-----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, HXyV5rw2RLldqbwcWCBcjqJ8hxRUm7VZ7rmm3wuuifk9qrW8W+Je0Ua+T7UT4k/M 1G2OG7ZRl2AUTseaFFTE/w== 0001035704-01-500305.txt : 20010815 0001035704-01-500305.hdr.sgml : 20010815 ACCESSION NUMBER: 0001035704-01-500305 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20010630 FILED AS OF DATE: 20010814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QWEST COMMUNICATIONS INTERNATIONAL INC CENTRAL INDEX KEY: 0001037949 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 841339282 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15577 FILM NUMBER: 1713819 BUSINESS ADDRESS: STREET 1: 1801 CALIFORNIA ST CITY: DENVER STATE: CO ZIP: 80202 BUSINESS PHONE: 3039921400 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-Q 1 d89933e10-q.txt FORM 10-Q FOR QUARTER ENDED JUNE 30, 2001 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 000-22609 QWEST COMMUNICATIONS INTERNATIONAL INC. (Exact name of registrant as specified in its charter) DELAWARE 84-1339282 (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.)
1801 CALIFORNIA STREET, DENVER, COLORADO 80202 (Address of principal executive offices and zip code) TELEPHONE NUMBER (303) 992-1400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] At July 31, 2001, 1,663,721,480 shares of common stock were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 QWEST COMMUNICATIONS INTERNATIONAL INC. FORM 10-Q TABLE OF CONTENTS
ITEM PAGE - ---- ---- PART I -- FINANCIAL INFORMATION 1. Financial Statements Condensed Consolidated Statements of Operations -- Three and six months ended June 30, 2001 and 2000........... 1 Condensed Consolidated Balance Sheets -- June 30, 2001 and December 31, 2000......................... 2 Condensed Consolidated Statements of Cash Flows -- Six months ended June 30, 2001 and 2000..................... 3 Notes to Condensed Consolidated Financial Statements........ 4 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 15 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 22 PART II -- OTHER INFORMATION 1. Legal Proceedings........................................... II-1 4. Submission of Matters to a Vote of Security Holders......... II-1 6. Exhibits and Reports on Form 8-K............................ II-3 Signature page.............................................. II-8
i 3 QWEST COMMUNICATIONS INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2001 2000 2001 2000 -------- ------- ------- ------ Revenues: Commercial services................................. $ 2,898 $1,252 $ 5,647 $2,459 Consumer and small business services................ 1,708 1,506 3,392 2,972 Directory services.................................. 348 331 690 678 Switched access services............................ 268 361 544 718 ------- ------ ------- ------ Total revenues.............................. 5,222 3,450 10,273 6,827 ------- ------ ------- ------ Operating expenses: Cost of services.................................... 1,850 830 3,646 1,695 Selling, general and administrative................. 1,343 1,061 2,601 2,066 Depreciation........................................ 865 600 1,697 1,186 Depreciation adjustment for access lines returned to service.......................................... 222 -- 222 -- Goodwill and other intangible amortization.......... 392 -- 711 -- Merger-related and other one-time charges........... 415 291 624 306 ------- ------ ------- ------ Total operating expenses.................... 5,087 2,782 9,501 5,253 ------- ------ ------- ------ Operating income...................................... 135 668 772 1,574 Other expense (income) - net: Interest expense - net.............................. 343 207 681 418 Investment write-downs.............................. 3,108 447 3,247 447 Decline in market value of financial instruments.... 23 192 -- 321 Gain on sale of rural exchanges..................... (50) -- (50) -- Gain on sale of investments......................... -- -- -- (79) Other expense - net................................. 14 15 34 14 ------- ------ ------- ------ Total other expense - net................... 3,438 861 3,912 1,121 ------- ------ ------- ------ (Loss) income before income taxes and extraordinary item................................................ (3,303) (193) (3,140) 453 Income tax provision (benefit)........................ 3 (72) 147 170 ------- ------ ------- ------ (Loss) income before extraordinary item............... (3,306) (121) (3,287) 283 Extraordinary item - early retirement of debt, net of tax................................................. -- -- (65) -- ------- ------ ------- ------ Net (loss) income..................................... $(3,306) $ (121) $(3,352) $ 283 ======= ====== ======= ====== Basic (loss) earnings per share: (Loss) income before extraordinary item............. $ (1.99) $(0.14) $ (1.98) $ 0.32 Extraordinary item - early retirement of debt, net of tax........................................... -- -- (0.04) -- ------- ------ ------- ------ Basic (loss) earnings per share....................... $ (1.99) $(0.14) $ (2.02) $ 0.32 ======= ====== ======= ====== Basic average shares outstanding...................... 1,661 887 1,659 882 ======= ====== ======= ====== Diluted (loss) earnings per share: (Loss) income before extraordinary item............. $ (1.99) $(0.14) $ (1.98) $ 0.32 Extraordinary item - early retirement of debt, net of tax........................................... -- -- (0.04) -- ------- ------ ------- ------ Diluted (loss) earnings per share..................... $ (1.99) $(0.14) $ (2.02) $ 0.32 ======= ====== ======= ====== Diluted average shares outstanding.................... 1,661 887 1,659 895 ======= ====== ======= ====== Dividends per share................................... $ 0.05 $ 0.00 $ 0.05 $ 0.31 ======= ====== ======= ======
The accompanying notes are an integral part of these condensed consolidated financial statements. 1 4 QWEST COMMUNICATIONS INTERNATIONAL INC. CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS)
JUNE 30, DECEMBER 31, 2001 2000 ----------- ------------ (UNAUDITED) ASSETS Current assets: Cash and cash equivalents................................. $ 516 $ 154 Accounts receivable - net................................. 4,842 4,235 Inventories and supplies.................................. 352 275 Prepaid and other......................................... 707 535 ------- ------- Total current assets........................................ 6,417 5,199 Property, plant and equipment - net......................... 29,050 25,760 Goodwill and other intangible assets - net.................. 34,688 32,327 Investments................................................. 1,571 8,186 Other assets................................................ 2,180 2,029 ------- ------- Total assets................................................ $73,906 $73,501 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current borrowings........................................ $ 5,859 $ 3,645 Accounts payable.......................................... 2,426 2,049 Accrued expenses and other current liabilities............ 3,272 3,806 Advance billings and customer deposits.................... 383 393 ------- ------- Total current liabilities................................... 11,940 9,893 Long-term borrowings........................................ 17,575 15,421 Post-retirement and other post-employment benefit obligations............................................... 2,927 2,735 Deferred taxes, credits and other........................... 4,178 4,148 Commitments and contingencies (Note 8) Stockholders' equity: Preferred stock - $1.00 par value, 200 million shares authorized, none issued and outstanding................ -- -- Common stock - $0.01 par value, 5 billion shares authorized, 1,685 million and 1,672 million issued, 1,663 million and 1,672 million outstanding............ 17 17 Additional paid-in capital................................ 41,740 41,289 Treasury stock............................................ (1,000) -- Retained (deficit) earnings............................... (3,411) 24 Accumulated other comprehensive loss...................... (60) (26) ------- ------- Total stockholders' equity.................................. 37,286 41,304 ------- ------- Total liabilities and stockholders' equity.................. $73,906 $73,501 ======= =======
The accompanying notes are an integral part of these condensed consolidated financial statements. 2 5 QWEST COMMUNICATIONS INTERNATIONAL INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS) (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ---------------- 2001 2000 ------ ------ Cash provided by operating activities..................... $2,307 $1,799 ------ ------ INVESTING ACTIVITIES Expenditures for property, plant and equipment............ (5,559) (2,702) Proceeds from sale of equity securities................... -- 1,140 Cash acquired in connection with the Merger............... -- 407 Other..................................................... 91 (206) ------ ------ Cash used for investing activities........................ (5,468) (1,361) ------ ------ FINANCING ACTIVITIES Net proceeds from current borrowings...................... 2,296 89 Proceeds from issuance of long-term borrowings -- net..... 3,238 992 Repayments of long-term borrowings........................ (1,102) (270) Costs relating to the early retirement of debt............ (106) -- Proceeds from issuance of common stock.................... 280 115 Repurchase of stock....................................... (1,000) -- Dividends paid on common stock............................ (83) (542) ------ ------ Cash provided by financing activities..................... 3,523 384 ------ ------ CASH AND CASH EQUIVALENTS Increase.................................................. 362 822 Beginning balance......................................... 154 78 ------ ------ Ending balance............................................ $ 516 $ 900 ====== ======
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 6 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED JUNE 30, 2001 (UNAUDITED) NOTE 1: BASIS OF PRESENTATION The condensed consolidated interim financial statements are unaudited. Qwest Communications International Inc. ("Qwest" or the "Company" or "we" or "us" or "our") prepared these financial statements in accordance with the instructions for Form 10-Q. In compliance with those instructions, certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In management's opinion, all adjustments (consisting only of normal recurring adjustments) necessary to fairly present the consolidated results of operations, financial position and cash flows as of June 30, 2001 and for all periods presented were made. These financial statements should be read in conjunction with the audited financial statements incorporated by reference in Qwest's Annual Report on Form 10-K for the year ended December 31, 2000. The consolidated results of operations for the three and six months ended June 30, 2001 are not necessarily indicative of the results expected for the full year. Certain reclassifications have been made to previously reported balances to conform with the current year presentation. Specifically, during the quarter ended June 30, 2001, we refined the definitions and processes by which expenses are classified as cost of services or selling, general and administrative expenses. As a result, these costs have been reclassified from cost of services to selling, general and administrative expenses for all periods presented. See Qwest's Current Report on Form 8-K, filed July 20, 2001, for additional information. NOTE 2: MERGER WITH U S WEST Final purchase price allocation. On June 30, 2000, Qwest completed its acquisition (the "Merger") of 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 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 (prior to the Merger or "pre-Merger Qwest") the acquired entity. The total value of the consideration was approximately $40.0 billion, which has been allocated to the identifiable tangible and intangible assets of pre-Merger Qwest. During the second quarter of 2001, we completed the allocation of the purchase price to the acquired net assets of pre-Merger Qwest as follows:
PRELIMINARY FINAL PURCHASE PURCHASE PRICE PRICE ALLOCATION ADJUSTMENT ALLOCATION (DOLLARS IN BILLIONS) ----------- ---------- ---------- Identified intangibles............................ $ 4.1 $ -- $ 4.1 Investment in KPNQwest, N.V. ..................... 7.9 (3.1) 4.8 Tangible assets and liabilities, net.............. 0.8 0.3 1.1 Deferred income taxes............................. (0.7) (0.1) (0.8) Goodwill.......................................... 27.9 2.9 30.8 ----- ----- ----- Purchase consideration............................ $40.0 $ -- $40.0 ===== ===== =====
The identifiable intangibles consist of the following (including related amortization periods): $2.2 billion in product technology (10 years), $1.2 billion in customer relationships (10 years), $100 million in assembled 4 7 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) workforce (3 years) and $600 million in tradename value (40 years). There was no change between the preliminary purchase price allocation of identifiable intangibles and the final independent appraisal. Prior to the Merger, pre-Merger Qwest's investment in KPNQwest, N.V. ("KPNQwest") was approximately $552 million. The preliminary purchase price allocation of $7.9 billion was based upon the publicly traded share price at the date of the Merger and did not consider restrictions related to our investment in KPNQwest. To properly value the investment, we obtained an independent appraisal that was completed in June 2001. The appraisal resulted in a final purchase price allocation of $4.8 billion, requiring an adjustment to the preliminary purchase price allocation of $3.1 billion. The excess carrying value of our investment in KPNQwest over our proportionate share of KPNQwest's net equity will be amortized over 10 years. At the time of the Merger, pre-Merger Qwest had net tangible assets with a book value of approximately $3.0 billion. To properly record the fiber optic network at fair value, we obtained an independent appraisal that was completed in June 2001. The appraisal resulted in a reduction of property, plant and equipment of approximately $1.1 billion. The reduction in carrying value was principally due to declining replacement costs for fiber optic network assets. There were no significant differences between the preliminary purchase price allocation and the final appraised values for property, plant and equipment. The remaining reduction in net tangible assets related principally to increased liabilities associated with severance costs for pre-Merger Qwest employees, costs to terminate redundant contracts, adjustments to the fair value of pre-Merger Qwest's obligations and transaction costs incurred by Qwest (the legal acquirer) to consummate the Merger. The preliminary allocation of purchase price to net tangible assets has been adjusted upward by approximately $300 million based upon information obtained subsequent to the preliminary purchase price allocation. We recorded deferred income taxes in the purchase price allocation, resulting from adjustments to the Company's tangible assets and liabilities and from recording the identifiable intangible assets. Because of the tax-free nature of the Merger, there was no corresponding increase in the tax basis of those assets and liabilities. The final purchase price allocation has resulted in goodwill of approximately $30.8 billion which will be amortized on a straight-line basis over 40 years. The operating results of pre-Merger Qwest have been included in the consolidated statement of operations from the Merger date (June 30, 2000). The unaudited results of operations for the three and six months ended June 30, 2001 and the pro forma, unaudited results of operations for the three and six months ended June 30, 2000 (as though the Merger had been completed as of the beginning of 2000) are as follows (dollars in millions, except for per share amounts):
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------------- -------------------- PRO FORMA PRO FORMA 2001 2000 2001 2000 ------- --------- ------- --------- Revenues.................................. $ 5,222 $4,654 $10,273 $9,171 Net loss.................................. (3,306) (349) (3,352) (166) Diluted loss per share.................... $ (1.99) $(0.21) $ (2.02) $(0.10)
The pro forma results of operations for the three and six month periods ended June 30, 2000, are not necessarily indicative of what the actual results of operations might have been if the Merger had been effective at the beginning of 2000. Merger-related and other one-time charges. We consider only those costs that are incremental and directly related to the Merger to be "Merger-related." For the three and six months ended June 30, 2001, we incurred the following Merger-related and other one-time charges totaling $415 million and $624 million, respectively. 5 8 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------ ------------ 2001 2000 2001 2000 (DOLLARS IN MILLIONS) ---- ---- ---- ---- Contractual settlements and legal contingencies....... $218 $ 53 $274 $ 53 Severance and headcount-related charges............... 84 226 199 236 Other Merger-related and one-time charges............. 113 12 151 17 ---- ---- ---- ---- Total Merger-related and other one-time charges................................... $415 $291 $624 $306 ==== ==== ==== ====
Other Merger-related and one-time charges include professional fees, re-branding costs and other costs related to the integration of U S WEST and Qwest. Additionally, other Merger-related and one-time charges include asset impairment charges of $31 million and $41 million for the three and six months ended June 30, 2001, respectively. Since the Merger, we have reduced staffing levels by approximately 12,700 employees and contractors. For the three and six months ended June 30, 2000, we incurred $291 million and $306 million, respectively in Merger-related costs. These primarily consisted of severance and headcount charges resulting from payments to employees who left the business upon the consummation of the Merger and retention bonus payments that were subject to the successful completion of the Merger. A summary, as of June 30, 2001, of Merger-related and other one-time charges accrued at December 31, 2000 and subsequent provisions and charges against those accruals and provisions follows:
DECEMBER 31, CURRENT CURRENT JUNE 30, 2000 BALANCE PROVISION UTILIZATION 2001 BALANCE (DOLLARS IN MILLIONS) ------------- --------- ----------- ------------- Contractual settlements and legal contingencies...................... $376 $274 $168 $482 Severance and headcount-related charges............................ 130 199 213 116 Other Merger-related and one-time charges............................ 17 151 145 23 ---- ---- ---- ---- Total Merger-related and other one-time charges... $523 $624 $526 $621 ==== ==== ==== ====
We do not foresee any additional Merger-related charges and anticipate that the majority of the $621 million accrual at June 30, 2001, will be paid by the end of the fiscal year. However, legal contingencies will be paid as the related matters are resolved. When the matters are finalized, any differences between amounts accrued and actual payments will be reflected in results of operations as a charge or benefit. NOTE 3: ACCESS LINES RETURNED TO SERVICE During 1999 and 2000, U S WEST committed to sell approximately 800,000 access lines to third-party telecommunications service providers, including approximately 570,000 access lines to Citizens Communications Company ("Citizens"). Because these access lines were "held for sale," we discontinued recognizing depreciation expense on these assets and recorded these assets at the lower of their cost or fair value, less estimated cost to sell. On July 20, 2001, we terminated our agreement with Citizens under which the majority of the remaining access lines were to have been sold and ceased actively marketing the remaining lines. As a result, the remaining access lines were reclassified as being "held for use" as of June 30, 2001. The access lines were measured individually at the lower of their (a) carrying value before they were classified as held for sale, adjusted for any depreciation (amortization) expense or impairment losses that would have been recognized had the assets been continuously classified as held and used, or (b) their fair value at June 30, 2001. The required adjustments to the 6 9 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) carrying value of the individual access lines are included in income from continuing operations for the three and six months ended June 30, 2001. This resulted in a charge to depreciation of $222 million. In April 2001, we sold approximately 38,000 access lines resulting in a gain for the three and six months ended June 30, 2001 of $50 million. NOTE 4: INVESTMENT WRITE-DOWNS AND DECLINE IN MARKET VALUE OF FINANCIAL INSTRUMENTS Investment write-downs. The following is a summary of the investment write-downs recorded during the periods indicated.
FOR THE FOR THE THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, -------------- -------------- 2001 2000 2001 2000 (DOLLARS IN MILLIONS) ------ ---- ------ ---- KPNQwest investment................................ $3,048 $ -- $3,048 $ -- Lucent Technology, Inc. investment................. 36 -- 36 -- Other investment losses............................ 24 447 163 447 ------ ---- ------ ---- Total investment write-downs....................... $3,108 $447 $3,247 $447 ====== ==== ====== ====
We review our portfolio of equity securities on a quarterly basis. Many factors are considered in assessing whether a decline in value is other than temporary, including, as may be appropriate: - Earnings trends and asset quality - Near term prospects and financial condition of the issuer - Financial condition and prospects of the issuer's region and industry - The cause and severity of the decline in market price - Analysts recommendations and stock price projections - The length of time market value was less than the carrying value - Stock price volatility and near term potential for recovery - Qwest's intent and ability to retain the investment As a result of the review of our portfolio of equity securities for the three months ended June 30, 2001, we recorded a charge of $3.1 billion to reduce the carrying values of our investments to their estimated fair values. KPNQwest equity investment. In March 1999, KPN Telecom B.V. ("KPN") and pre-Merger Qwest formed a corporate joint venture ("KPNQwest"). The carrying value of Qwest's investment in KPNQwest at the date of the Merger was $552 million. On June 30, 2000, our preliminary estimate of the value of our investment in KPNQwest, was $7.9 billion, based upon the closing price of the 11% publicly traded minority stake of $39.625 per share on that date. However, because our investment in KPNQwest is subject to a number of restrictions, the fair value of our investment was ultimately determined by an independent appraisal. As part of the finalization of the purchase price allocation, we engaged an independent appraiser to perform a valuation of our investment in KPNQwest as of June 30, 2000. The appraisal was completed in June 2001, and indicated a fair value for our investment in KPNQwest of $4.8 billion or $23.775 per share. 7 10 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) At June 30, 2001, we evaluated our investment in KPNQwest and concluded that the decline in fair value was other than temporary. Factors considered in reaching this conclusion included the following, among others: 1. KPNQwest's stock price had remained at approximately $11 per share throughout the second quarter. The period of time the market price was below our carrying value of $23.775 per share and the severity of the decline indicated that the decline had become other than temporary. 2. Analysts had released new recommendations during the quarter of their stock price targets for KPNQwest which showed a significant decline from the first quarter. 3. The European telecom sector had experienced a severe deterioration during the quarter, including numerous bankruptcies, making the near term prospects of KPNQwest's stock recovery less certain at June 30, 2001. As a result of the evaluation of our investment in KPNQwest, we concluded that the fair value of our investment at June 30, 2001, was $1.3 billion and took a charge of $3.048 billion to reduce the carrying value to the estimated fair value of the investment. Other investments. During the three and six months ended June 30, 2001, we concluded that several other investments in equity securities had experienced declines in fair value that were other than temporary. These losses made up the majority of our charges of $60 million and $199 million for the three months and six months ended June 30, 2001, respectively. Included in these charges for the three and six months ended June 30, 2001 was a charge for $36 million relating to our investment in Lucent Technology, Inc. ("Lucent"). Although the market price for Lucent stock had declined below our carrying value as of March 31, 2001, we concluded that insufficient evidence existed to reach a conclusion that the decline was not temporary. Factors considered in reaching that conclusion included Lucent's earnings trends, financial health (including debt and analyst ratings), asset quality, executive management changes, restructuring plans, large customer contract announcements and actions taken to reduce headcount, capital and other expenditures. In addition, we considered the potential acquisition of Lucent by a large, European telecommunications equipment manufacturer. At June 30, 2001, we again evaluated our investment in Lucent and concluded that the decline in fair value was other than temporary. Factors considered in reaching this conclusion included the following: 1. An additional three months of declines in the Lucent stock price. 2. The magnitude by which Lucent did not meet analysts' first quarter 2001 earnings estimates. 3. A decline in the number of analysts with buy recommendations. 4. The announced termination of merger discussions with the large European telecommunications equipment manufacturer. As a result of the evaluation of our investment in Lucent, we concluded that the fair value of the investment at June 30, 2001 was $4.2 million and took a charge of $36 million to reduce the investment from its carrying value to its fair value. For the three and six months ended June 30, 2000, we recorded charges of $447 million associated with an other than temporary decline in our Global Crossing Ltd. ("Global Crossing") investment. Decline in market value of derivatives. We hold derivatives associated with our previously-owned equity investment in Global Crossing. These derivatives are recorded at market value with any change in market value taken immediately to income. Due to a decline in the market value of the derivatives, we recorded a charge of $23 million for the three months ended June 30, 2001. There was no net charge for the six months ended June 30, 2001 as the loss in the second quarter was fully offset by the gain in the first quarter of 2001. For the three and six 8 11 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) months ended June 30, 2000, the charges were $192 million and $321 million, respectively. The derivative contracts outstanding at June 30, 2001 will expire in August 2001. NOTE 5: WEIGHTED AVERAGE SHARES The following table is a reconciliation of basic weighted average shares to diluted weighted average shares. The 2000 shares have been adjusted to reflect the conversion of the U S WEST shares into Qwest shares due to the Merger.
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, --------------- --------------- 2001 2000 2001 2000 (IN MILLIONS) ------ ----- ------ ----- Basic weighted average shares outstanding............. 1,661 887 1,659 882 Dilutive effect of stock options...................... -- -- -- 13 ----- --- ----- --- Diluted weighted average shares outstanding........... 1,661 887 1,659 895 ===== === ===== ===
For the three and six months ended June 30, 2001, 125 million and 125 million options, respectively, were excluded from the earnings per share computation solely because the effect was anti-dilutive. Anti-dilutive options for the three months ended June 30, 2000 were 13 million. NOTE 6: SEGMENT INFORMATION We operate 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 exchange access services that connect customers to the facilities of interexchange carriers ("IXCs") and interconnection to our telecommunications network to competitive local exchange carriers ("CLECs"). The network services segment provides access to our telecommunications network, including our information technologies, primarily to our 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. We provide the majority of our 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 (our "local service area"). 9 12 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Following is a breakout of our segments. The accounting principles used are the same as those used in the condensed consolidated financial statements. The "other" category includes unallocated corporate expenses and revenues. We internally track, separately, only the assets of our directory services segment and all remaining assets are included as a reconciling item. Reconciling items also includes other adjustments.
TOTAL COMMUNICATIONS RETAIL WHOLESALE NETWORK AND RELATED DIRECTORY RECONCILING CONSOLIDATED SERVICES SERVICES SERVICES SERVICES SERVICES OTHER ITEMS TOTAL -------- --------- -------- ---------------- --------- ----- ----------- ------------ (DOLLARS IN MILLIONS) THREE MONTHS ENDED JUNE 30, 2001 External revenues...... $4,075 $763 $ 28 $4,866 $ 348 $ 8 $ -- $ 5,222 EBITDA(1).............. 3,121 635 (1,705) 2,051 225 (247) -- 2,029 Assets................. -- -- -- -- 1,678 -- 72,228 73,906 Capital expenditures... 83 -- 2,502 2,585 2 29 -- 2,616 2000 External revenues...... 2,380 790 57 3,227 332 (109) -- 3,450 EBITDA(1).............. 1,510 578 (672) 1,416 166 (23) -- 1,559 Assets................. -- -- -- -- 741 -- 69,107 69,848 Capital expenditures... 175 58 1,180 1,413 12 -- -- 1,425
TOTAL COMMUNICATIONS RETAIL WHOLESALE NETWORK AND RELATED DIRECTORY RECONCILING CONSOLIDATED SERVICES SERVICES SERVICES SERVICES SERVICES OTHER ITEMS TOTAL -------- --------- -------- ---------------- --------- ----- ----------- ------------ (DOLLARS IN MILLIONS) SIX MONTHS ENDED JUNE 30, 2001 External revenues...... $7,940 $1,515 $ 84 $9,539 $ 690 $ 44 $ -- $10,273 EBITDA(1).............. 6,074 1,260 (3,243) 4,091 439 (504) -- 4,026 Assets................. -- -- -- -- 1,678 -- 72,228 73,906 Capital expenditures... 245 -- 5,289 5,534 2 23 -- 5,559 2000 External revenues...... 4,680 1,518 115 6,313 678 (164) -- 6,827 EBITDA(1).............. 2,978 1,160 (1,333) 2,805 356 (95) -- 3,066 Assets................. -- -- -- -- 741 -- 69,107 69,848 Capital expenditures... 329 82 2,268 2,679 23 -- -- 2,702
- --------------- (1) Earnings before interest, income taxes, depreciation and amortization ("EBITDA") does not include non-recurring and non-operating items such as Merger-related and other one-time charges, investment write-downs, gains/losses on the sale of investments, declines in the market value of financial instruments and gains on sales of rural exchanges. EBITDA does not represent cash flow for the periods presented and should not be considered as an alternative to net (loss) earnings as an indicator of 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. 10 13 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A reconciliation from Segment EBITDA to (loss) earnings before income taxes and extraordinary item follows:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------- ----------------- 2001 2000 2001 2000 (DOLLARS IN MILLIONS) -------- ------- ------- ------ Segment EBITDA................................ $ 2,029 $1,559 $ 4,026 $3,066 Less: Depreciation and amortization............... 1,479 600 2,630 1,186 Merger-related and other one-time charges... 415 291 624 306 Other expense -- net........................ 3,438 861 3,912 1,121 ------- ------ ------- ------ (Loss) earnings before income taxes and extraordinary item.......................... $(3,303) $ (193) $(3,140) $ 453 ======= ====== ======= ======
NOTE 7: OTHER COMPREHENSIVE (LOSS) INCOME Comprehensive (loss) income for the three and six months ended June 30, 2001 and 2000 are as follows:
THREE MONTHS SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------- ----------------- 2001 2000 2001 2000 (DOLLARS IN MILLIONS) ------- ----- -------- ----- Net (loss) income................................ $(3,306) $(121) $(3,352) $283 Other comprehensive (loss) income: Net unrealized gains (losses) on available-for-sale marketable securities, net of deferred taxes.............................. 23 62 21 (60) Foreign currency translation..................... (17) -- (54) -- ------- ----- ------- ---- Comprehensive (loss) income...................... $(3,300) $ (59) $(3,385) $223 ======= ===== ======= ====
Net unrealized gains for the quarters ended June 30, 2001 and 2000 were net of deferred tax expenses of $16 million and $39 million, respectively. Net unrealized gains and losses for the six months ended June 30, 2001 and 2000 were net of deferred tax expenses (benefits) of $13 million and ($40) million, respectively. Embedded in net unrealized gains and losses on available-for-sale marketable securities are reclassification adjustments. Reclassification adjustments are comprised of amounts that have been removed from comprehensive income and recognized in income or loss from operations in the condensed consolidated statement of operations during the periods cited below. For the three and six months ended June 30, 2001, unrealized gains and losses on marketable securities included reclassification adjustments of $27 million of losses (net of deferred tax benefits of $17 million) and $36 million of losses (net of deferred tax benefits of $23 million), respectively, pertaining to other than temporary impairments of our investments in certain marketable equity securities. For the three and six months ended June 30, 2000, unrealized gains (losses) on marketable securities include reclassification adjustments of $49 million (net of deferred tax expenses of $30 million) pertaining to realized gains from the sale of securities. NOTE 8: COMMITMENTS AND CONTINGENCIES COMMITMENTS Minimum Usage Requirements. We have agreements with IXCs and third party vendors that require us to maintain minimum monthly and/or annual billings based on usage. We believe that we will meet substantially all minimum usage commitments. Where requirements have not been met, we have recorded appropriate charges. 11 14 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We have reflected in our financial statements the financial impact of all current, unmet minimum usage requirements. CONTINGENCIES In January 2001, an amended purported class action complaint was filed in Denver District Court against us and certain current and former officers and directors on behalf of stockholders of U S WEST. The complaint alleges that we have 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. In June 2000, the court rejected the plaintiffs' motion for a temporary restraining order attempting to prevent the closing of the Merger. We have filed a motion to dismiss the complaint, which is pending. Through June 2001, seven purported class action complaints have been filed in various state courts against us 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. The complaints also 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. The parties have signed agreements to settle the complaints. As of June 2001, the settlements have been approved by all of the courts. In April 1999, CSX Transportation, Inc. filed a complaint in federal district court in Jacksonville, Florida against us claiming breach of a 1995 contract. Discovery in the case is ongoing, and trial is scheduled to commence in October 2001. Through June 2001, several purported class actions have been filed in various courts against us on behalf of landowners in California, Colorado, Georgia, Illinois, Indiana, Kansas, Louisiana, Mississippi, Missouri, Oregon, South Carolina, Tennessee and Texas. The complaints challenge our right to install our fiber optic cable network in railroad rights-of-way and in California, Colorado, Illinois, South Carolina and Texas, also challenged our right to install fiber optic cable in utility and pipeline rights of way. The complaints allege that the railroads, utilities and pipeline companies own a limited property right-of-way that did not include the right to permit us to install our 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 our network passes. The California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, Oregon, Tennessee and Texas actions purport to be on behalf of a class of such landowners in California, Colorado, Georgia, Kansas, Louisiana, Mississippi, Missouri, Oregon, Tennessee and Texas, respectively. The Illinois action purports to be on behalf of landowners adjacent to railroad rights-of-way over which our network passes in Illinois, Iowa, Kentucky, Michigan, Minnesota, Nebraska, Ohio and Wisconsin. The South Carolina action purports to be on behalf of landowners adjacent to railroad rights-of-way over which our network passes in Georgia, North Carolina, South Carolina and Virginia. The complaints seek damages on theories of trespass and unjust enrichment, as well as punitive damages. None of the complaints have been certified by a court as an appropriate state-wide or national class action. In Tennessee, the court certified a class of a small number of counties, and that ruling is on appeal. We have 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 us in state court in Delaware on behalf of Qwest stockholders. The complaints allege that we and our directors breached our 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. 12 15 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 our intent to solicit an alternative transaction to the U S WEST 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 entering into a merger agreement with Global Crossing thereby refusing to seek all bona fide offers for U S WEST and refusing to consider an acquisition proposal from Qwest. Since the filing of the complaints, there has been no discovery or other activity in the cases. 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. An administrative hearing was held in May 2001, and we are awaiting a recommendation from the administrative law judge. 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 continue to analyze regulatory and governmental requirements and may modify our practices as a result. 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 or awards of damages. We are currently in the process of attempting to resolve various billing, reimbursement and other commercial disputes with Touch America, Inc. arising under agreements entered into for the sale of our interLATA (local access transport area) business in our local service area to Touch America, Inc. on June 30, 2000. We have been named as a defendant in various other litigation matters. We intend to vigorously defend these outstanding claims. We have provided for these matters in our condensed consolidated financial statements as of June 30, 2001. We do not expect any material adverse impacts in excess of such provision as a result of the ultimate resolution of these matters. NOTE 9: SUBSEQUENT EVENTS Completion of New Debt Offering. On July 30, 2001, we issued $3.75 billion in long-term borrowings. The borrowings were comprised of the following: $1.25 billion face value with a coupon rate of 5.875% and a three-year maturity, $2 billion face value with a coupon rate of 7.00% and an eight-year maturity and $500 million face value with a coupon rate of 7.625% and a twenty-year maturity. We received cash proceeds (after underwriting fees and other issuance costs) of $3.709 billion that we used to repay existing borrowings. NOTE 10: NEW ACCOUNTING STANDARDS In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This pronouncement eliminated the use of the "pooling of interests" method of accounting for all mergers and acquisitions. As a result, all mergers and acquisitions will be accounted for using the "purchase" method of accounting. SFAS No. 141 is effective for all mergers and acquisitions initiated after June 30, 2001. Adoption of this pronouncement has no impact on our results from operations or our financial position. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses financial accounting and reporting for intangible assets (excluding goodwill) acquired individually or with a group of other assets at the time of their acquisition. It also addresses financial accounting and reporting 13 16 QWEST COMMUNICATIONS INTERNATIONAL INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) for goodwill and other intangible assets subsequent to their acquisition. Intangible assets (excluding goodwill) acquired outside of a business combination will be initially recorded at their fair value. If the intangible asset has a finite useful life, it will be amortized over that life. Intangible assets with an indefinite life are not amortized. Both types of intangible assets will be reviewed annually for impairment and a loss recorded when the asset's carrying value exceeds its value. Goodwill will be treated similar to an intangible asset with an indefinite life. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We currently estimate the adoption of SFAS No. 142 will reduce our amortization expense by approximately $850-$950 million annually, beginning January 1, 2002. No determination has been made at this time of the potential impairment, if any, to be recorded at the time of adoption. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement deals with the costs of closing facilities and removing assets. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation in the period it is incurred. This cost is initially capitalized and amortized over the remaining life of the underlying asset. Once the obligation is ultimately settled, any difference between the final cost and the recorded liability is recognized as a gain or loss on disposition. SFAS No. 143 is effective for years beginning after June 15, 2002. We are currently evaluating the impact this pronouncement will have on our future consolidated financial results. 14 17 ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This Form 10-Q 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 the "Company" 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 compete; - 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; - higher than anticipated employee levels, capital expenditures and operating expenses; - rapid and significant changes in technology and markets; - adverse changes in the regulatory or legislative environment affecting Qwest's business; - delays in Qwest's ability to provide interLATA services within its 14-state local service area; - failure to maintain rights-of-way; and - failure to achieve the projected synergies and financial results expected to result from the acquisition of U S WEST, Inc. ("U S WEST"), by 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. Further, the information contained in this document is a statement of our present intention and is based upon, among other things, the existing regulatory environment, industry conditions, market conditions and prices, the economy in general and our assumptions. We may change our intentions, at any time and without notice, based upon any changes in such factors, in our assumptions or otherwise. 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 our behalf may issue. We do not undertake any obligation to review or confirm analyst's expectations or estimates or to release publicly 15 18 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. In addition, we make no representation with respect to any materials available on the Internet, including materials available on our website. MERGER WITH U S WEST 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 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 results of operations for Qwest (the acquired entity for accounting purposes) before the Merger ("pre-Merger Qwest") with U S WEST, are not reflected in the accompanying condensed consolidated statements of operations. However, due to the significance of the Merger, the comparison of 2001 to 2000 results in Management's Discussion and Analysis of Financial Condition and Results of Operations will be based upon the 2001 financial statements prepared in accordance with generally accepted accounting principles ("GAAP") (referred to "As Reported") and the 2000 pro forma financial statements. The 2000 pro forma financial statements were prepared as if the Merger occurred on January 1, 2000 and the financial statements of pre-Merger Qwest and U S WEST were combined as of that date. These financial statements have been adjusted to reflect the elimination of pre-Merger Qwest's in-region long-distance activity, the inclusion of interest expense on pre-Merger Qwest borrowings and the amortization of intangible assets arising out of the Merger. The pro forma results of operations for the three and six month periods ended June 30, 2000, are not necessarily indicative of what the actual results of operations might have been if the Merger had been effective at the beginning of 2000. 16 19
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30, ------------------------------------- -------------------------------------- 2001 2000 2001 2000 AS PRO INCREASE AS PRO INCREASE REPORTED FORMA (DECREASE) REPORTED FORMA (DECREASE) (DOLLARS IN MILLIONS) -------- ------- ---------------- -------- ------ ------------------ Revenues: Commercial services............... $ 2,898 $ 2,287 $ 611 26.7% $ 5,647 $4,460 $ 1,187 26.6% Consumer and small business services........................ 1,708 1,675 33 2.0 3,392 3,315 77 2.3 Directory services................ 348 331 17 5.1 690 678 12 1.8 Switched access services.......... 268 361 (93) (25.8) 544 718 (174) (24.2) ------- ------- ------- ------ ------- ------ ------- -------- Total revenues............. 5,222 4,654 568 12.2 10,273 9,171 1,102 12.0 ------- ------- ------- ------ ------- ------ ------- -------- Operating expenses: Cost of services.................. 1,850 1,516 334 22.0 3,646 3,019 627 20.8 Selling, general and administrative.................. 1,343 1,344 (1) (0.1) 2,601 2,634 (33) (1.3) ------- ------- ------- ------ ------- ------ ------- -------- EBITDA............................ 2,029 1,794 235 13.1 4,026 3,518 508 14.4 ------- ------- ------- ------ ------- ------ ------- -------- Depreciation...................... 865 650 215 33.1 1,697 1,275 422 33.1 Depreciation adjustment for access lines returned to service....... 222 -- 222 -- 222 -- 222 -- Amortization...................... 392 317 75 23.7 711 634 77 12.1 Merger-related and other one-time charges......................... 415 357 58 16.2 624 393 231 58.8 ------- ------- ------- ------ ------- ------ ------- -------- Total operating expenses... 5,087 4,184 903 21.6 9,501 7,955 1,546 19.4 ------- ------- ------- ------ ------- ------ ------- -------- Operating income.................... 135 470 (335) (71.3) 772 1,216 (444) (36.5) Other expense (income)-net: Interest expense-net.............. 343 244 99 40.6 681 492 189 38.4 Investment write-downs............ 3,108 447 2,661 595.3 3,247 447 2,800 626.4 Decline in market value of financial instruments........... 23 192 (169) (88.0) -- 321 (321) (100.0) Gain on sale of rural exchanges... (50) -- (50) -- (50) -- (50) -- Gain on sale of investments....... -- (38) 38 (100.0) -- (122) 122 (100.0) Other expense (income)-net........ 14 14 -- -- 34 19 15 78.9 ------- ------- ------- ------ ------- ------ ------- -------- Total other expense-net.... 3,438 859 2,579 300.2 3,912 1,157 2,755 238.1 ------- ------- ------- ------ ------- ------ ------- -------- (Loss) income before income taxes and extraordinary item............ (3,303) (389) (2,914) (749.1) (3,140) 59 (3,199) (5,422.0) Income tax provision (benefit)...... 3 (40) 43 (107.5) 147 225 (78) (34.7) ------- ------- ------- ------ ------- ------ ------- -------- Loss before extraordinary item...... (3,306) (349) (2,957) (847.3) (3,287) (166) (3,121) (1,880.1) Extraordinary item -- early retirement of debt, net of tax.... -- -- -- -- (65) -- (65) -- ------- ------- ------- ------ ------- ------ ------- -------- Net loss............................ $(3,306) $ (349) $(2,957) (847.3)% $(3,352) $ (166) $(3,186) (1,919.3)% ======= ======= ======= ====== ======= ====== ======= ========
RESULTS OF OPERATIONS Three and Six Months Ended June 30, 2001 Compared with 2000 REVENUES Total Revenues. Total revenues for the three months and six months ended June 30, 2001 were $5.222 billion and $10.273 billion, respectively, representing increases of $568 million or 12.2% and $1.102 billion or 12.0%, respectively over the same periods in 2000. Major contributors to the growth for the three and six months ended June 30, 2001 over the three and six months ended June 30, 2000 were sales of Internet Protocol ("IP"), data and wireless products and services. As compared to 2000, IP and data services revenues increased by 41% and 42% during the three and six months ended June 30, 2001 driven largely by sales of optical capacity, private lines, digital subscriber lines ("DSL"), dedicated internet access ("DIA") and web hosting. We believe revenues from data products and services will account for an increasingly larger portion of our revenues in future periods. Wireless products and services revenue in the three and six month periods ended June 30, 2001 grew by almost 51% and 48% respectively, over the three and six month periods ended June 30, 2000. Average revenue 17 20 per user increased to $52 from $50 in the first quarter of 2001 as we focused on high-value customers and exited the low-usage, pre-paid business. Commercial Services Revenues. Commercial services revenues are derived from sales of IP, data, voice and wireless products and services provided to both retail and wholesale business customers. The increases over the prior periods in commercial services revenues for the three and six months ended June 30, 2001 were 26.7% and 26.6%, respectively, primarily attributable to growth in our IP and data services (DIA, virtual private network, Internet dial access, optical private lines, ATM and frame relay). During the three and six month periods ended June 30, 2001, we recognized $430 million and $857 million, respectively, in optical capacity sales under indefeasible right of use ("IRU") agreements versus $197 million and $416 million, respectively, for the comparable periods in 2000. Certain rule-making bodies, such as the Emerging Issues Task Force, are currently discussing matters which may impact the accounting for sale-type leases. We actively monitor these rule-making activities and evaluate their impact on our current accounting practices. Consumer and Small Business Services Revenues. Consumer and small business services revenues are derived from sales of IP, data, voice and wireless products and services to the consumer and small business markets. The increases in consumer and small business services revenues for the three months and six months ended June 30, 2001 over comparable periods in 2000, were principally attributable to sales of wireless services and products and data services partially offset by a decline in out-of-region consumer long-distance. Sales of bundled packages (which include the phone line, calling features and/or wireless services) to our small business and consumer customers for these periods also contributed to the revenue growth. Directory Services Revenues. Directory services revenues are derived primarily from selling advertising in our published directories. Directory services revenues increased 5.1% for the three months ended June 30, 2001 and 1.8% for the six months ended June 30, primarily due to a change in the mix and length of directories published and increased advertising rates as compared to the same periods in the prior year. Switched Access Services Revenues. Switched access services revenues are derived from inter- and intrastate switched access from interexchange carriers ("IXCs"). The decreases in switched access services revenues for the three and six months ended June 30, 2001 as compared to the same periods in 2000, were principally attributable to increased competition and federal access reform that reduced the rates we are able to collect for switched access services. We believe revenues from switched access services will continue to be negatively impacted by federal access reform. OPERATING EXPENSES Cost of services. Cost of services, as a percent of revenues, increased from 32.6% for the three months ended June 30, 2000 to 35.4% for the three months ended June 30, 2001. For the six months ended June 30, 2001, cost of services, as a percent of revenues, increased to 35.5% versus 32.9% for the comparable period in 2000. The increases in cost of services for the three and six months ended June 30, 2001 were primarily attributable to a shift in our product mix to higher growth services, increases in our access expenses, costs associated with the sales of data and wireless products and services, expenses associated with improving local service and costs related to the re-entry into the long-distance business in our 14-state local service area. Partially offsetting this growth were decreased costs related to a reduction in the number of employees and contractors and other savings generated through tighter cost controls and operational efficiencies. Since June 30, 2000, we have reduced our contractors by 3,300. Selling, general and administrative. Selling, general and administrative expenses, as a percentage of revenues, decreased from 28.9% for the three months ended June 30, 2000, to 25.7% for the three months ended June 30, 2001. For the six months ended June 30, 2001, selling, general and administrative expenses, as a percentage of revenue decreased to 25.3% as compared to 28.7% for the six months ended June 30, 2000. The percentage decreases were primarily attributable to the reduction in employee headcount, lower taxes (other than income taxes) and an increase in the pension credit (net of other post-retirement benefits). Selling, general and administrative expenses for the three months ended June 30, 2001, were relatively flat when compared to the same period of 2000. We held selling, general and administrative expenses flat primarily 18 21 due to the reduction in headcount, lower taxes (other than income taxes), a higher pension credit (net of other post-retirement benefits) and lower commissions due to changes in our commission compensation plan. Offsetting these expense savings were increases in uncollectible expenses, professional fees and occupancy costs relating to the opening of several new CyberCenters. For the six months ended June 30, 2001, selling, general and administrative expenses dropped from the same period in 2000 primarily because of the decreases in employee headcount, lower taxes (other than income taxes), higher pension credit (net of other post-retirement benefits) and lower commissions due to changes in our commission compensation plan. Since June 30, 2000, we have reduced our employee headcount by almost 9,400, a portion of which also impacts cost of services. Partially offsetting these decreases were increases in uncollectible expenses, professional fees and increases in occupancy costs relating to the opening of several new CyberCenters. For the three months ended June 30, 2001, results include a pension credit, net of other post-retirement expenses, of $85 million ($51 million after-tax or $0.03 per diluted share) compared to $80 million ($46 million after-tax or $0.03 per pro forma diluted share) for the three months ended June 30, 2000. For the six months ended June 30, 2001, results include a pension credit, net of post-retirement expenses, of $170 million ($104 million after-tax or $0.06 per diluted share) compared to $141 million ($86 million after-tax or $0.05 per pro forma diluted share) for the same period in 2000. Depreciation. The increases in depreciation expense for the three and six month periods ended June 30, 2001 compared to the same periods in 2000, were primarily attributable to a one-time charge for access lines returned to service and higher overall property, plant and equipment balances. We continue to invest in our network and service platforms to support re-entry into the long-distance business in our local service area, meet increased customer demand and make service improvements. During 1999 and 2000, U S WEST committed to sell approximately 800,000 access lines to third-party telecommunications service providers, including approximately 570,000 access lines to Citizens Communications Company ("Citizens"). Because these access lines were "held for sale," we discontinued recognizing depreciation expense on these assets and recorded these assets at the lower of their cost or fair value less estimated cost to sell. On July 20, 2001, we terminated our agreement with Citizens under which the majority of the remaining access lines were to have been sold and ceased actively marketing the remaining lines. As a result, the remaining access lines were reclassified as being "held for use" as of June 30, 2001. The access lines were measured individually at the lower of their (a) carrying value before they were classified as held for sale, adjusted for any depreciation (amortization) expense or impairment losses that would have been recognized had the assets been continuously classified as held and used, or (b) their fair value at June 30, 2001. The required adjustments to the carrying value of the individual access lines are included in income from continuing operations for the three and six months ended June 30, 2001. This resulted in a charge to depreciation of $222 million. Goodwill and other intangible amortization. Amortization expense is directly attributable to goodwill and other intangibles recorded as a result of the Merger. The final purchase price allocation to identifiable intangible assets and goodwill was $4.1 billion and $30.8 billion, respectively. Additionally, $4.8 billion was allocated to our investment in KPNQwest, N.V. ("KPNQwest"), which created an excess carrying value of $4.2 billion that was being amortized over 10 years at June 30, 2001. The average amortization period for all identifiable intangibles, the excess basis in KPNQwest and goodwill was 25 years. Following the final allocation of our purchase price and the $3.048 billion write down of our investment in KPNQwest on June 30, 2001, amortization of intangible assets will be reduced by approximately $84 million per quarter starting July 1, 2001. Merger-related and other one-time charges. For the three and six months ended June 30, 2001, we incurred Merger-related and other one-time charges totaling $415 million and $624 million, respectively. We consider only those costs that are incremental and directly related to the Merger to be Merger-related. For the quarter ended June 30, 2001, the Merger-related costs include $218 million of contract settlements and legal contingencies, $84 million of severance and headcount-related charges and $113 million of other Merger-related and one-time charges. For the six months ended June 30, 2001, the charge includes $274 million of contract settlements and legal contingencies, $199 million of severance and headcount-related charges and $151 million of other Merger-related and one-time charges. Other Merger-related and one-time charges include professional fees, 19 22 re-branding costs and other integration-related costs. Additionally, other Merger-related and one-time charges include asset impairment charges of $31 million and $41 million for the three and six months ended June 30, 2001, respectively. Since the Merger, we have reduced staffing levels by approximately 12,700 employees and contractors. The severance charge for the six months ended June 30, 2001 relates to approximately 3,400 employees who were involuntarily terminated. Other expense (income)-net. Interest expense was $343 million and $681 million for the three and six months ended June 30, 2001, respectively, compared to $244 million and $492 million for the three and six months ended June 30, 2000. The increases in interest expense were primarily attributable to increased borrowings required to fund the capital improvements to our network and the repurchase of shares from BellSouth Corporation ("BellSouth"). We follow a process of reviewing our portfolio of equity securities on a quarterly basis. We evaluate for an other than temporary decline when the carrying value of an investment exceeds its fair value. For a further discussion of the factors we use to determine the fair value of our equity investments, see Note 4 to the condensed consolidated financial statements. For the three months ended June 30, 2001, we recorded a write-down of $3.048 billion on our investment in KPNQwest, $60 million in other unrealized investment losses and a $23 million decline in the fair value of our derivative financial instruments. The six month period ended June 30, 2001, showed the same $3.048 billion write-down on KPNQwest and $199 million in other unrealized investment losses. The $3.1 billion write-down on our investment in KPNQwest and other marketable equity securities represents a non-cash charge against earnings. At June 30, 2001, subsequent to the charge for other than temporary declines in fair value, these investments had a carrying value of $1.3 billion for KPNQwest and $15 million for our portfolio of other marketable securities. A decline of $192 million in the fair value of our derivative financial instruments and a write-down of $447 million of our investment in Global Crossing Ltd. ("Global Crossing") was reported in the quarter ended June 30, 2000. For the six months ended June 30, 2000, we recorded a $321 million decline in the market value of our derivative financial instruments and the $447 million write-down of our Global Crossing investment. These were offset somewhat by the gains on the sales of various marketable equity securities of $38 million and $122 million for the three and six months ended June 30, 2000, respectively. During the second quarter of 2001, we completed a sale of approximately 38,000 access lines in Utah resulting in a gain of $50 million. Other expenses include losses from our investments accounted for under the equity method and regulatory interest expense. Provision for income taxes. The overall effective tax rate for all periods presented were impacted by the non-deductible goodwill and KPNQwest excess basis amortization, KPNQwest investment write-down, foreign losses associated with our investment in KPNQwest and certain Merger-related costs. Adjusting for these items, the effective tax rates for the three months ended June 30, 2001 and June 30, 2000 were 46.4% and 33.8%, respectively. For the six months ended June 30, 2001 and June 30, 2000, the effective tax rates after adjustment for the items discussed above, were 37.1% and 38.5%, respectively. The changes in these adjusted effective tax rates were due to miscellaneous permanent differences and tax credits. Extraordinary item -- early retirement of debt. During the six months ended June 30, 2001, we completed a tender offer to buy back certain outstanding debt. In the tender, we repurchased approximately $995 million in principal ($1.2 billion in face value) of outstanding debt. As a result of the repurchase, we incurred a pre-tax charge of $106 million ($65 million after tax) in premium payments. Net loss. Net loss for the three months ended June 30, 2001 was $3.306 billion compared to a net loss of $349 million in the second quarter of 2000. Net loss increased from $166 million in the first six months of 2000 to $3.352 billion during the same period in 2001. These increases in net loss were primarily due to the write-down of our investment in KPNQwest. Other contributors to the higher loss were Merger-related costs, the one- 20 23 time depreciation charge to return access lines to service, depreciation driven by the continued investment in our network and increases in interest expense. LIQUIDITY AND CAPITAL RESOURCES The liquidity and capital resources analysis is based upon As Reported results. Consequently, operating, investing and financing activities for the six months ended June 30, 2001 as compared to the six months ended June 30, 2000, were impacted significantly by the Merger. Operating Activities. Cash provided by operations increased to $2.307 billion for the six months ended June 30, 2001 from $1.799 billion for the same period in 2000. The change was primarily due to the growth in net income after adjusting for depreciation, amortization and the write-down of our KPNQwest investment. Investing Activities. Capital expenditures were $5.559 billion for the six months ended June 30, 2001 and $2.702 billion for the six months ended June 30, 2000. Capital expenditures have been, and continue to be, focused on the modernization and expansion of our telecommunications network, expansion of our wireless, local broadband, Internet and data communications networks, construction of CyberCenters in major markets, re-entry into the long-distance business in our local service area and service improvements. Our capital expenditures through June 30, 2001 represent almost 65% of our expected capital spending for the year. The heavier capital costs in the first half of the year are primarily attributable to spending on capital associated with our re-entry into the long-distance business in our local service area and infrastructure built to meet demand. Included in our expenditures for property, plant and equipment are cash expenditures for optical capacity purchase agreements. These agreements provide us with the right, among other things, to network capacity provided by major carriers on specific routes at current market rates for periods of 20 to 25 years. Several of these carriers have also acquired optical capacity from us, principally in the United States, during the first and second quarters in separate cash transactions at fair market rates. These transactions are accounted for separately as purchases of property, plant and equipment used in our operations and as sales of inventory. Property, plant and equipment increased by approximately $200 million and $450 million due to these purchases during the three and six month periods ended June 30, 2001, respectively. Revenue recognized on these sales was $280 million and $540 million for the three and six month periods ended June 30, 2001, respectively. In April 2001, we sold approximately 38,000 access lines resulting in a gain of $50 million and generating cash proceeds of $91 million. Future cash needs could be impacted with the pursuit of new business opportunities, including the acceleration of the deployment of additional and/or advanced new services to customers, such as broadband data, wireless and video services. In addition, the expansion and upgrades of our network and the construction of CyberCenters could effect our future cash requirements. We expect that such cash needs, if any, will be funded through operations, the sale of assets and, when necessary, the issuance of debt. Financing Activities. Cash provided by financing activities was $3.523 billion and $384 million for the six months ended June 30, 2001 and 2000, respectively. In 2001, we increased our commercial paper balances to finance the acquisition of telecommunications equipment for the upgrade and expansion of our network. Long-term borrowings increased during 2001 to refinance maturing commercial paper obligations. During the six months ended June 30, 2001 we reacquired 22.22 million shares of our common stock from BellSouth for $1.0 billion. In March 2001, we completed a cash tender offer to buy back certain outstanding debt. In the tender offer, we repurchased approximately $995 million in principal ($1.2 billion in face value) of outstanding debt. As a result of the repurchase, we incurred $106 million ($65 million after tax) in premium payments. On May 2, 2001, our Board of Directors approved a dividend of five cents per share on our common stock which was paid to stockholders of record as of the close of business on June 1, 2001 in satisfaction of any prior statement by us in connection with or following the Merger regarding the payment or declaration of dividends. As a result, dividends of $83 million were paid on common stock for the three and six months ended June 30, 2001 compared to $542 million in the comparable 2000 periods. The decline was due to a change in the dividend policy after the Merger. 21 24 We maintain commercial paper programs to finance purchases of telecommunications equipment. As of June 30, 2001, we had a $4.0 billion syndicated credit facility to support our commercial paper programs. The syndicated credit facility matures on May 3, 2002. Subsequent to June 30, 2001, we issued $3.75 billion in long-term borrowings. The borrowings were comprised of the following: $1.25 billion face value with a coupon rate of 5.875% and a three-year maturity, $2 billion face value with a coupon rate of 7.00% and an eight-year maturity and $500 million face value with a coupon rate of 7.625% and a twenty-year maturity. We received cash proceeds (after underwriting fees and other issuance costs) of $3.709 billion that we used to repay existing borrowings. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards 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 and 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 our consolidated financial results. In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities. SFAS No. 140 requires that after a transfer of financial assets, an entity continues to recognize the financial and servicing assets it controls and the liabilities it has incurred and does not recognize those financial and servicing assets when control has been surrendered and the liability has been extinguished. SFAS No. 140 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. Adoption of SFAS No. 140 did not have a material impact on our consolidated financial results. In June 2001, the FASB issued SFAS No. 141, "Business Combinations." This pronouncement eliminated the use of the "pooling of interests" method of accounting for all mergers and acquisitions. As a result, all mergers and acquisitions will be accounted for using the "purchase" method of accounting. SFAS No. 141 is effective for all mergers and acquisitions initiated after June 30, 2001. Adoption of this pronouncement has no impact on our results from operations or our financial position. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets." This statement addresses financial accounting and reporting for intangible assets (excluding goodwill) acquired individually or with a group of other assets at the time of their acquisition. It also addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. Intangible assets (excluding goodwill) acquired outside of a business combination will be initially recorded at their fair value. If the intangible asset has a finite useful life, it will be amortized over that life. Intangible assets with an indefinite life are not amortized. Both types of intangible assets will be reviewed annually for impairment and a loss recorded when the asset's carrying value exceeds its value. Goodwill will be treated similar to an intangible asset with an indefinite life. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. We currently estimate the adoption of SFAS No. 142 will reduce our amortization expense by approximately $850-$950 million annually beginning January 1, 2002. No determination has been made at this time of the potential impairment, if any, to be recorded at the time of adoption. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement deals with the costs of closing facilities and removing assets. SFAS No. 143 requires entities to record the fair value of a legal liability for an asset retirement obligation in the period it is incurred. This cost is initially capitalized and amortized over the remaining life of the underlying asset. Once the obligation is ultimately settled, any difference between the final cost and the recorded liability is recognized as a gain or loss on disposition. SFAS No. 143 is effective for years beginning after June 15, 2002. We are currently evaluating the impact this pronouncement will have on our future consolidated financial results. 22 25 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to market risks arising from changes in interest rates. The objective of our interest rate risk management program is to manage the level and volatility of our interest expense. We may employ derivative financial instruments to manage our interest rate risk exposure. We may also employ financial derivatives to hedge foreign currency exposures associated with particular debt. As of June 30, 2001 and December 31, 2000, approximately $4.5 billion and $2.4 billion, respectively, of floating-rate debt was exposed to changes in interest rates. This exposure is linked to commercial paper and London Interbank Offered Rates ("LIBOR") rates. A hypothetical increase of one-percentage point in commercial paper and LIBOR rates would increase annual pre-tax interest expense by $45 million. As of June 30, 2001 and December 31, 2000, we also had approximately $1.3 billion 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% change in the interest rates on this debt would not have had a material effect on our earnings. As of June 30, 2001 and December 31, 2000, we had entered into cross-currency swaps with notional amounts of $133 million. The cross-currency swaps hedge our exposure to movements in the Swiss Franc to the U. S. dollar exchange rate. The effect of the cross-currency swap is to synthetically transform the Swiss Franc borrowings into $84 million and $93 million of U. S. dollar borrowings at June 30, 2001 and December 31, 2000, respectively. Any foreign exchange gains (losses) on the cross-currency swaps would be offset by foreign exchange losses (gains) on the Swiss Franc debt obligations. The Swiss Franc borrowings mature in November 2001. As of June 30, 2001 and December 31, 2000, we had entered into equity swaps with notional amounts of $259 million and $761 million relating to the sale of 8 million and 24 million shares, respectively, of Global Crossing common stock we previously owned. Of the 24 million shares subject to equity swaps, one-third matured in February 2001 and one-third matured in May 2001, leaving equity swaps on 8 million shares. In connection with the remaining equity swaps, we have equity collars on 4 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% reduction in the market price of Global Crossing common shares, based upon the market price of $8.64 at June 30, 2001, would not have had a material effect on our earnings. The remaining equity swaps will mature in August 2001. We currently hold 200 million shares of stock in KPNQwest. At June 30, 2001 and December 31, 2000, the 11% minority stake in KPNQwest was trading at $11.11 and $18.94 per share, respectively. The carrying value of our KPNQwest investment was approximately $6.67 per share at June 30, 2001. The per share value of our investment in KPNQwest may be less than the publicly traded minority stake because of the size of our holdings and the restrictions on the marketability of our shares. Given the foregoing, a hypothetical 10% decline in the public trading price of KPNQwest at June 30, 2001, could decrease our investment value by approximately $100 million. Equity investments in other publicly traded companies consists of the following (dollars in millions):
JUNE 30, 2001 DECEMBER 31, 2000 - ------------------------------------------- ------------------------------------------- UNREALIZED UNREALIZED UNREALIZED UNREALIZED COST GAINS LOSSES FAIR VALUE COST GAINS LOSSES FAIR VALUE - ---- ---------- ---------- ---------- ---- ---------- ---------- ---------- $111.. $3 $(99) $15 $90 $30 $(62) $58 ==== == ==== === === === ==== ===
The estimated potential loss in fair value resulting from a hypothetical 10% decrease in the June 30, 2001 prices quoted by stock exchanges would decrease the fair value of our other equity investments by $2 million. RECENT REGULATORY DEVELOPMENTS As a general matter, we are subject to substantial regulation, including requirements and restrictions arising under the Telecommunication Act of 1996 (the "Act") and state utility laws, and the rules and policies of the 23 26 Federal Communications Commission ("FCC"), state Public Utility Commissions ("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 our 14-state local service area, and governs the terms and conditions under which we provide services to our customers (including competitive local exchange carriers ("CLECs") and IXCs in our local service area). Interconnection. The FCC is continuing to interpret the obligations of incumbent local exchange carriers ("ILECs") under the Act to interconnect their networks with, and make unbundled network elements available to, CLECs. These decisions establish our obligations in our local service area, and our rights when we compete outside of our local service area. 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 proceedings that directly affect the rates and charges for access services that we sold or purchased. 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; 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. On April 20, 2001, the Court of Appeals vacated and remanded to the FCC its classification of DS2-based advanced services. InterLATA Long-Distance Entry. Several Regional Bell Operating Companies ("RBOCs") 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 June 30, 2001, long-distance authority has been granted in the states of New York, Kansas, Oklahoma, Texas, Massachusetts and Connecticut. We filed applications with all of our local service area 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 state level to evaluate our satisfaction of requirements under the 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 thirteen states, and testing of those systems began in March 2001. Testing in Arizona is being conducted separately, and began in February 2001. We expect to file FCC applications for at least one state by the end of 2001 with the remaining applications to be filed with the FCC at the end of 2001 or in early 2002. Reciprocal Compensation for Internet Service Providers ("ISPs"). On April 27, 2001, the FCC issued an Order with regard to Intercarrier Compensation for ISP bound traffic. The Order required carriers serving ISP bound traffic to reduce reciprocal compensation rates over a 36 month period beginning with an initial reduction to $0.0015 per minute of use and ending with a rate of $0.0007 per minute of use. In addition, a cap was placed on the number of minutes of use on which the terminating carrier may charge such rates. This reduction will lower costs that Qwest pays CLECs for delivering such traffic to other carriers. CONTINGENCIES We have certain pending regulatory actions. See Note 8 to the condensed consolidated financial statements. 24 27 PART II -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In July and August 2001, three purported class action complaints were filed in the federal district court in Colorado against Qwest, its Chairman and Chief Executive Officer Joseph P. Nacchio and its Chief Financial Officer Robin R. Szeliga. On behalf of purchasers of Qwests' publicly traded stock between March 22, 2001 and July 23, 2001. The complaints allege, among other things, that Qwest, Mr. Nacchio and Ms. Szeliga made material false statements regarding the results of operations for the quarter ended March 31, 2001 in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and that, during the above period, the individual defendants sold shares of Qwest common stock. The complaints allege that Qwest's first quarter 2001 results and the statements regarding those results were false and misleading due to Qwest's alleged improper valuation of KPNQwest in violation of generally accepted accounting principles, and due to the following alleged facts which the plaintiffs' claim were undisclosed: (1) first quarter earnings were better than expected because of a change in the discount rate used to calculate Qwest's pension obligations; (2) Qwest failed to properly "write-down" the value of its holdings in KPNQwest; (3) Qwest's aggressive use of capitalization to classify interest and software development costs as assets rather than expenses increased first quarter earnings; and (4) Qwest's selling, general and administrative expenses were 22% of sales, not due to tight expense controls but to improper classification of selling, general and administrative expenses as cost of sales. The complaints seek unspecified compensatory damages and other relief. Since the filing of the complaints, there has been no discovery or other activity in these cases. On July 23, 2001, we filed a demand for arbitration against Citizens Communications alleging that it breached Agreements for Purchase and Sale of Telephone Exchanges dated as of June 16, 1999, between Citizens Utilities Company and U S WEST Communications, Inc., with respect to the purchase and sale of exchanges in Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska and Wyoming. The demand for arbitration was filed after Citizens Communications failed to close the exchange sales in violation of the terms of the Purchase Agreements. For a discussion of other claims and proceedings arising in the ordinary course of business, see Note 8: "Commitments and Contingencies" -- to the condensed consolidated financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company held its annual meeting of stockholders (the "Annual Meeting") on May 2, 2001. There were 1,649,490,762 shares of Common Stock of the Company that could be voted at the meeting, and 87.0%, or 1,435,857,927 shares, of Common Stock were represented at the meeting, in person or by proxy, which constituted a quorum. At the meeting, the following items and their results were submitted to a vote of the Stockholders of the Company: (1) Election of five Class I Directors who were nominated to serve on the Board of Directors for a term of three years expiring at our Annual Meeting in the year 2004 and until the director's successor has been duly elected and qualified, or until the earlier of the director's death, resignation or retirement. The votes cast were as follows:
VOTES FOR VOTES WITHHELD --------- -------------- Thomas J. Donohue........................................ 1,398,460,031 37,397,896 Jordan L. Haines......................................... 1,398,329,099 37,528,828 Peter S. Hellman......................................... 1,399,795,279 36,062,648 Vinod Khosla............................................. 1,398,714,117 37,143,810 Marilyn Carlson Nelson................................... 1,398,618,162 37,239,765
(2) Ratification of the amendment to our Employee Stock Purchase Plan to increase the number of shares authorized under the Employee Stock Purchase Plan from 1,520,000 to 7 million. The votes cast were as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON VOTES - --------- ------------- --------------- ---------------- 1,381,694,706 42,268,665 11,894,556 0
II-1 28 (3) Shareowner proposal requesting that we seek advance shareowner approval of future severance arrangements with our executive officers that provide for more generous pay-outs than to our other managers. The votes cast on this shareowner proposal were as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON VOTES - --------- ------------- --------------- ---------------- 317,213,772 898,620,121 16,840,555 203,183,479
(4) Shareowner proposal requesting that we disregard the effects of accounting rule income, particularly pension credits, when determining performance-based compensation for our executive officers. The votes cast on this shareowner proposal were as follows:
VOTES FOR VOTES AGAINST VOTES ABSTAINED BROKER NON VOTES - --------- ------------- --------------- ---------------- 185,921,085 1,024,370,769 22,382,594 203,183,479
II-2 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits filed for Qwest through the filing of this Form 10-Q.
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). (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).
II-3 30
EXHIBIT NUMBER DESCRIPTION ------- ----------- (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). (4.11) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (4.12) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (4.13) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (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 2001 Proxy Statement for the Annual Meeting of Stockholders).* (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.13) -- Employment Agreement dated October 6,1998 with Afshin Mohebbi (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (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.
II-4 31
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE. (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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).
II-5 32
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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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, File No. 1-14087). (10.36) -- Qwest Communications International Inc., Deferred Compensation Plan for Nonemployee Directors, effective as of July 1, 2000 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.37) -- Amended and Restated Qwest Digital Media, LLC Growth Share Plan (as of June 1, 2000) (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.38) -- 364-Day $4.0 billion Credit Agreement, dated as of May 4, 2001, among Qwest Capital Funding, Inc., Qwest Corporation, Qwest Communications International Inc., the banks listed therein and Bank of America, N.A., as administrative agent (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). 10.39 -- Purchase Agreement, dated July 25, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Lehman Brothers Inc. and MERRILL LYNCH & CO., INC. as Representatives of the several initial purchasers listed therein. 10.40 -- Registration Rights Agreement, dated July 30, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Lehman Brothers Inc. and MERRILL LYNCH & CO., INC. as Representatives of the several initial purchasers listed therein. (99.1) -- 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)). (99.2) -- Annual Report on Form 11-K for the Qwest Communications International Inc. 401K Plan for the year ended December 31, 2000 (incorporated by reference to Qwest's Annual Report on Form 10-K, File No. 000-22609). (99.3) -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 2000 (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K, File No. 000-22609, Paper Copy (P)).
- --------------- ( ) Previously filed. II-6 33 * 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. (b) Reports on Form 8-K: (i) On April 5, 2001, Qwest filed a report on Form 8-K regarding its intention not to acquire Winstar Communications, Inc. (ii) On April 25, 2001, Qwest filed a report on Form 8-K regarding its 2001 first quarter results of operations. (iii) On April 27, 2001, Qwest filed a report on Form 8-K regarding its strategic alliance with Microsoft Corporation. (iv) On May 17, 2001, Qwest filed a report on Form 8-K regarding its chief executive officer's structured daily stock sales program. (v) On June 5, 2001, Qwest filed a report on Form 8-K regarding a speech by its chief executive officer. (vi) On June 8, 2001, Qwest filed a report on Form 8-K regarding the filing of Form 144 by its chief executive officer for the sale of stock. (vii) On June 20, 2001, Qwest filed a report on Form 8-K regarding its analysts conference. (viii) On June 21, 2001, Qwest filed a report on Form 8-K regarding its response to a Morgan Stanley equity research report. II-7 34 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. QWEST COMMUNICATIONS INTERNATIONAL INC. By: /s/ ROBIN R. SZELIGA ------------------------------------- Robin R. Szeliga Executive Vice President -- Finance and Chief Financial Officer August 14, 2001 II-8 35 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). (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).
36
EXHIBIT NUMBER DESCRIPTION ------- ----------- (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). (4.11) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (4.12) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (4.13) -- First Supplemental Indenture, dated as of February 16, 2001, to the 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) (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). (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 2001 Proxy Statement for the Annual Meeting of Stockholders).* (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.13) -- Employment Agreement dated October 6, 1998 with Afshin Mohebbi (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (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.
37
EXHIBIT NUMBER DESCRIPTION ------- ----------- (10.17)**# -- IRU Agreement dated as of May 2, 1997 with GTE. (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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).
38
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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000). (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, File No. 1-14087). (10.36) -- Qwest Communications International Inc., Deferred Compensation Plan for Nonemployee Directors, effective as of July 1, 2000 (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.37) -- Amended and Restated Qwest Digital Media, LLC Growth Share Plan (as of June 1, 2000) (incorporated by reference to Qwest's Annual Report on Form 10-K for the year ended December 31, 2000).* (10.38) -- 364-Day $4.0 billion Credit Agreement, dated as of May 4, 2001, among Qwest Capital Funding, Inc., Qwest Corporation, Qwest Communications International Inc., the banks listed therein and Bank of America, N.A., as administrative agent (incorporated by reference to Qwest's quarterly report on Form 10-Q for the quarter ended March 31, 2001). 10.39 -- Purchase Agreement, dated July 25, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Lehman Brothers Inc. and MERRILL LYNCH & CO., INC. as Representatives of the several initial purchasers listed therein. 10.40 -- Registration Rights Agreement, dated July 30, 2001, among Qwest Capital Funding, Inc., Qwest Communications International Inc., Lehman Brothers Inc. and MERRILL LYNCH & CO., INC. as Representatives of the several initial purchasers listed therein. (99.1) -- 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)). (99.2) -- Annual Report on Form 11-K for the Qwest Communications International Inc. 401K Plan for the year ended December 31, 2000 (incorporated by reference to Qwest's Annual Report on Form 10-K, File No. 000-22609). (99.3) -- Annual Report on Form 11-K for the U S WEST Savings Plan/ESOP for the year ended December 31, 2000 (incorporated by reference to Qwest Communications International Inc.'s Annual Report on Form 10-K, File No. 000-22609, Paper Copy (P)).
- --------------- ( ) Previously filed. 39 * 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-10.39 3 d89933ex10-39.txt PURCHASE AGREEMENT DATED JULY 25, 2001 1 Exhibit 10.39 PURCHASE AGREEMENT QWEST CAPITAL FUNDING, INC. $1,250,000,000 OF 5.875% Notes due August 3, 2004 $2,000,000,000 OF 7% NOTES DUE AUGUST 3, 2009 $500,000,000 OF 7.625% Notes due August 3, 2021 UNCONDITIONALLY GUARANTEED AS TO PAYMENT OF PRINCIPAL, PREMIUM, IF ANY, AND INTEREST BY QWEST COMMUNICATIONS INTERNATIONAL INC. July 25, 2001 Lehman Brothers Inc. 3 World Financial Center New York, NY 10285 MERRILL LYNCH & CO., INC. Merrill Lynch, Pierce, Fenner & Smith Incorporated 4 World Financial Center New York, NY 10080 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated and Lehman Brothers Inc. are acting as representatives (the "REPRESENTATIVES"), $1,250,000,0000 of 5.875% Notes due August 3, 2004 (the "2004 NOTES"), $2,000,000,0000 of 7% Notes due August 3, 2009 (the "2009 NOTES") and $500,000,000 of 7.625% Notes due August 3, 2021 (the "2021 NOTES" together with the 2004 Notes and the 2009 Notes, the "NOTES"). The Notes 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"). 2 The Securities will have the benefit of a Registration Rights Agreement, dated as of July 30, 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. In connection with the sale of the Securities, the Company and the Guarantor have prepared an offering memorandum dated July 25, 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 2004 Notes set forth opposite such Initial Purchaser's name in Schedule I hereto at a price (the "PURCHASE PRICE") equal to 99.570% of their principal amount, the principal amount of 2009 Notes set forth opposite such Initial Purchaser's name in Schedule I hereto at a Purchase Price equal to 98.702% of their principal amount and the principal amount of 2021 Notes set forth opposite such Initial Purchaser's name in Schedule I hereto at a Purchase Price equal to 98.083% of their principal amount, plus in each case accrued interest, if any, from July 30, 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: 2 3 (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 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; 3 4 (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 July 30, 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 Sidley Austin 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 4 5 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 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 5 6 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 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 6 7 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 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 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 7 8 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 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 8 9 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: (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 9 10 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 10 11 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 (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); 11 12 (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 the Company or the Guarantor in writing prior to the execution of this Agreement, 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) 12 13 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; (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 July 25 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 July 25, 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: 13 14 (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. (v) The Notes have been duly authorized by all necessary corporate action on the part of the Company. (vi) The Exchange Notes (as defined in the Registration Rights Agreement) have been duly authorized by all necessary corporate action on the part of 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. (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. 14 15 (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 have been duly authorized by all necessary corporate action on the part of the Guarantor and 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, when duly executed in the manner contemplated in the Indenture and issued and delivered in exchange for the 15 16 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) have been duly authorized by all necessary corporate action on the part of the Guarantor and 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. (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 16 17 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 17 18 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 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 18 19 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 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 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 Sidley Austin 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 19 20 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 20 21 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 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 21 22 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. 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. 22 23 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 23 24 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 Merrill Lynch, Pierce, Fenner & Smith Incorporated, 4 World Financial Center, New York, New York 10080; Attention: Syndicate Desk and Lehman Brothers Inc., 3 World Financial Center, New York, New York 10285 (telefax: (212) 516-1553); Attention: Debt Capital Markets. 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: Scott Berman, 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. 24 25 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: July 25, 2001 LEHMAN BROTHERS INC. MERRILL LYNCH & CO., INC. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: LEHMAN BROTHERS INC. By:_______________________________ Name: Title: By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By:_______________________________ Name: Title: For themselves and as Representatives of the other Initial Purchasers named in Schedule I hereto. 25 EX-10.40 4 d89933ex10-40.txt REGISTRATION RIGHTS AGREEMENT DATED JULY 30, 2001 1 Exhibit 10.40 REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and entered into as of July 30, 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 July 25, 2001 (the "Purchase Agreement"), among the Guarantor, the Company, as issuer of the 5.875% Notes due August 3, 2004, the 7% Notes due August 3, 2009 and the 7.625% Notes due August 3, 2021 (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. 2 "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 5.875% Notes due August 3, 2004, the 7% Notes due August 3, 2009 and the 7.625% Notes due August 3, 2021 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. "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 Lehman Brothers Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated, and Bear, Stearns & Co. Inc., Credit Suisse First Boston Corporation, J.P. Morgan Securities Inc., 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, Mizuho International plc, RBC Dominion Securities Corporation, Royal Bank of Scotland plc, U.S. Bancorp Piper Jaffray Inc., Wachovia Securities, Inc., Wells Fargo Brokerage Services, LLC, Westdeutsche Landesbank Girozentrale. 2 3 "Inspectors" shall have the meaning set forth in Section 3(n) hereof. "Issue Date" shall mean July 30, 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 tradeable 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 3 4 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 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. 4 5 "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 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; 5 6 (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 6 7 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 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 Sidley Austin 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 7 8 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 Sidley Austin 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 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; 8 9 (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 3 or August 3, as the case may be, to Holders on the relevant record dates for the payment of interest pursuant to the Indenture. (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 9 10 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 10 11 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 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 11 12 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 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 depositary) 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; 12 13 (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, Qwest Communications International Inc. as then conducted and the Registration Statement, Prospectus and documents, if any, incorporated or deemed to be 13 14 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 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 14 15 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 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 15 16 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 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 16 17 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 17 18 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 give any such notice to suspend the disposition of Registrable Securities or Exchange 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 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 18 19 (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 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 19 20 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 (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. 20 21 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 21 22 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 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, 22 23 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. 23 24 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: LEHMAN BROTHERS INC. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: LEHMAN BROTHERS INC. By: ___________________________________ Authorized Signatory By: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: ___________________________________ Authorized Signatory For themselves and as Representatives of the several Initial Purchasers 24 -----END PRIVACY-ENHANCED MESSAGE-----