, Qwest was required to divest transport services between local access and transport areas ("LATAs") within U S WEST's 14-state region local service area. In June 2000, the Company sold its interLATA customer base, along with other assets. Under the terms of the agreement, the purchase price paid is subject to adjustment for revenue fluctuations during the 90 days subsequent to the agreement date. Depending on certain circumstances, the revenue adjustment may not be settled until the end of the first quarter 2001. Qwest does not expect the adjustment, if any, to have a material adverse impact on its consolidated results of operations or financial position. Regulatory Matters. Qwest has pending regulatory actions in local regulatory jurisdictions which call for price decreases, refunds or both. These actions are generally routine and incidental to Qwest's business. From time to time, Qwest receives complaints and becomes subject to investigations regarding tarriffs, "slamming" (the practice of changing long-distance carriers without the customer's consent) and other matters. In 2000, the California Public Utilities Commission opened an investigation relating to certain slamming complaints. A purported class action complaint was filed in federal court in Connecticut containing slamming allegations. The Attorney General of Connecticut has also filed a similar complaint in state court in Connecticut. Qwest may receive complaints or become subject to investigations in the future. Such complaints or investigations could result in the imposition of certain fines and other penalties. NOTE 10: SEGMENT INFORMATION Qwest operates in four segments: retail services, wholesale services, network services and directory services. The retail services segment provides local telephone services, long-distance services, wireless services and data services. The wholesale services segment provides (i) exchange access services that connect customers to the facilities of IXCs and (ii) interconnection to the Qwest telecommunications network to CLECs. The network services segment provides access to the Qwest telecommunications network, including Qwest's information technologies, primarily to the Company's retail services and wholesale services segments. The directory services segment publishes White and Yellow Pages telephone directories and provides electronic directory and other information services. Qwest provides the majority of its services to more than 25 million residential and business customers in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Following is a breakout of the Company's segments. The accounting policies used are the same as those used in the consolidated financial statements. The "other" category includes unallocated corporate expenses and F-39 41 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) revenues. Beginning in fiscal 2000, Qwest internally tracks only the assets and capital expenditures of its Directory Services segment. Reconciling items include unallocated assets and capital expenditures.
TOTAL COMMUNICATIONS RETAIL WHOLESALE NETWORK AND RELATED DIRECTORY RECONCILING SERVICES SERVICES SERVICES SERVICES SERVICES OTHER ITEMS COMBINED -------- --------- -------- -------------- --------- ----- ----------- -------- (DOLLARS IN MILLIONS) 2000 External revenues...... $11,913 $3,194 $ 353 $15,460 $1,546 $ -- (396) $16,610 Intersegment revenues............. 121 -- 99 220 15 -- (235) -- EBITDA(1).............. 7,236 2,523 (2,962) 6,797 896 (322) -- 7,371 Assets................. -- -- -- -- 829 -- 72,672 73,501 Capital expenditures... -- -- -- -- 41 -- 6,556 6,597 1999 External revenues...... 9,022 2,871 242 12,135 1,446 -- (399) 13,182 Intersegment revenues............. 87 -- 60 147 10 -- (157) -- EBITDA................. 6,111 2,157 (2,793) 5,475 741 (116) -- 6,100 Assets................. -- -- -- -- 819 -- 22,453 23,272 Capital expenditures... 587 111 3,199 3,897 48 (1) -- 3,944 1998 External revenues...... 8,556 2,590 214 11,360 1,277 -- (242) 12,395 Intersegment revenues............. 28 -- 70 98 10 -- (108) -- EBITDA................. 6,194 1,908 (2,776) 5,326 657 (234) -- 5,749 Assets................. -- -- -- -- 524 -- 17,883 18,407 Capital expenditures... 362 -- 2,143 2,505 42 125 -- 2,672
- --------------- (1) Earnings before interest, income taxes, depreciation and amortization ("EBITDA") does not include non-recurring and non-operating items such as Merger costs, asset write-offs and impairments, gains/losses on the sale of investments and fixed assets, changes in the market values of investments, one-time legal charges, in-region long-distance activity, Qwest construction activity, Separation charges, regulatory accruals and sales of local telephone exchanges. 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. A reconciliation from Segment EBITDA to pre-tax income follows:
YEAR ENDED DECEMBER 31, ------------------------ 2000 1999 1998 ------ ------ ------ (DOLLARS IN MILLIONS) Segment EBITDA............................................. $7,371 $6,100 $5,749 Less: Separation costs........................................... -- -- 129 Merger-related and other charges........................... 1,752 -- -- Other expense -- net....................................... 1,697 1,435 630 Taxes other than income taxes.............................. 454 396 372 Depreciation and amortization.............................. 3,342 2,367 2,199 ------ ------ ------ Pre-tax income............................................. $ 126 $1,902 $2,419 ====== ====== ======
F-40 42 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11: QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTERLY FINANCIAL DATA ------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- (DOLLARS IN MILLIONS) 2000 Revenues.................................................. $3,377 $3,450 $4,765 $5,018 Net income (loss)......................................... 404 (121) (248) (116) Earnings (loss) per share: Basic................................................... 0.46 (0.14) (0.15) (0.07) Diluted................................................. 0.45 (0.14) (0.15) (0.07) 1999 Revenues.................................................. $3,168 $3,227 $3,296 $3,491 Net income................................................ 634 406 136 166 Earnings per share: Basic................................................... 0.73 0.47 0.16 0.19 Diluted................................................. 0.72 0.46 0.15 0.19
NOTE 12: SUBSEQUENT EVENTS In January 2001, Qwest repurchased 22.22 million shares of its common stock from BellSouth Corporation ("BellSouth") for $1.0 billion in cash. The repurchased shares will be available to satisfy the Company's obligations under its employee benefits and options programs. As part of the transaction, BellSouth agreed to purchase $250 million in services from Qwest over the next five years. BellSouth will pay for these services in shares of Qwest common stock. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The United States market for trading in Qwest common stock is the New York Stock Exchange. As of March 5, 2001, the Company's common stock was held by approximately 491,036 stockholders of record.
MARKET PRICE ---------------------------------- PER SHARE MARKET AND DIVIDEND DATA HIGH LOW CLOSE DIVIDENDS(1) ---------------------------------- -------- ------------ -------- ------------ 2000 First quarter........................... $79.0000 $65.1250 $72.6250 $0.5350 Second quarter(2)....................... 91.0000 66.0000 85.7500 0.0000 Third quarter........................... 57.8750 43.5000 48.1250 0.0000 Fourth quarter.......................... 51.4375 32.3750 40.8750 0.0000 1999 First quarter........................... $65.6250 $53.3125 $55.0625 $0.5350 Second quarter.......................... 62.2500 51.5625 58.7500 0.7500 Third quarter........................... 60.2500 51.7500 57.0625 0.5350 Fourth quarter.......................... 73.0000 57.0000 72.0000 0.5350
- --------------- (1) The decrease in 2000 dividends was due to a change in the Company's dividend policy after the merger between Qwest and U S WEST (2) The merger between Qwest and U S WEST was effective June 30, 2000. The stock prices prior to June 30, 2000 reflect the price of U S WEST common stock. On June 30, 2000, each share of U S WEST common stock was converted into the right to receive 1.72932 shares of Qwest common stock and cash in lieu of fractional shares. F-41 EX-21 13 d84707ex21.txt SUBSIDIARIES 1 EXHIBIT 21
SUBSIDIARIES OF QWEST COMMUNICATIONS INTERNATIONAL INC. JURISDICTION OF INCORPORATION 1056974 Ontario, Inc. Ontario 1200 Landmark Center Condominium Association Nebraska Block 142 Parking Garage Association Colorado El Paso County Telephone Company Colorado LCI International CA, Inc. Delaware LCI International of Virginia, Inc. Virginia LCI International Telecom Corp. Delaware LCI International, Inc. Delaware Lightwave Spectrum, Inc. Delaware Malheur Home Telephone Company Oregon Opticom S.A. de C.V. Mexico Phoenix Network, Inc. Delaware Qwest Advanced Technologies, Inc. Colorado Qwest (Asia) Limited Hong Kong Qwest Asset Management Company Colorado Qwest B.V. Netherlands Qwest Broadband Services, Inc. Delaware Qwest Business Resources, Inc. Colorado Qwest Capital Funding, Inc. Colorado Qwest Communications Corporation Delaware Qwest Communications Corporation of Virginia Virginia Qwest Corporation Colorado Qwest Cyber Solutions LLC Delaware Qwest Database Services, Inc. Colorado Qwest Dex Holdings, Inc. Delaware Qwest Dex, Inc. Colorado Qwest Digital Media, LLC Delaware Qwest Foundation Colorado Qwest Government Services, Inc. Colorado Qwest Hong Kong, LLC Delaware Qwest Information Technologies, Inc. Colorado Qwest Internet Solutions, Inc. Delaware Qwest Interprise America, Inc. Colorado Qwest Interprise America of Virginia, Inc. Virginia Qwest Investment Company Delaware Qwest IP Holdings, Inc. Delaware Qwest Japan, Inc. Delaware Qwest Communications International Ltd. United Kingdom Qwest Long Distance, Inc. Colorado Qwest N Limited Partnership Delaware Qwest Services Corporation Colorado Qwest Transoceanic, Inc. Delaware Qwest Wireless, LLC Delaware Servicios Derecho de Via S.A.de C.V. Mexico Training Partnerships, Inc. Colorado Transoceanic Operations, Inc. Delaware TW Wireless, LLC Delaware USLD Communications Corp. Delaware USLD Communications, Inc. Texas Vicorp.com Delaware Vicorp.com International Delaware Western Re, Inc. Vermont
EX-23 14 d84707ex23.txt CONSENT OF ARTHUR ANDERSEN 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 24, 2001, on the consolidated balance sheets of Qwest Communications International Inc. (the "Company") as of December 31, 2000 and of USW-C, Inc., its predecessor, as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2000, included in the Company's Annual Report for the year ended December 31, 2000 and into the Company's previous filings. ARTHUR ANDERSEN LLP Denver, Colorado, March 15, 2001. 1 -----END PRIVACY-ENHANCED MESSAGE-----