<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 6, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
USW-C, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4811 84-0953188
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) Number)
</TABLE>
USW-C, INC.
7800 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(303) 793-6500
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
STEPHEN E. BRILZ, ESQ.
U S WEST, INC.
7800 EAST ORCHARD ROAD
ENGLEWOOD, COLORADO 80111
(303) 793-6500
(Name and address, including zip code, of agent for service)
------------------------
COPIES TO:
DENNIS J. BLOCK, ESQ.
WEIL, GOTSHAL & MANGES LLP
767 FIFTH AVENUE
NEW YORK, NEW YORK 10153
(212) 310-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
Upon consummation of the transactions described herein.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM
SECURITIES TO BE REGISTERED(1) AGGREGATE OFFERING PRICE(1)
<S> <C>
Common Stock, par value $.01 per share(2).......................... $24,415,937,500
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF
SECURITIES TO BE REGISTERED(1) REGISTRATION FEE
<S> <C>
Common Stock, par value $.01 per share(2).......................... $7,202,702
</TABLE>
(1) Being registered hereby are (i) shares of Common Stock, par value $.01 per
share ("New U S WEST Common Stock"), of USW-C, Inc. (to be renamed "U S
WEST, Inc.") ("New U S WEST") which will be issued to holders of U S WEST
Communications Group Common Stock, par value $.01 par share ("Communications
Stock"), of U S WEST, Inc. ("U S WEST") in redemption of the Communications
Stock and (ii) shares of New U S WEST Common Stock which will be issued as a
dividend to holders of U S WEST Media Group Common Stock, par value $.01 per
share ("Media Stock"), of U S WEST, pursuant to the terms of the Separation
Agreement described herein (collectively, the "Separation"). Pursuant to
Rule 457(f)(2), the Proposed maximum aggregate offering price equals the sum
of (i) 490,000,000 (the number of shares of Communications Stock which are
expected to be outstanding immediately prior to the Separation) multiplied
by $48.09375 (the average of the high and low trading prices of the
Communications Stock on February 3, 1998) plus (ii) $850,000,000 (the value
of the shares of New U S WEST Common Stock to be issued as a dividend to
holders of Media Stock in connection with the Separation). The registration
fee is calculated on the basis of the Proposed maximum aggregate offering
price. Accordingly, pursuant to Rule 457(o), the number of shares being
registered is not included in the table.
(2) Includes Preferred Stock Purchase Rights which, prior to the occurrence of
certain events, will not be exercisable or evidenced separately from the New
U S WEST Common Stock.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED FEBRUARY 6, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
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<S> <C>
[LOGO] [LOGO]
</TABLE>
PROXY STATEMENT FOR
1998 ANNUAL MEETING OF STOCKHOLDERS
OF U S WEST, INC.
TO BE HELD ON
, JUNE , 1998
You are invited to attend our 1998 Annual Meeting of Stockholders, which
will be held on , June , 1998, at 1:30 p.m., Eastern Time, at
. At the Annual Meeting, we will be asking you to approve the
separation of U S WEST into two independent companies. We call this transaction
the "Separation." If the Separation is completed, the U S WEST Communications
Group will become a separately traded public company known as "U S WEST, Inc."
and the U S WEST Media Group will become a separately traded public company
known as "MediaOne Group, Inc." As part of the Separation, the U S WEST Media
Group's directories business known as "U S WEST Dex" will become part of the U S
WEST Communications Group. At the Annual Meeting, we will also be asking you to
elect members of the Board of Directors of U S WEST, ratify U S WEST's
independent auditors, approve certain benefit plans and consider certain
stockholder proposals.
This Proxy Statement provides you with detailed information about the
Separation and the other proposals to be voted on at the Annual Meeting. Whether
or not you plan to attend the Annual Meeting, please take the time to vote by
proxy in the manner described in this Proxy Statement.
SEE "RISK FACTORS" BEGINNING ON PAGE 18 FOR INFORMATION THAT SHOULD BE
CONSIDERED BY YOU IN EVALUATING THE SEPARATION.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SEPARATION OR THE SECURITIES TO BE
ISSUED PURSUANT TO THIS PROXY STATEMENT. THE SECURITIES AND EXCHANGE COMMISSION
HAS NOT PASSED UPON THE FAIRNESS OR MERITS OF THE SEPARATION OR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
, 1998
<PAGE>
Until 25 days after the date of mailing of this Proxy Statement, all dealers
effecting transactions in New U S WEST Common Stock, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
TABLE OF CONTENTS
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PAGE
---------
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CHAPTER 1: INTRODUCTION.................................................................................. 1
CHAPTER 2: RISK FACTORS.................................................................................. 18
Risk Factors Related to New U S WEST................................................................... 18
Risk Factors Related to MediaOne....................................................................... 20
CHAPTER 3: THE SEPARATION................................................................................ 23
Description of the Separation.......................................................................... 23
Background of the Separation........................................................................... 27
Reasons for the Separation............................................................................. 34
Recommendation of the Board of Directors............................................................... 38
Opinions of Financial Advisors......................................................................... 38
Accounting Treatment................................................................................... 44
Regulatory Requirements................................................................................ 44
Interest of Certain Persons in the Separation.......................................................... 45
Stock Exchange Listings................................................................................ 46
Dividend Policy........................................................................................ 46
Treatment of Indebtedness.............................................................................. 47
Treatment of Preferred Stock........................................................................... 48
Federal Securities Laws Consequences................................................................... 48
Certain U.S. Federal Income Tax Consequences........................................................... 49
Employee Benefits and Compensation Matters............................................................. 50
Appraisal Rights....................................................................................... 55
Relationship Between New U S WEST and MediaOne After the Separation.................................... 55
CHAPTER 4: OTHER MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING.......................................... 57
Election of Directors.................................................................................. 57
Ratification of Accountants............................................................................ 58
Proposal to Approve the 1998 New U S WEST Stock Plan................................................... 59
Proposal to Approve the New U S WEST Long-Term Incentive Plan.......................................... 63
Proposal to Approve the New U S WEST Executive Short-Term Incentive Plan............................... 64
Proposal to Approve an Amendment to the U S WEST 1994 Stock Plan....................................... 65
Stockholder Proposals.................................................................................. 66
U S WEST Director and Executive Officer Information.................................................... 66
CHAPTER 5: INFORMATION ABOUT NEW U S WEST................................................................ 71
Business of New U S WEST............................................................................... 71
Management of New U S WEST............................................................................. 78
New U S WEST Selected Historical Financial Information................................................. 83
New U S WEST Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................................................ 84
New U S WEST Unaudited Pro Forma Condensed Combined Financial Statements............................... 101
CHAPTER 6: INFORMATION ABOUT MEDIAONE.................................................................... 106
Business of MediaOne................................................................................... 106
Management of MediaOne................................................................................. 114
MediaOne Unaudited Pro Forma Condensed Combined Financial Statements................................... 116
CHAPTER 7: CAPITAL STOCK................................................................................. 126
New U S WEST Capital Stock............................................................................. 126
MediaOne Capital Stock................................................................................. 130
Comparison of Rights of Stockholders................................................................... 135
Certain Antitakeover Considerations.................................................................... 137
CHAPTER 8: THE ANNUAL MEETING AND CERTAIN OTHER MATTERS.................................................. 139
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PAGE
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The Annual Meeting..................................................................................... 139
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Market Price and Dividend Data of Communications Stock and Media Stock................................. 143
Security Ownership of Certain Beneficial Owners and Management......................................... 144
Legal Matters.......................................................................................... 146
Experts................................................................................................ 146
Where You Can Find More Information.................................................................... 146
Stockholder Proposals.................................................................................. 148
ANNEXES
Annex A-1--Pre-Separation Charter Amendments........................................................... A-1-1
Annex A-2--Post-Separation Charter Amendments.......................................................... A-2-1
Annex B-1--Opinion of Lazard Freres & Co. LLC.......................................................... B-1
Annex B-2--Opinion of SBC Warburg Dillon Read Inc...................................................... B-2
Annex C--1998 New U S WEST Stock Plan.................................................................. C-1
Annex D--New U S WEST Long-Term Incentive Plan......................................................... D-1
Annex E--New U S WEST Executive Short Term Incentive Plan.............................................. E-1
Annex F--New U S WEST Combined Financial Statements.................................................... F-1
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<PAGE>
GLOSSARY
Set forth below is a list of certain defined terms used in this Proxy
Statement and the page on which such terms are defined.
<TABLE>
<CAPTION>
TERM PAGE
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<S> <C>
1992 Cable Act................................... 113
1995 Recapitalization............................ 9
1998 New U S WEST Stock Plan..................... 52
A/N.............................................. 108
Access Reform Order.............................. 76
AFOR............................................. 99
AirTouch......................................... 1
AirTouch Determination Price..................... 111
AirTouch Merger Agreement........................ 111
AirTouch Transaction............................. 1
AirTouch Transaction Adjustments................. 116
AT&T............................................. 74
Bain............................................. 30
Bellcore......................................... 92
Broker Non-votes................................. 142
Cable Comparables................................ 42
Cable Index...................................... 42
Capital Funding Indebtedness..................... 47
CAPs............................................. 18
CDMA............................................. 73
Charter.......................................... 107
Charter Amendments............................... 25
Chofu............................................ 109
CLECs............................................ 18
Code............................................. 30
Comcast.......................................... 42
Commission....................................... 27
Communications Group............................. 1
Communications Group Region...................... 1
Communications Indebtedness...................... 47
Communications Redemption........................ 23
Communications Right............................. 132
Communications Stock............................. 1
Communications Stock Awards...................... 50
Continental...................................... 3
Continental Acquisition.......................... 7
Continental Adjustments.......................... 116
Continental Indebtedness......................... 47
Court............................................ 99
Cox.............................................. 42
CPE.............................................. 73
DBS.............................................. 21
Deferred Benefit Plans........................... 56
DEUs............................................. 64
Dex.............................................. 2
Dex Alignment.................................... 2
Dex Dividend..................................... 23
Dex Dividend Number.............................. 24
Dex Equity Value................................. 24
Dex Indebtedness................................. 2
Dex Value........................................ 24
DGCL............................................. 25
Discontinued Operations Adjustments.............. 116
Distribution..................................... 49
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TERM PAGE
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Draft Proxy Statement............................ 39
EBITDA........................................... 11
EBITDA Multiple.................................. 42
Eighth Circuit................................... 75
Employee Matters Agreement....................... 56
EPS.............................................. 41
ESOP............................................. 53
Exchange Act..................................... 27
Executives....................................... 45
FCC.............................................. 5
FCC Order........................................ 75
Financial Forecasts.............................. 39
GAAP............................................. 11
GSM.............................................. 109
HFC.............................................. 106
Home Box Office.................................. 110
Incentive Stock Options.......................... 60
IRS.............................................. 4
IRS Ruling....................................... 4
ISPs............................................. 18
IXCs............................................. 18
LATAs............................................ 18
Lazard Freres.................................... 4
Lazard Freres Opinion............................ 38
LEC Index........................................ 41
LECs............................................. 18
Lehman........................................... 32
LMDS............................................. 21
Media Group...................................... 1
Media Right...................................... 132
Media Stock...................................... 1
Media Stock Awards............................... 50
MediaOne......................................... 2
MediaOne Acquiring Person........................ 133
MediaOne Board................................... 4
MediaOne Bylaws.................................. 22
MediaOne Common Stock............................ 3
MediaOne Delaware................................ 3
MediaOne Distribution Date....................... 132
MediaOne ESOP.................................... 53
MediaOne Exercise Price.......................... 132
MediaOne Indebtedness............................ 47
MediaOne Pension Plan............................ 54
MediaOne Preferred Stock......................... 130
MediaOne Redemption Price........................ 134
MediaOne Restated Certificate.................... 130
MediaOne Rights.................................. 132
MediaOne Rights Agreement........................ 132
MediaOne Savings Plan/ESOP....................... 53
MediaOne Separation Adjustments.................. 116
MediaOne Series A Preferred Stock................ 130
MediaOne Series C Preferred Stock................ 48
MediaOne Series D Preferred Stock................ 48
MediaOne Series E Preferred Stock................ 48
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TERM PAGE
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MediaOne Stock Plan.............................. 65
Merrill.......................................... 32
Minnesota Sale Agreement......................... 107
Minnesota System................................. 107
MMDS............................................. 21
MTCPs............................................ 86
New Primestar.................................... 109
NewVector........................................ 111
New U S WEST..................................... 2
New U S WEST Acquiring Person.................... 127
New U S WEST Board............................... 4
New U S WEST Bylaws.............................. 19
New U S WEST Committee........................... 59
New U S WEST Common Stock........................ 2
New U S WEST Compensation Plans.................. 52
New U S WEST Distribution Date................... 127
New U S WEST Employee Benefit Committee.......... 59
New U S WEST Exercise Price...................... 127
New U S WEST ESOP................................ 53
New U S WEST ESTIP............................... 52
New U S WEST Human Resources Committee........... 52
New U S WEST Indebtedness........................ 47
New U S WEST LTIP................................ 52
New U S WEST Pension Plan........................ 54
New U S WEST Preferred Stock..................... 126
New U S WEST Redemption price.................... 129
New U S WEST Registration Statement.............. 147
New U S WEST Restated Certificate................ 25
New U S WEST Right............................... 127
New U S WEST Rights Agreement.................... 127
New U S WEST Savings Plan/ESOP................... 53
New U S WEST Separation Adjustments.............. 101
New U S WEST Series A Preferred Stock............ 127
New U S WEST SIP................................. 26
Non-employer Stock............................... 53
Nonqualified Stock Options....................... 60
NYSE............................................. 19
Old Common Stock................................. 9
One2One.......................................... 109
Opinions......................................... 38
OPUC............................................. 99
Oregon Circuit Court............................. 99
Original AirTouch Transaction.................... 29
PCS.............................................. 73
PCS Holdings..................................... 111
P/E.............................................. 41
PICCs............................................ 77
POPs............................................. 73
Price Cap Order.................................. 76
Price Cap Plan................................... 77
Primestar........................................ 108
Pro Forma Financial Statements................... 39
PSC.............................................. 99
PSE.............................................. 19
PUCs............................................. 18
RBOCs............................................ 71
Record Date...................................... 140
<CAPTION>
TERM PAGE
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Refinancing...................................... 47
Reorganization................................... 25
Restructuring Plan............................... 92
S&P's............................................ 42
SARs............................................. 59
Savings Plan/ESOP................................ 53
SBC Warburg Dillon Read.......................... 4
SBC Warburg Dillon Read Opinion.................. 38
Section 83(b) election........................... 63
Securities Act................................... 26
Separation Agreement............................. 23
Separation Date.................................. 23
Separation Time.................................. 23
Separation Transactions.......................... 38
Severance Agreements............................. 45
SFAS............................................. 8
SLCs............................................. 77
SMATV............................................ 21
Special Committee................................ 28
State Supreme Court.............................. 99
Stock Awards..................................... 50
Targeted Stocks.................................. 1
Tax Sharing Agreement............................ 56
TCI.............................................. 42
TCI Exchange..................................... 107
Telecommunications Act........................... 18
Telewest......................................... 9
Tenth Circuit.................................... 76
Time Warner Cable................................ 108
Titus............................................ 109
Transition Team.................................. 32
Trust Securities................................. 9
TWE.............................................. 27
TWE-A/N.......................................... 108
TWE Japan........................................ 111
TWE Non-Competition Restrictions................. 111
TWX.............................................. 107
U.S. District Court.............................. 75
Universal Service Order.......................... 76
U S WEST......................................... 1
U S WEST Board................................... 2
U S WEST Bylaws.................................. 19
U S WEST Communications.......................... 3
U S WEST Financial Advisors...................... 38
U S WEST Indebtedness............................ 47
U S WEST Pension Plan............................ 54
U S WEST Preferred Stock......................... 48
U S WEST Restated Certificate.................... 19
U S WEST Rights Agreement........................ 132
U S WEST Series C Preferred Stock................ 48
U S WEST Series D Preferred Stock................ 48
U S WEST Series E Preferred Stock................ 48
U S WEST SIP..................................... 26
U S WEST Stock Plans............................. 50
WUTC............................................. 99
xDSL............................................. 28
</TABLE>
<PAGE>
CHAPTER 1: INTRODUCTION
THIS INTRODUCTION HIGHLIGHTS SELECTED INFORMATION FROM THIS PROXY STATEMENT
AND MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO
UNDERSTAND THE SEPARATION FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL
TERMS OF THE SEPARATION, YOU SHOULD READ CAREFULLY THIS ENTIRE PROXY STATEMENT
AND THE DOCUMENTS WE HAVE REFERRED TO YOU. SEE "WHERE YOU CAN FIND MORE
INFORMATION" ON PAGE 146. THE GLOSSARY WHICH FOLLOWS THE TABLE OF CONTENTS
INDICATES WHERE CERTAIN CAPITALIZED TERMS USED THROUGHOUT THIS PROXY STATEMENT
ARE DEFINED.
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ABOUT OUR BUSINESSES.............. U S WEST, Inc. ("U S WEST") is a diversified global
communications company engaged in the
telecommunications, broadband communications, wireless
communications and directories businesses. U S WEST
conducts its businesses through two groups: the U S WEST
Communications Group (the "Communications Group") and
the U S WEST Media Group (the "Media Group").
The Communications Group provides telecommunications
services, including local telephone services and
exchange access services, in a 14-state mountain and
western region of the United States (the "Communications
Group Region"). The Communications Group also provides
other products and services, including high-speed data
and Internet services and wireless communications
services, to customers both inside and outside the
Communications Group Region.
The Media Group is comprised of domestic and
international broadband communications, wireless
communications and directories businesses. The Media
Group's domestic broadband communications business
provides cable, telephony and high-speed data services
to customers under the name "MediaOne" and is the third
largest cable television system operator in the United
States. In January 1998, U S WEST entered into an
agreement to sell the Media Group's domestic wireless
business to AirTouch Communications, Inc. ("AirTouch")
for approximately $5.7 billion in a tax-free transaction
(the "AirTouch Transaction").
U S WEST has two classes of common stock: the U S WEST
Communications Group Common Stock (the "Communications
Stock"), which is intended to reflect separately the
performance of the Communications Group, and the U S
WEST Media Group Common Stock (the "Media Stock"), which
is intended to reflect separately the performance of the
Media Group. The Communications Stock and the Media
Stock are called "Targeted Stocks."
THE SEPARATION.................... We are proposing to separate U S WEST into two
independent companies. This transaction is called the
"Separation." Under this proposal, the Communications
Group would become a separately traded public company
known as "U S WEST, Inc." and the Media Group would
become a separately traded public company known as
"MediaOne Group, Inc." In this Proxy Statement, the
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1
CHAPTER 1: INTRODUCTION
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Communications Group after the Separation is called "New
U S WEST" and the Media Group after the Separation is
called "MediaOne."
As a result of developments in technology, the
marketplace and the regulatory arena, the potential for
synergies between the Communications Group and the Media
Group has been greatly reduced. The Communications Group
and the Media Group are currently implementing
strategies based on distinct technologies, separate sets
of customers and different regulatory environments. We
believe that these strategies will be executed more
efficiently, and that the Communications Group and the
Media Group will be able to compete more effectively, if
they are independent companies that are not restrained
by conflicts that result from a single corporate
structure.
As part of the Separation, we are proposing to align the
domestic directories business of the Media Group--known
as "Dex"--with the Communications Group. This aspect of
the Separation is called the "Dex Alignment." The Board
of Directors of U S WEST (the "U S WEST Board"), in
consultation with U S WEST's management and its
financial advisors, has valued Dex at $4.75 billion. In
connection with the Dex Alignment, holders of Media
Stock will be issued a total of $850 million in value of
shares of common stock of New U S WEST ("New U S WEST
Common Stock"). This amount represents the $4.75 billion
value of Dex net of $3.9 billion of U S WEST debt
currently allocated to the Media Group which will be
refinanced by New U S WEST in connection with the
Separation (the "Dex Indebtedness").
We believe that the inclusion of Dex among New U S
WEST's businesses will better position New U S WEST to
offer its customers a broader product offering and to
manage more effectively its brand and customer
relationships.
After the Separation, New U S WEST will own all of the
Communications Group's businesses as well as Dex and
MediaOne will own all of the Media Group's businesses
other than Dex.
STRUCTURE OF THE SEPARATION....... In order to complete the Separation, we will contribute
the businesses of the Communications Group and Dex to
New U S WEST (which is a newly formed indirect
subsidiary of U S WEST) and then distribute all of the
New U S WEST Common Stock to the holders of
Communications Stock, other than $850 million in value
of New U S WEST Common Stock that will be distributed to
holders of Media Stock pursuant to the Dex Alignment.
After this distribution, the name of New U S WEST will
be changed to "U S WEST, Inc." and the name of U S WEST
will be changed to "MediaOne Group, Inc."
As a result of the Separation, New U S WEST will have
approximately $9.8 billion of debt, which will include
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2
CHAPTER 1: INTRODUCTION
<PAGE>
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<S> <C>
approximately $5.4 billion of debt of U S WEST
Communications, Inc. ("U S WEST Communications"), the
Communications Group's local telephone company,
approximately $4.2 billion of debt currently guaranteed
by U S WEST (including the Dex Indebtedness) that will
be refinanced by New U S WEST as part of the Separation.
After the Separation, MediaOne will have approximately
$7.3 billion of debt and trust preferred securities,
which will include $2.7 billion of debt of MediaOne of
Delaware, Inc., the Media Group's broadband company
formerly known as Continental Cablevision, Inc.
("MediaOne Delaware" or "Continental"), approximately
$4.5 billion of debt and trust preferred securities
currently issued or guaranteed by U S WEST that will be
refinanced by MediaOne as part of the Separation. If the
AirTouch Transaction is consummated, MediaOne's
post-Separation indebtedness will be reduced by
approximately $1.4 billion. Following the Separation,
MediaOne intends to monetize the AirTouch securities it
receives in the AirTouch Transaction and use a portion
of the proceeds of such monetization to further reduce
its indebtedness.
WHAT STOCKHOLDERS WILL RECEIVE.... In the Separation, holders of Communications Stock and
Media Stock will receive the following securities:
/ / Holders of Communications Stock will receive one
share of New U S WEST Common Stock for each share of
Communications Stock held.
/ / Holders of Media Stock will retain their shares of
Media Stock (which after the Separation will represent
shares of common stock of MediaOne ("MediaOne
Common Stock")) and will receive a fraction of a
share of New U S WEST Common Stock as a
distribution on each share of Media Stock held.
This fraction of a share of New U S WEST Common
Stock is being issued to holders of Media Stock in
connection with the Dex Alignment. Holders of Media
Stock will receive only whole shares of New U S
WEST Common Stock. To the extent the total number
of shares of New U S WEST Common Stock distributed
to any stockholder results in a fraction, that
fraction will be paid in cash.
The value of the total number of shares of New U S WEST
Common Stock which will be issued to holders of Media
Stock will equal $850 million. The fraction of a share
of New U S WEST Common Stock to be distributed per share
of Media Stock will be based upon the average price of
the Communications Stock measured over the 20 trading
day period ending on the fifth trading day prior to the
Separation. If the Separation had been completed on
January 30, 1998, this fraction would have equalled 0.03
of a share of New U S WEST Common Stock per share of
Media Stock (which
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3
CHAPTER 1: INTRODUCTION
<PAGE>
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<S> <C>
would have a value of $1.43 based upon $47 5/8--the
closing price of the Communications Stock on February 5,
1998).
Holders of Series C Preferred Stock, Series D Preferred
Stock and Series E Preferred Stock of U S WEST will
retain their shares as part of the Separation. After the
Separation, these shares will represent shares of
Preferred Stock of MediaOne.
DIVIDENDS AFTER THE SEPARATION.... If the Separation is completed, it is anticipated that
New U S WEST will pay dividends on the New U S WEST
Common Stock initially at a quarterly rate of $0.535 per
share, which is the same dividend currently paid on the
Communications Stock. While the Board of Directors of
New U S WEST (the "New U S WEST Board") is not expected
to change this dividend policy, it has the right to do
so at any time.
Dividends are not currently paid on the Media Stock. If
the Separation is completed, it is anticipated that the
Board of Directors of MediaOne (the "MediaOne Board")
will continue this policy for the foreseeable future and
not declare dividends on the MediaOne Common Stock.
Instead, it is anticipated that the MediaOne Board will
retain future earnings, if any, for the development of
the businesses of MediaOne.
TAX MATTERS....................... For U.S. federal income tax purposes, the Separation
will be tax-free to you as U S WEST's common
stockholders (other than with respect to the cash
proceeds holders of Media Stock will receive instead of
fractional shares of New U S WEST Common Stock) and to U
S WEST. We are asking the Internal Revenue Service (the
"IRS") for a ruling confirming that the distribution of
New U S WEST Common Stock to our stockholders and
certain other related transactions will be tax-free to
you and U S WEST (the "IRS Ruling"). We will only
complete the Separation if we receive this IRS Ruling.
BOARD RECOMMENDATION.............. The U S WEST Board has carefully reviewed the terms of
the Separation, including the Dex Alignment. We have
received opinions of two independent investment banking
firms, Lazard Freres & Co. LLC ("Lazard Freres") and SBC
Warburg Dillon Read Inc. ("SBC Warburg Dillon Read"), as
to the fairness, from a financial point of view, to the
holders of Communications Stock and Media Stock of the
consideration to be provided to them in the Separation.
The full text of these investment banking opinions,
which in each case sets forth the assumptions made,
matters considered and limitations on the review
undertaken in connection with the opinions, are included
in Annex B-1 and Annex B-2 to this Proxy Statement. YOU
ARE URGED TO READ THESE OPINIONS CAREFULLY.
BASED ON THE FOREGOING, THE U S WEST BOARD HAS
DETERMINED THAT THE SEPARATION IS IN THE BEST INTERESTS
OF U S WEST AND ITS STOCKHOLDERS AND IS FAIR TO THE
HOLDERS OF BOTH CLASSES OF U S WEST'S COMMON STOCK. THE
U S WEST BOARD HAS
</TABLE>
4
CHAPTER 1: INTRODUCTION
<PAGE>
<TABLE>
<S> <C>
UNANIMOUSLY APPROVED THE SEPARATION AND RECOMMENDS THAT
HOLDERS OF COMMUNICATIONS STOCK AND MEDIA STOCK APPROVE
THE SEPARATION.
RISK FACTORS...................... There are significant risks and challenges involved with
the businesses of New U S WEST and MediaOne following
the Separation. These and other risks are addressed in
"Chapter 2: Risk Factors."
TIMING AND APPROVALS.............. We are working towards completing the Separation as soon
as possible. The completion of the Separation depends
upon meeting a number of conditions, including the
approval of the Separation by our stockholders and our
receipt of the IRS Ruling and certain approvals from the
Federal Communications Commission (the "FCC"). We
currently expect to complete the Separation by
, 1998.
In order to complete the Separation, we need the
following approvals by our stockholders at the Annual
Meeting:
/ / The approval of the holders of a majority of the
voting power of the outstanding shares of Communications
Stock and Media Stock, voting as a single class.
/ / The approval of the holders of a majority of the
outstanding shares of Communications Stock, voting
as a separate class.
/ / The approval of the holders of a majority of the
outstanding shares of Media Stock, voting as a
separate class.
VOTING AT THE ANNUAL MEETING...... The Annual Meeting will be held on June , 1998 at 1:30
p.m., Eastern Time, at . At the Annual
Meeting, we will be asking you to approve the
Separation. We will also be asking you to elect five
directors to the U S WEST Board, ratify U S WEST's
independent auditors, approve certain benefit plans and
consider certain stockholder proposals. See "Chapter 4:
Other Matters to Be Considered at the Annual Meeting."
Your vote is important to us no matter how many shares
of Communications Stock or Media Stock you own. You can
vote by proxy or by attending the Annual Meeting. Votes
by proxy may be made (i) by mail, by completing and
returning the enclosed proxy card, (ii) by telephone, by
calling 1-800- - or (iii) via the Internet, by
accessing a special site at http://www. .com. We
hope you can attend the Annual Meeting. HOWEVER, WHETHER
OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, WE WOULD
APPRECIATE IT IF YOU VOTE BY PROXY AS SOON AS POSSIBLE.
If you attend and vote at the Annual Meeting, your vote
will cancel any previous vote which you may have made by
proxy. Once you vote by proxy, you can revoke your vote
at any time by notifying us or delivering a proxy with a
later date.
</TABLE>
5
CHAPTER 1: INTRODUCTION
<PAGE>
<TABLE>
<S> <C>
WHEN YOU WILL RECEIVE NEW Following completion of the Separation, stockholders
SHARES.......................... holding stock certificates representing Communications
Stock or Media Stock will receive their shares of New U
S WEST Common Stock in uncertificated book-entry form
unless a stockholder elects to receive a certificate
representing such shares. All stockholders holding stock
certificates representing Media Stock will receive new
certificates representing their shares of MediaOne
Common Stock. We will send you information about these
procedures following completion of the Separation. YOU
SHOULD NOT SEND YOUR STOCK CERTIFICATES AT THIS TIME.
Stockholders who hold their shares in uncertificated
book-entry form through the U S WEST Shareowner
Investment Plan will receive shares of NEW U S WEST
Common Stock in uncertificated book-entry form and
shares of MediaOne Common Stock in certificated form. No
action will be required by stockholders who hold their
shares through the U S WEST Shareowner Investment Plan
to receive the New U S WEST Common Stock and MediaOne
Common Stock to which they are entitled pursuant to the
Separation.
PRESENTATION OF FINANCIAL In order to assist you in reviewing the terms of the
INFORMATION..................... Separation, this Proxy Statement contains both
historical and pro forma financial information.
Historical financial information contained or
incorporated by reference in this Proxy Statement
includes historical financial information of U S WEST,
the Communications Group and the Media Group. This
historical financial information is of the same type as
the financial information which we send to you each
year. In addition, this Proxy Statement contains
restated historical financial information of New U S
WEST. This financial information presents New U S WEST's
combined financial position, results of operations and
cash flows as if it were a separate entity for all of
the periods presented but does not give effect to
certain transactions being undertaken in connection with
the Separation, including the refinancing of the $3.9
billion of Dex Indebtedness by New U S WEST and the
issuance of $850 million of New U S WEST Common Stock to
holders of Media Stock in connection with the Dex
Alignment.
This Proxy Statement contains pro forma financial
information for both New U S WEST and MediaOne. The pro
forma financial information for New U S WEST gives
effect to the refinancing of the $3.9 billion of Dex
Indebtedness by New U S WEST and the issuance of $850
million of New U S WEST Common Stock to holders of Media
Stock in connection with the Dex Alignment, transfers of
certain assets and liabilities of U S WEST to New U S
WEST and allocations of certain costs and expenses in
connection with the Separation.
</TABLE>
6
CHAPTER 1: INTRODUCTION
<PAGE>
<TABLE>
<S> <C>
The pro forma financial information for MediaOne
contained in this Proxy Statement gives effect to the
discontinuance by MediaOne of the businesses of New U S
WEST, the refinancing by New U S WEST of the $3.9
billion of Dex Indebtedness, the distribution of all of
the New U S WEST Common Stock to U S WEST's
stockholders, transfers of certain assets and
liabilities of U S WEST to New U S WEST and allocations
of certain costs and expenses in connection with the
Separation, the acquisition by U S WEST of Continental
in 1996 (the "Continental Acquisition") and certain
related transactions, and the consummation of the
AirTouch Transaction.
Pro forma financial information is presented for
illustrative purposes only and does not necessarily
indicate the combined results of operations or financial
position that would have occurred if the transactions
presented had occurred at the beginning of each period
presented or on the dates indicated. You should read the
pro forma financial information together with the
historical financial information included or
incorporated by reference in this Proxy Statement.
ADDITIONAL INFORMATION............ For additional information about the Separation, please
contact Beacon Hill Associates, Inc., our information
agent, toll-free at 1-800- - .
</TABLE>
7
CHAPTER 1: INTRODUCTION
<PAGE>
U S WEST SELECTED HISTORICAL FINANCIAL INFORMATION
Dollars in millions (except per share amounts)
The following table sets forth selected historical financial information for
U S WEST. This information should be read in conjunction with U S WEST's
Consolidated Financial Statements, including the notes thereto, which are
incorporated herein by reference. See "Chapter 8: The Annual Meeting and Certain
Other Matters--Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR
AS OF SEPTEMBER 30, YEAR ENDED OR AS OF DECEMBER
(UNAUDITED) 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Sales and other revenues(1)......................................... $ 11,471 $ 9,353 $ 12,911 $ 11,746 $ 10,953
Income before extraordinary items and cumulative effect of change in
accounting principles(2)........................................... 663 914 1,144 1,329 1,426
Net income (loss)(3)................................................ 660 948 1,178 1,317 1,426
Earnings per common share before extraordinary items and cumulative
effect of change in accounting principle(2, 4)..................... -- -- -- -- 3.14
Earnings (loss) per common share(3, 4).............................. -- -- -- -- 3.14
Dividends per common share(4)....................................... -- -- -- -- 2.14
BALANCE SHEET INFORMATION
Total assets........................................................ $ 40,554 $ 25,583 $ 40,855 $ 25,071 $ 23,204
Total debt(5)....................................................... 15,708 9,130 15,351 8,855 7,938
Mandatorily redeemable preferred securities(6)...................... 1,180 651 1,131 651 51
Shareowners' equity................................................. 11,522 8,282 11,549 7,948 7,382
OTHER INFORMATION
Return on common shareowners' equity(7)............................. 7.8% 14.8% 13.2% 17.2% 21.6%
Percentage of debt to total capital(5).............................. 55.3% 50.6% 54.8% 50.7% 51.6%
Ratio of earnings to combined fixed charges and preferred stock
dividends.......................................................... 2.33 3.67 3.29 4.03 4.85
Capital expenditures(5)............................................. $ 2,672 $ 2,337 $ 3,474 $ 3,140 $ 2,820
Employees........................................................... 67,888 60,837 69,286 61,047 61,505
Number of common shareowners........................................ -- -- -- -- 816,099
Weighted average common shares outstanding (thousands)(4)........... -- -- -- -- 453,316
COMMUNICATIONS GROUP
INFORMATION(2, 3, 4):
Earnings per common share......................................... $ 2.08 $ 1.97 $ 2.62 $ 2.50 $ 2.53
Dividends per common share........................................ 1.605 1.605 2.14 2.14 2.14
Average common shares outstanding (thousands)..................... 482,374 476,744 477,549 470,716 453,316
Number of common shareowners of record............................ 685,056 725,561 725,560 775,125 --
MEDIA GROUP INFORMATION(2, 3, 4):
Earnings (loss) per common share.................................. $ (0.64) $ 0.01 $ (0.16) $ 0.29 $ 0.61
Average common shares outstanding (thousands)..................... 606,568 473,501 491,924 470,549 453,316
Number of common shareowners of record............................ 661,206 716,938 705,341 770,346 --
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Sales and other revenues(1)......................................... $ 10,294 $ 9,823
Income before extraordinary items and cumulative effect of change in
accounting principles(2)........................................... 476 1,076
Net income (loss)(3)................................................ (2,806) (614)
Earnings per common share before extraordinary items and cumulative
effect of change in accounting principle(2, 4)..................... 1.13 2.61
Earnings (loss) per common share(3, 4).............................. (6.69) (1.49)
Dividends per common share(4)....................................... 2.14 2.12
BALANCE SHEET INFORMATION
Total assets........................................................ $ 20,680 $ 23,461
Total debt(5)....................................................... 7,199 5,430
Mandatorily redeemable preferred securities(6)...................... -- --
Shareowners' equity................................................. 5,861 8,268
OTHER INFORMATION
Return on common shareowners' equity(7)............................. -- 14.4%
Percentage of debt to total capital(5).............................. 55.1% 39.6%
Ratio of earnings to combined fixed charges and preferred stock
dividends.......................................................... 2.38 3.85
Capital expenditures(5)............................................. $ 2,441 $ 2,554
Employees........................................................... 60,778 63,707
Number of common shareowners........................................ 836,328 867,773
Weighted average common shares outstanding (thousands)(4)........... 419,365 412,518
COMMUNICATIONS GROUP
INFORMATION(2, 3, 4):
Earnings per common share.........................................
Dividends per common share........................................
Average common shares outstanding (thousands).....................
Number of common shareowners of record............................
MEDIA GROUP INFORMATION(2, 3, 4):
Earnings (loss) per common share..................................
Average common shares outstanding (thousands).....................
Number of common shareowners of record............................
</TABLE>
- ------------------------------
(1) Results for the first nine months of 1997 include $1,532 of sales and other
revenues related to the Continental Acquisition.
(2) Income for the first nine months of 1997 is before an extraordinary item and
includes net losses of $301 ($0.50 per share of Media Stock) related to the
Continental Acquisition and net gains of $63 ($0.10 per share of Media
Stock) on the sales of investments. Also included is a gain of $48 ($0.10
per share of Communications Stock) on the sales of certain rural telephone
exchanges. Income for the first nine months of 1996 is before the cumulative
effect of a change in accounting principle and includes a gain of $31 ($0.06
per share of Communications Stock) on the sales of certain rural telephone
exchanges and the current effect of $13 ($0.03 per share of Communications
Stock) from adopting Statement of Financial Accounting Standards ("SFAS")
No. 121. Also included are net losses of $19 ($0.04 per share of Media
Stock) from the sale of U S WEST's cable television interests in Norway,
Sweden and Hungary. 1996 income is before the cumulative effect of a change
in accounting principle and includes a gain of $36 ($0.08 per share of
Communications Stock) on the sales of certain
8
CHAPTER 1: INTRODUCTION
<PAGE>
rural telephone exchanges and the current effect of $15 ($0.03 per share of
Communications Stock) from adopting SFAS No. 121. Also included are net
losses of $71 ($0.15 per share of Media Stock) related to the Continental
Acquisition and a charge of $19 ($0.04 per share of Media Stock) from the
sale of U S WEST's cable television interests, as described above. 1995
income is before an extraordinary item and includes a gain of $95 ($0.20 per
share of Media Stock) from the merger of Telewest Communications plc
("Telewest") with SBC CableComms (UK), a gain of $85 ($0.18 per share of
Communications Stock) on the sales of certain rural telephone exchanges and
costs of $17 ($0.01 per share of Communications Stock and $0.02 per share of
Media Stock) associated with the 1995 Recapitalization discussed in footnote
4 below. 1994 income includes a gain of $105 ($0.23 per share) on the
partial sale of U S WEST's joint venture interest in Telewest, a gain of $41
($0.09 per share) on the sale of U S WEST's paging operations and a gain of
$51 ($0.11 per share) on the sales of certain rural telephone exchanges.
1993 income is before extraordinary items and was reduced by a restructuring
charge of $610 ($1.46 per share) and a charge of $54 ($0.13 per share) for
the cumulative effect on deferred taxes of the 1993 federally mandated
increase in income tax rates. 1993 and 1992 income is from continuing
operations.
(3) Net income for the first nine months of 1997 was reduced by an extraordinary
charge of $3 ($0.01 per share of Communications Stock) for the early
extinguishment of debt. Net income for the first nine months of 1996 and
full year 1996 includes a gain of $34 ($0.07 per share of Communications
Stock) for the cumulative effect of the adoption of SFAS No. 121. 1995 net
income was reduced by an extraordinary item of $12 ($0.02 per share of
Communications Stock and $0.01 per share of Media Stock) for the early
extinguishment of debt. 1993 net income was reduced by extraordinary charges
of $3,123 ($7.45 per share) for the discontinuance of SFAS No. 71 and $77
($0.18 per share) for the early extinguishment of debt. 1993 net income also
includes a charge of $120 ($0.28 per share) for U S WEST's decision to
discontinue the operations of its capital assets segment. 1992 net income
includes a charge of $1,793 ($4.35 per share) for the cumulative effect of a
change in accounting principles. Discontinued operations provided net income
of $38 ($0.09 per share) and $103 ($0.25 per share) in 1993 and 1992,
respectively.
(4) The average common shares of Media Stock outstanding for the year ended
December 31, 1996 include 150,615,000 shares issued in connection with the
Continental Acquisition. Effective November 1, 1995, each share of common
stock of U S WEST ("Old Common Stock") was converted into one share each of
Communications Stock and Media Stock (the "1995 Recapitalization"). Earnings
per common share and dividends per common share for 1995 and 1994 have been
presented on a pro forma basis to reflect the two classes of stock as if
they had been outstanding since January 1, 1994. For periods prior to the
1995 Recapitalization, the average shares of Communications Stock and Media
Stock outstanding are assumed to equal the average shares of Old Common
Stock outstanding for such periods.
(5) Debt at September 30, 1997 and December 31, 1996, includes debt related to
the Continental Acquisition. Capital expenditures, debt and the percentage
of debt to total capital excludes the capital assets segment, which has been
discontinued and is held for sale. Percentage of debt to total capital
includes Company-obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely Company-guaranteed debentures ("Trust
Securities") and mandatorily redeemable preferred stock as a component of
total capital.
(6) Includes Trust Securities of $1,080 at September 30, 1997 and December 31,
1996, and $600 at September 30, 1996 and December 31, 1995, and preferred
stock subject to mandatory redemption of $100 at September 30, 1997, and $51
at December 31, 1996, September 30, 1996, December 31, 1995 and December 31,
1994.
(7) The return on common shareowners' equity for the first nine months of 1997
is based on income before extraordinary items. The return on common
shareowners' equity for the first nine months of 1996 and for full year 1996
is based on income before the cumulative effect of a change in accounting
principle. 1995 return on common shareowners' equity is based on income
before extraordinary items. 1993 return on common shareowners' equity is not
presented. Return on common shareowners' equity for fourth-quarter 1993 was
19.9 percent based on income from continuing operations. 1992 return on
common shareowners' equity is based on income before the cumulative effect
of change in accounting principles.
9
CHAPTER 1: INTRODUCTION
<PAGE>
COMMUNICATIONS GROUP SELECTED HISTORICAL FINANCIAL INFORMATION
Dollars in millions (except per share amounts)
The following table sets forth selected historical financial information for
the Communications Group. This information should be read in conjunction with U
S WEST's Consolidated Financial Statements and the Communications Group's
Combined Financial Statements, including the notes thereto, which are
incorporated herein by reference. See "Chapter 8: The Annual Meeting and Certain
Other Matters--Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR
AS OF SEPTEMBER 30, YEAR ENDED OR AS OF DECEMBER
(UNAUDITED) 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 7,803 $ 7,480 $ 10,079 $ 9,484 $ 9,176
Net income (loss)(1)................................................ 1,007 938 1,249 1,176 1,150
Earnings per common share(1, 2)..................................... 2.08 1.97 2.62 2.50 2.53
Dividends per common share(2)....................................... 1.605 1.605 2.14 2.14 2.14
BALANCE SHEET INFORMATION
Total assets........................................................ $ 16,921 $ 16,822 $ 16,915 $ 16,585 $ 15,944
Total debt.......................................................... 5,750 6,776 6,498 6,754 6,124
Communications Group equity(3)...................................... 4,241 3,817 3,917 3,476 3,179
OTHER INFORMATION
EBITDA(4)........................................................... 3,471 3,324 4,462 4,220 4,026
EBITDA margin(4).................................................... 44.5% 44.4% 44.3% 44.5% 43.9%
Return on Communications Group equity(3, 5)......................... 32.1% 32.2% 32.0% 35.6% 39.0%
Percentage of debt to total capital(3).............................. 57.6% 64.0% 62.4% 66.0% 65.8%
Capital expenditures................................................ $ 1,629 $ 2,008 $ 2,806 $ 2,739 $ 2,477
Telephone network access lines in service (thousands)............... 15,829 15,253 15,424 14,795 14,299
Billed access minutes of use (millions)--
interstate........................................................ 41,085 38,674 52,039 47,801 43,768
intrastate........................................................ 8,702 7,808 10,451 9,504 8,507
Communications Group employees...................................... 47,217 50,351 48,037 50,825 51,402
Telephone company employees......................................... 43,388 47,568 45,427 47,934 47,493
Telephone company employees per ten thousand access lines........... 27.4 31.2 29.5 32.4 33.2
Average common shares outstanding (thousands)(2).................... 482,374 476,744 477,549 470,716 453,316
Common shares outstanding (thousands)(2)............................ 483,461 479,205 480,457 473,635 469,343
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 8,870 $ 8,530
Net income (loss)(1)................................................ (2,809) (815)
Earnings per common share(1, 2)..................................... -- --
Dividends per common share(2)....................................... -- --
BALANCE SHEET INFORMATION
Total assets........................................................ $ 15,423 $ 20,655
Total debt.......................................................... 5,673 5,181
Communications Group equity(3)...................................... 2,722 6,003
OTHER INFORMATION
EBITDA(4)........................................................... 3,743 3,553
EBITDA margin(4).................................................... 42.2% 41.7%
Return on Communications Group equity(3, 5)......................... 22.5% 13.7%
Percentage of debt to total capital(3).............................. 67.6% 46.3%
Capital expenditures................................................ $ 2,226 $ 2,385
Telephone network access lines in service (thousands)............... 13,803 13,301
Billed access minutes of use (millions)--
interstate........................................................ 40,594 37,413
intrastate........................................................ 7,529 6,956
Communications Group employees...................................... 52,598 55,352
Telephone company employees......................................... 49,668 52,423
Telephone company employees per ten thousand access lines........... 36.0 39.4
Average common shares outstanding (thousands)(2).................... -- --
Common shares outstanding (thousands)(2)............................ -- --
</TABLE>
- ------------------------------
(1) Income for the first nine months of 1997 includes a gain of $48 ($0.10 per
share) on the sales of certain rural telephone exchanges and an
extraordinary charge of $3 ($0.01 per share) for the early extinguishment of
debt. Income for the first nine months of 1996 includes a gain of $31 ($0.06
per share) on the sales of certain rural telephone exchanges and the
cumulative and current effects of $34 ($0.07 per share) and $13 ($0.03 per
share), respectively, from adopting SFAS No. 121. 1996 net income includes a
gain of $36 ($0.08 per share) on the sales of certain rural telephone
exchanges and the cumulative and current effects of $34 ($0.07 per share)
and $15 ($0.03 per share), respectively, from adopting SFAS No. 121. 1995
net income includes a gain of $85 ($0.18 per share) on the sales of certain
rural telephone exchanges and other charges of $16 ($0.03 per share),
including an extraordinary charge of $8 for the early extinguishment of debt
and $8 for costs associated with the 1995 Recapitalization. 1994 net income
includes a gain of $51 ($0.11 per share) on the sales of certain rural
telephone exchanges. 1993 net income was reduced by $534 for a restructuring
charge and $54 for the cumulative effect on deferred taxes of the 1993
federally mandated increase in income tax rates. 1993 net income was also
reduced by extraordinary charges of $3,123 for the discontinuance of SFAS
No. 71 and $77 for the early extinguishment of debt. 1992 net income was
reduced by $1,745 for the cumulative effect of a change in accounting
principles.
(2) Pursuant to the 1995 Recapitalization, each share of Old Common Stock was
converted into one share each of Communications Stock and Media Stock. For
periods prior to the 1995 Recapitalization, the shares of Communications
Stock outstanding are assumed to equal the shares of Old Common Stock
outstanding for such periods.
10
CHAPTER 1: INTRODUCTION
<PAGE>
(3) The increases in the percentage of debt to total capital and return on
Communications Group equity, and the decrease in Communications Group equity
since 1992, are primarily due to the effects of discontinuing SFAS No. 71 in
1993 and the cumulative effect of a change in accounting principles in 1992.
(4) Earnings before interest, taxes, depreciation, amortization and other
("EBITDA"). EBITDA excludes gains on sales of rural telephone exchanges and
a restructuring charge. The Communications Group considers EBITDA an
important indicator of the operating performance of its businesses. EBITDA,
however, should not be considered as an alternative to operating or net
income as an indicator of performance or as an alternative to cash flows
from operating activities as a measure of liquidity, in each case determined
in accordance with generally accepted accounting principles ("GAAP").
(5) The return on Communications Group equity for the first nine months of 1997
is based on income before extraordinary item. The return on Communications
Group equity for the first nine months of 1996 and full year 1996 is based
on income before the cumulative effect of a change in accounting principle.
1995 return on Communications Group equity is based on income before
extraordinary item. 1993 return on Communications Group equity is based on
income excluding extraordinary items, a restructuring charge and the
cumulative effect on deferred taxes of the 1993 federally mandated increase
in income tax rates. 1992 return on Communications Group equity is based on
income before the cumulative effect of a change in accounting principles.
11
CHAPTER 1: INTRODUCTION
<PAGE>
MEDIA GROUP SELECTED HISTORICAL FINANCIAL INFORMATION
Dollars in millions (except per share amounts)
The following table sets forth selected historical financial information for
the Media Group. This information should be read in conjunction with U S WEST's
Consolidated Financial Statements and the Media Group's Combined Financial
Statements, including the notes thereto, which are incorporated herein by
reference. See "Chapter 8: The Annual Meeting and Certain Other Matters--Where
You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED
OR AS OF
SEPTEMBER 30, YEAR ENDED OR AS OF DECEMBER
(UNAUDITED) 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Sales and other revenues(1)......................................... $ 3,754 $ 1,965 $ 2,955 $ 2,374 $ 1,908
Income (loss) before extraordinary item(2).......................... (347) 10 (71) 145 276
Earnings (loss) available for common stock(2)....................... (386) 7 (80) 138 276
Earnings (loss) per common share(3)................................. (0.64) 0.01 (0.16) 0.29 0.61
BALANCE SHEET INFORMATION
Total assets........................................................ 23,747 8,853 24,061 8,615 7,394
Total debt(4)....................................................... 9,958 2,354 8,853 2,101 1,814
Preferred securities(5)............................................. 1,180 651 1,131 651 51
Media Group equity.................................................. 7,281 4,465 7,632 4,472 4,203
OTHER INFORMATION
EBITDA(6)........................................................... 1,437 641 937 716 533
Capital expenditures(1)............................................. 1,042 329 668 401 343
Average common shares outstanding (thousands)(3).................... 606,568 473,501 491,924 470,549 453,316
Common shares outstanding (thousands)(3)............................ 606,861 473,985 608,863 472,314 469,343
PROPORTIONATE INFORMATION(7)
Sales and other revenues(1)......................................... $ 6,688 $ 4,376 $ 6,367 $ 5,115 $ 4,213
Operating income.................................................... 426 431 459 476 401
Income (loss) before extraordinary item(2).......................... (347) 10 (71) 145 276
EBITDA(6)........................................................... 1,944 1,058 1,473 1,149 902
Subscribers/advertisers (thousands)................................. 12,836 6,499 11,919 5,922 4,199
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Sales and other revenues(1)......................................... $ 1,549 $ 1,384
Income (loss) before extraordinary item(2).......................... 85 146
Earnings (loss) available for common stock(2)....................... 85 146
Earnings (loss) per common share(3)................................. -- --
BALANCE SHEET INFORMATION
Total assets........................................................ 5,446 3,130
Total debt(4)....................................................... 1,526 249
Preferred securities(5)............................................. -- --
Media Group equity.................................................. 3,139 2,265
OTHER INFORMATION
EBITDA(6)........................................................... 485 410
Capital expenditures(1)............................................. 215 169
Average common shares outstanding (thousands)(3).................... -- --
Common shares outstanding (thousands)(3)............................ -- --
PROPORTIONATE INFORMATION(7)
Sales and other revenues(1)......................................... $ 2,157 --
Operating income.................................................... 195 --
Income (loss) before extraordinary item(2).......................... 85 --
EBITDA(6)........................................................... 527 --
Subscribers/advertisers (thousands)................................. 3,086 --
</TABLE>
- ------------------------------
(1) Results for the first nine months of 1997 include $1,532 of sales and other
revenues and $708 of capital expenditures related to the Continental
Acquisition.
(2) The loss for the first nine months of 1997 includes net losses of $301
related to the Continental Acquisition and net gains of $63 on the sales of
investments. Results for the first nine months of 1996 include a charge of
$19 from the sale of U S WEST's cable television interests in Norway, Sweden
and Hungary. 1996 net losses include a net loss of $71 related to the
Continental Acquisition, and a charge of $19 on the sale of the Company's
cable television interests, as described above. 1995 income is before
extraordinary item and includes a gain of $95 from the merger of Telewest
with SBC CableComms (UK) and costs of $9 associated with the 1995
Recapitalization. 1994 income includes a gain of $105 on the partial sale of
U S WEST's joint venture interest in Telewest and a gain of $41 on the sale
of U S WEST's paging operations. 1993 income was reduced by restructuring
charges totaling $76. 1993 and 1992 income and earnings available for common
stock is from continuing operations.
(3) The average common shares of Media Stock outstanding for the year ended
December 31, 1996 include 150,615,000 shares issued related to the
Continental Acquisition. Pursuant to the 1995 Recapitalization, each share
of Old Common Stock was converted into one share each of Communications
Stock and one share of Media Stock. For periods prior to the 1995
Recapitalization, the shares of Media Stock outstanding are assumed to equal
the shares of Old Common Stock outstanding for such periods.
(4) Debt at September 30, 1997 and December 31, 1996 includes debt related to
the Continental Acquisition. Total debt excludes debt associated with the
capital assets segment, which has been discontinued and is held for sale.
12
CHAPTER 1: INTRODUCTION
<PAGE>
(5) Includes Trust Securities of $1,080 at September 30, 1997 and December 31,
1996, and $600 at September 30, 1996 and December 31, 1995, and preferred
stock subject to mandatory redemption of $100 at September 30, 1997, and $51
at December 31, 1996, September 30, 1996, December 31, 1995 and December 31,
1994.
(6) EBITDA excludes gains on asset sales, equity losses, guaranteed minority
interest expense and restructuring charges. The Media Group considers EBITDA
an important indicator of the operating performance of its businesses.
EBITDA, however, should not be considered as an alternative to operating or
net income as an indicator of performance or as an alternative to cash flows
from operating activities as a measure of liquidity, in each case determined
in accordance with GAAP. The results for the first nine months of 1997
include EBITDA of $635 related to the Continental Acquisition. 1993 EBITDA
was reduced by restructuring charges totaling $120.
(7) Selected proportionate data is not required by GAAP or intended to replace
the Combined Financial Statements prepared in accordance with GAAP. It is
presented supplementally because the Media Group believes that proportionate
data facilitates the understanding and assessment of its Combined Financial
Statements. Proportionate accounting reflects the Media Group's relative
ownership interests in operating revenues and expenses for both its
consolidated and equity method investments. The table does not reflect
financial data of the capital assets segment which has been discontinued and
is held for sale.
13
CHAPTER 1: INTRODUCTION
<PAGE>
NEW U S WEST SELECTED HISTORICAL FINANCIAL INFORMATION
Dollars in millions (except per share amounts)
The following table sets forth selected historical financial information for
New U S WEST. This information presents New U S WEST's results of operations and
financial condition as if it were a separate entity for all periods presented
but does not give effect to certain transactions being undertaken in connection
with the Separation, including the refinancing by New U S WEST of the Dex
Indebtedness and the issuance of $850 of New U S WEST Common Stock to holders of
Media Stock in connection with the Dex Alignment. For financial information for
New U S WEST which gives effect to all such transactions, see "--New U S WEST
Selected Pro Forma Financial Information." This information should be read in
conjunction with New U S WEST's Combined Financial Statements, including the
notes thereto, included elsewhere in this Proxy Statement. See "Annex F--New U S
WEST Combined Financial Statements."
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR
AS OF SEPTEMBER 30, YEAR ENDED OR AS OF DECEMBER
(UNAUDITED) 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 8,657 $ 8,283 $ 11,168 $ 10,508 $ 10,132
Net income (loss)(1)................................................ 1,256 1,141 1,535 1,423 1,403
Dividends per common share.......................................... 1.605 1.605 2.14 2.14 2.14
BALANCE SHEET INFORMATION
Total assets........................................................ 17,264 17,191 17,279 16,960 16,317
Total debt.......................................................... 5,795 6,832 6,545 6,782 6,147
Total equity........................................................ 4,409 3,984 4,085 3,657 3,357
OTHER INFORMATION
Return on equity(2, 3).............................................. 38.5% 38.5% 38.6% 41.8% 45.3%
Percentage of debt to total capital(2).............................. 56.8% 63.2% 61.6% 65.0% 64.7%
Capital expenditures................................................ $ 1,644 $ 2,023 $ 2,831 $ 2,770 $ 2,513
Telephone network access lines in service (thousands)............... 15,829 15,253 15,424 14,795 14,299
Billed access minutes of use (millions)--
interstate........................................................ 41,085 38,674 52,039 47,801 43,768
intrastate........................................................ 8,702 7,808 10,451 9,504 8,507
Total employees..................................................... 50,661 54,056 51,477 54,552 55,246
Telephone company employees......................................... 43,388 47,568 45,427 47,934 47,493
Telephone company employees per ten thousand access lines........... 27.4 31.2 29.5 32.4 33.2
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 9,779 $ 9,447
Net income (loss)(1)................................................ (2,585) (627)
Dividends per common share.......................................... -- --
BALANCE SHEET INFORMATION
Total assets........................................................ 15,727 20,984
Total debt.......................................................... 5,728 5,233
Total equity........................................................ 2,837 6,156
OTHER INFORMATION
Return on equity(2, 3).............................................. 27.5% 16.9%
Percentage of debt to total capital(2).............................. 66.9% 46.0%
Capital expenditures................................................ $ 2,251 $ 2,423
Telephone network access lines in service (thousands)............... 13,803 13,301
Billed access minutes of use (millions)--
interstate........................................................ 40,594 37,413
intrastate........................................................ 7,529 6,956
Total employees..................................................... 56,147 59,549
Telephone company employees......................................... 49,668 52,423
Telephone company employees per ten thousand access lines........... 36.0 39.4
</TABLE>
- ------------------------------
(1) Income for the first nine months of 1997 includes a gain of $48 on the sales
of certain rural telephone exchanges and an extraordinary charge of $3 for
the early extinguishment of debt. Income for the first nine months of 1996
includes a gain of $31 on the sales of certain rural telephone exchanges and
the cumulative and current effects of $34 and $13, respectively, from
adopting SFAS No. 121. 1996 net income includes a gain of $36 on the sales
of certain rural telephone exchanges and the cumulative and current effects
of $34 and $15, respectively, from adopting SFAS No. 121. 1995 net income
includes a gain of $85 on the sales of certain rural telephone exchanges and
other charges of $16, including an extraordinary charge of $8 for the early
extinguishment of debt and $8 for costs associated with the 1995
Recapitalization. 1994 net income includes a gain of $51 on the sales of
certain rural telephone exchanges. 1993 net income was reduced by $566 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates. 1993 net income
was also reduced by extraordinary charges of $3,123 for the discontinuance
of SFAS No. 71 and $77 for the early extinguishment of debt. 1992 net income
was reduced by $1,782 for the cumulative effect of a change in accounting
principles.
(2) The increases in the percentage of debt to total capital and return on
equity, and the decrease in total equity since 1992, are primarily due to
the effects of discontinuing SFAS No. 71 in 1993 and the cumulative effect
of change in accounting principles in 1992.
(3) The return on equity for the first nine months of 1997 is based on income
before extraordinary item. The return on equity for the first nine months of
1996 and full year 1996 is based on income before the cumulative effect of a
change in accounting principle. 1995 return on equity is based on income
before extraordinary item. 1993 return on equity is based on income
excluding extraordinary items, a restructuring charge and the cumulative
effect on deferred taxes of the 1993 federally mandated increase in income
tax rates. 1992 return on equity is based on income before the cumulative
effect of a change in accounting principles.
14
CHAPTER 1: INTRODUCTION
<PAGE>
NEW U S WEST SELECTED PRO FORMA FINANCIAL INFORMATION
The following unaudited selected pro forma condensed combined financial
information of New U S WEST gives effect to the refinancing of $3.9 billion of
Dex Indebtedness by New U S WEST and the issuance of $850 million of New U S
WEST Common Stock to holders of Media Stock in connection with the Dex
Alignment, transfers of certain assets and liabilities of U S WEST to New U S
WEST and allocations of certain costs and expenses in connection with the
Separation. The selected unaudited pro forma condensed combined financial
information has been derived from, or prepared on a basis consistent with, the
unaudited pro forma condensed combined financial statements of New U S WEST,
including the notes thereto, included elsewhere in this Proxy Statement. This
information is presented for illustrative purposes only and is not necessarily
indicative of the combined results of operations or financial position that
would have occurred if the transactions had occurred at the beginning of each
period presented or on the dates indicated, nor is it necessarily indicative of
the future operating results or financial position of New U S WEST. This
information should also be read in conjunction with the unaudited pro forma
condensed combined financial statements of New U S WEST, including the notes
thereto, included elsewhere in this Proxy Statement. See "Chapter 5: Information
About New U S WEST--New U S WEST Unaudited Pro Forma Condensed Combined
Financial Statements."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION:
Sales and other revenues................................................ $ 8,657 $ 11,168
Income from operations.................................................. 2,289 2,811
Income before extraordinary item and cumulative effect of change in
accounting principle.................................................. 1,142 1,346
Earnings before extraordinary item and cumulative effect of change in
accounting principle per share of New U S WEST Common Stock........... 2.28 2.71
BALANCE SHEET INFORMATION:
Total assets............................................................ 17,326 --
Total debt.............................................................. 9,822 --
Shareowners' equity..................................................... 417 --
Book value per share of New U S WEST Common Stock....................... 0.83 --
</TABLE>
15
CHAPTER 1: INTRODUCTION
<PAGE>
MEDIAONE SELECTED PRO FORMA FINANCIAL INFORMATION
The following unaudited selected pro forma condensed combined financial
information of MediaOne gives effect to the discontinuance of the businesses of
New U S WEST, the refinancing of $3.9 billion of Dex Indebtedness by New U S
WEST, the distribution of all of the New U S WEST Common Stock to U S WEST's
stockholders, transfers of certain assets and liabilities of U S WEST to New U S
WEST and allocations of certain costs and expenses in connection with the
Separation, the Continental Acquisition and certain related transactions, and
the AirTouch Transaction. The selected unaudited pro forma condensed combined
financial information has been derived from, or prepared on a basis consistent
with, the unaudited pro forma condensed combined financial statements of
MediaOne, including the notes thereto, included elsewhere in this Proxy
Statement. This information is presented for illustrative purposes only and is
not necessarily indicative of the combined results of operations or financial
position that would have occurred if the transactions had occurred at the
beginning of each period presented or on the dates indicated, nor is it
necessarily indicative of the future operating results or financial position of
the MediaOne. This information should also be read in conjunction with the
unaudited pro forma condensed combined financial statements of MediaOne,
including the notes thereto, included elsewhere in this Proxy Statement. See
"Chapter 6: Information About MediaOne--MediaOne Unaudited Pro Forma Condensed
Combined Financial Statements."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ -----------------
DOLLARS IN MILLIONS
(EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION:
Sales and other revenues................................................ $ 1,805 $ 2,362
Loss from continuing operations(1)...................................... (461) (643)
Loss from continuing operations available for common stock(1)........... (500) (693)
Loss from continuing operations per share of MediaOne Common Stock(1)... (0.82) (1.11)
BALANCE SHEET INFORMATION:
Total assets............................................................ 25,527 --
Total debt.............................................................. 4,897 --
Total redeemable preferred securities................................... 1,180 --
Total equity............................................................ 13,042 --
Book value per share of MediaOne Common Stock........................... 21.49 --
</TABLE>
- ------------------------
(1) The loss from continuing operations is before extraordinary item and
cumulative effect of change in accounting principle.
16
CHAPTER 1: INTRODUCTION
<PAGE>
COMPARATIVE PER SHARE DATA
The following table sets forth (i) historical earnings, cash dividends and
book value per share for U S WEST, (ii) unaudited pro forma combined earnings,
cash dividends and book value per share for New U S WEST, (iii) unaudited pro
forma combined earnings, cash dividends and book value per share for MediaOne
and (iv) unaudited pro forma equivalent combined earnings, cash dividends and
book value per share for the Media Stock. The pro forma data for New U S WEST
and MediaOne give effect to the transactions described under "--New U S WEST
Selected Pro Forma Financial Information" and "--MediaOne Selected Pro Forma
Financial Information," respectively. This data should be read in conjunction
with U S WEST's Consolidated Financial Statements and the Communications Group's
and Media Group's Combined Financial Statements, including the notes thereto,
which are incorporated herein by reference, and the unaudited pro forma
condensed combined financial statements of New U S WEST and MediaOne, including
the notes thereto, included elsewhere in this Proxy Statement. See "Chapter 5:
Information About New U S WEST--New U S WEST Pro Forma Condensed Combined
Financial Statements," "Chapter 6: Information About MediaOne-- MediaOne Pro
Forma Condensed Combined Financial Statements" and "Chapter 8: The Annual
Meeting and Certain Other Matters--Where You Can Find More Information."
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
OR AS OF OR AS OF
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------- -----------------
<S> <C> <C>
HISTORICAL:
U S WEST
Earnings per share of Communications Stock(1)......................... $ 2.08 $ 2.62
Loss per share of Media Stock......................................... (0.64) (0.16)
Cash dividends per share of Communications Stock...................... 1.605 2.14
Cash dividends per share of Media Stock(2)............................ -- --
Book value per share of Communications Stock.......................... 8.77 8.15
Book value per share of Media Stock................................... 12.00 12.53
PRO FORMA:
New U S WEST
Earnings per share before extraordinary item and cumulative effect of
change in accounting principle...................................... $ 2.28 $ 2.71
Cash dividends per share.............................................. 1.605 2.14
Book value per share.................................................. 0.83 --
MediaOne
Loss per share from continuing operations(3).......................... (0.82) (1.11)
Cash dividends per share(2)........................................... -- --
Book value per share.................................................. 21.49
PRO FORMA EQUIVALENT(4):
U S WEST
Loss per share of Media Stock......................................... (0.75) (1.03)
Cash dividends per share of Media Stock(2)............................ 0.05 0.06
Book value per share of Media Stock................................... 21.51 --
</TABLE>
- ------------------------------
(1) Earnings per share excludes the cumulative effect of a change in accounting
principle in 1996.
(2) Dividends are not currently paid on the Media Stock. It is anticipated that
the MediaOne Board will continue this policy for the foreseeable future.
(3) The loss from continuing operations is before extraordinary item in 1997 and
cumulative effect of change in accounting principle in 1996.
(4) Represents the sum of (i) pro forma loss, cash dividends or book value per
share of MediaOne Common Stock, respectively, plus (ii) pro forma earnings,
cash dividends or book value, per share of New U S WEST Common Stock,
respectively, multiplied by 0.03 (the estimated fraction of a share of New U
S WEST Common Stock which will be distributed per share of Media Stock in
connection with the Dex Alignment). For a description of the manner in which
such fraction will be calculated, see "Chapter 3: The
Separation--Description of the Separation--The Dex Alignment."
17
CHAPTER 1: INTRODUCTION
<PAGE>
CHAPTER 2: RISK FACTORS
RISK FACTORS RELATED TO NEW U S WEST
REGULATION
The businesses of New U S WEST are subject to a high degree of regulation at
the federal, state and local levels, including regulation by state public
utility commissions ("PUCs") with respect to access charge tariffs and
intrastate rates and services and by the FCC with respect to interstate access
tariffs and other matters. In particular, the Telecommunications Act of 1996
(the "Telecommunications Act") has introduced new regulations affecting New U S
WEST's businesses in many areas. The regulations to which New U S WEST's
businesses are subject can in certain circumstances impose significant
limitations on its operations. In addition, these regulations are constantly
evolving and may change significantly over time. There can be no assurance that
future regulatory changes will not have a material adverse effect on New U S
WEST. See "Chapter 5: Information About New U S WEST-- Business of New U S
WEST--Regulation" and Note 14 to New U S WEST's Combined Financial Statements
included in Annex F.
COMPETITION
New U S WEST operates in an increasingly competitive environment. Services
similar to those offered by New U S WEST, including local exchange services,
exchange access services, long-distance services within local access and
transport areas ("LATAs") and high-speed data and Internet access services, are
also offered by other telecommunications companies, primarily by interexchange
carriers ("IXCs") and other local exchange carriers ("LECs"), including
competitive local exchange carriers ("CLECs") and competitive access providers
("CAPs"). High-speed data and internet access services are also provided by
internet service providers ("ISPs"). Dex competes with various other providers
of directory services, including with providers of electronic directory
services. The wireless communications services currently being introduced by New
U S WEST face competition from numerous other providers of wireless services in
each market. The interLATA long distance service which New U S WEST plans to
introduce will face competition from IXCs. The telecommunications industry is
continually subject to rapid and significant changes in technology. There can be
no assurance that the introduction of any new technology will not result in the
entry of additional competitors into New U S WEST's markets. See "Chapter 5:
Information About New U S WEST--Business of New U S WEST-- Competition."
DIVIDEND POLICY
If the Separation is consummated, it is anticipated that New U S WEST will
pay dividends on the New U S WEST Common Stock initially at a quarterly rate of
$0.535 per share, which is the same dividend currently paid on the
Communications Stock. While the New U S WEST Board is not expected to change
this dividend policy, it has the right to do so at any time. See "Chapter 3: The
Separation--Dividend Policy."
NO PRIOR PUBLIC MARKET FOR NEW U S WEST COMMON STOCK; NO ASSURANCE AS TO MARKET
PRICE
Although the Communications Stock has been traded publicly since its initial
issuance in 1995, there has been no public market for the New U S WEST Common
Stock. Because, among other things, the New U S WEST Common Stock will be a
security of New U S WEST (rather than a security of U S WEST) and, as a result
of the Dex Alignment, New U S WEST will include a significant business not
currently attributed to the Communications Group, there can be no assurance that
the public market for the New U S WEST Common Stock will be similar to the
public market for the Communications Stock. See "Chapter 7: Capital Stock--New U
S WEST Capital Stock" and
"--Comparison of Rights of Stockholders." Based on the one-for-one redemption
ratio at which the
18
CHAPTER 2: RISK FACTORS
<PAGE>
Communications Stock will be redeemed for New U S WEST Common Stock,
approximately million shares of New U S WEST Common Stock will be issued and
outstanding immediately after the Separation, which shares will have been
approved for listing on the New York Stock Exchange (the "NYSE") and the Pacific
Stock Exchange (the "PSE"), subject to official notice of issuance. Based on the
current ownership of Communications Stock, upon consummation of the Separation,
shares of New U S WEST Common Stock will be broadly distributed among numerous
individual and institutional holders. Ultimately, the value of each share of New
U S WEST Common Stock will be principally determined in the trading markets and
could be influenced by many factors, including the terms and conditions of the
Separation and the Dex Alignment, the operations of New U S WEST, the growth and
expansion of New U S WEST's businesses, investors' expectations of New U S
WEST's prospects, trends and uncertainties affecting the telecommunications
industry as a whole, future issuances and repurchases of New U S WEST Common
Stock and general economic and other conditions. There can be no assurance that
the trading value of each share of New U S WEST Common Stock immediately after
the Separation will be consistent with the trading value of each share of
Communications Stock immediately before the Separation. The trading value of the
New U S WEST Common Stock could be higher or lower than the trading value of
Communications Stock, and U S WEST and New U S WEST are unable to estimate
whether such difference (whether favorable or unfavorable) will be material to
holders of New U S WEST Common Stock.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF NEW U S WEST
The New U S WEST Restated Certificate (as defined herein) and the Bylaws of
New U S WEST (the "New U S WEST Bylaws") will contain certain provisions which
could have the effect of delaying, deferring or preventing a change in control
of New U S WEST or the removal of New U S WEST management, of deterring
potential acquirors from making an offer to stockholders of New U S WEST and of
limiting any opportunity to realize premiums over prevailing market prices for
the New U S WEST Common Stock in connection therewith. Such provisions include a
classified board of directors, a provision prohibiting stockholder action by
written consent, a provision prohibiting stockholders from calling special
meetings, a provision which requires the approval of 80% of the stockholders to
remove a director, and a requirement that certain business combinations be
approved by 80% of the stockholders. The foregoing provisions are substantially
similar to the provisions that are present in the Restated Certificate of
Incorporation of U S WEST (the "U S WEST Restated Certificate") and the Bylaws
of U S WEST (the "U S WEST Bylaws"). In addition, the New U S WEST Rights (as
defined herein) will permit disinterested stockholders to acquire additional
shares of New U S WEST or of an acquiring company at a substantial discount in
the event of certain described changes of control. See "Chapter 7: Capital
Stock--Certain Antitakeover Considerations."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
Some of the information presented in or in connection with this Proxy
Statement constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Although U S WEST and New U S
WEST believe that their expectations are based on reasonable assumptions within
the bounds of their knowledge of their businesses and operations, there can be
no assurance that actual results will not differ materially from their
expectations. Factors that could cause actual results to differ from
expectations include: (i) greater than anticipated competition from new entrants
into the local exchange, intraLATA toll, wireless, data and directories markets;
(ii) changes in demand for New U S WEST's products and services, including
optional custom calling features; (iii) higher than anticipated employee levels,
capital expenditures and operating expenses; (iv) the loss of significant
customers; (v) pending regulatory actions in state jurisdictions; (vi)
regulatory changes affecting the telecommunications industry, including changes
that could have an impact on the competitive environment in the local exchange
market; (vii) a change in economic conditions in the various markets served by
New U S WEST's operations; (viii) greater than anticipated competitive
19
CHAPTER 2: RISK FACTORS
<PAGE>
activity requiring new pricing for services; (ix) higher than anticipated
start-up costs associated with new business opportunities; (x) delays in New U S
WEST's ability to begin offering interLATA long-distance services; or (xi)
delays in the development of anticipated technologies, or the failure of such
technologies to perform according to expectations.
RISK FACTORS RELATED TO MEDIAONE
LOSS OF AVAILABILITY OF COMMUNICATIONS GROUP AND DEX CASH FLOWS AND CREDIT
SUPPORT
The businesses comprising the Media Group are currently wholly owned by U S
WEST. While the Media Stock, as a Targeted Stock, is intended to reflect
separately the performance of the Media Group, the Media Stock is a class of
common stock of U S WEST. As a result of being a wholly owned business group of
U S WEST, the Media Group has been able to borrow money using U S WEST's
consolidated investment grade credit rating, which is supported by the cash
flows generated by the businesses of both the Communications Group and the Media
Group. The ability of the Media Group to borrow money using U S WEST's
consolidated credit rating has permitted the Media Group to have lower borrowing
costs than it would as a stand-alone entity and to access the commercial paper
market on a regular basis in order to fund its operations. The terms of U S
WEST's indebtedness include few covenants and therefore have not interfered with
the operations of the Media Group or limited the flexibility of the Media Group
to pursue its business objectives. In addition, under U S WEST's current
structure, the U S WEST Board has the ability to transfer money from the
Communications Group to the Media Group through a short-term loan or the
creation of an "inter-group interest." While the U S WEST Board has never
elected to make any such transfer and would only do so in extraordinary
circumstances, the ability of the U S WEST Board to make any such transfer
provides the Media Group with an additional source of capital which could be
drawn upon in the event of an economic downturn or other adverse circumstances.
Upon consummation of the Separation, MediaOne will not have an ownership
interest in, or any other affiliation with, New U S WEST. As a result, MediaOne
will not have access to the cash flows generated by the businesses of New U S
WEST, including the cash flows generated by U S WEST Communications and Dex, to
support its credit rating or otherwise. The rating agencies have not yet
finalized what the credit rating of MediaOne will be following consummation of
the Separation. Based upon the anticipated capitalization of MediaOne, it is
expected that MediaOne's credit rating will be lower than the current credit
rating of U S WEST. The expected lower credit rating of MediaOne could have
important consequences to the businesses and operations of MediaOne. Among other
things, MediaOne may have borrowing costs that are higher than the current
borrowing costs of the businesses of the Media Group. MediaOne may also have
reduced access to the commercial paper market and therefore may be required to
borrow from commercial banks to fund its short-term capital requirements. Such
bank indebtedness, as well as MediaOne's public indebtedness, may contain
covenants that could reduce MediaOne's operating flexibility and its ability to
plan for, or react to, changes affecting its business and market conditions.
As a result of the AirTouch Transaction, MediaOne's post-Separation
indebtedness will be reduced. See "Chapter 3: The Separation--Treatment of
Indebtedness." U S WEST believes that the AirTouch Transaction may improve the
credit rating to be assigned to MediaOne in the Separation.
OPERATING LOSSES
For the nine months ended September 30, 1997 and the year ended December 31,
1996, on a pro forma basis, after giving effect to the discontinuance of the
operations of the businesses of New U S WEST, the Continental Acquisition and
the AirTouch Transaction, MediaOne would have had operating losses from
continuing operations of $178 million and $259 million, respectively. See
"Chapter 6: Information About MediaOne--MediaOne Unaudited Condensed Combined
Financial Statements." These losses result from the significant amount of
amortization of intangible assets recognized
20
CHAPTER 2: RISK FACTORS
<PAGE>
in connection with the Continental Acquisition and from depreciation associated
with capital expenditures required to upgrade MediaOne's networks. There can be
no assurance that MediaOne will realize positive operating income from
continuing operations in the foreseeable future. See "Chapter 6: Information
About MediaOne."
REGULATION
The businesses of MediaOne are subject to a high degree of regulation at the
federal, state and local levels, as well as in various foreign countries in
connection with certain overseas business activities. These regulations can in
certain circumstances impose significant limitations on operations. In addition,
these regulations are constantly evolving and may change significantly over
time. There can be no assurance that future regulatory changes will not have a
material adverse effect on MediaOne. See "Chapter 6: Information About
MediaOne--Business of MediaOne--Regulation."
COMPETITION
MediaOne's businesses operate in an increasingly competitive environment.
MediaOne's cable television systems compete with other providers of video
programming, including direct broadcast satellite ("DBS") systems, multipoint
multichannel distributions services ("MMDS") systems, local multipoint
distribution services ("LMDS") systems, satellite master antenna television
("SMATV") systems and providers of other new technologies. The cable television
services offered by MediaOne face competition from other communications and
entertainment media, including broadcast television, video tape rentals and live
sporting events. In addition, with the passage of the Telecommunications Act,
additional competitors are entering into MediaOne's markets, including LECs with
greater financial resources than MediaOne, who offer video programming services
similar to those offered by MediaOne. As MediaOne begins to offer additional
services over its networks, including local exchange and data services, MediaOne
will face additional competition from other providers of such services,
including from LECs, IXCs and ISPs. MediaOne's international businesses also
typically face significant competition in their markets. The broadband
communications industry is continually subject to rapid and significant changes
in technology. There can be no assurance that the introduction of any new
technology will not result in the entry of additional competitors into
MediaOne's markets, which could reduce MediaOne's market share. See "Chapter 6:
Information About MediaOne--Business of MediaOne--Competition."
RISKS ASSOCIATED WITH INTERNATIONAL INVESTMENT
The Media Group has made, and MediaOne intends to continue to consider
making, investments in companies located outside of the United States. Such
investments are subject to risks and uncertainties relating to international
investments which may include taxation, nationalization, inflation, currency
fluctuations, increased regulation and approval requirements and governmental
regulation limiting returns to foreign investors. Recent economic events,
including currency devaluations in Asia, are likely to negatively impact the
value of MediaOne's investments in that region.
DIVIDEND POLICY
Dividends are not currently paid on the Media Stock. If the Separation is
completed, it is anticipated that the MediaOne Board will continue this policy
for the foreseeable future and will not declare dividends on the MediaOne Common
Stock. Instead, it is anticipated that the MediaOne Board will retain future
earnings, if any, for the development of the businesses of MediaOne. See
"Chapter 3: The Separation--Dividend Policy."
NO ASSURANCE AS TO MARKET PRICE OF MEDIAONE COMMON STOCK FOLLOWING SEPARATION
The Media Stock has been traded publicly since its initial issuance in 1995
as a Targeted Stock. Following consummation of the Separation, the MediaOne
Common Stock will be the only class of common stock of MediaOne and will not be
a Targeted Stock. As a result of the Dex Alignment,
21
CHAPTER 2: RISK FACTORS
<PAGE>
MediaOne will not include a significant business that is currently attributed to
the Media Group. Accordingly, there can be no assurance that the public market
for the MediaOne Common Stock will be similar to the public market for the Media
Stock. See "Chapter 7: Capital Stock--MediaOne Capital Stock" and "--Comparison
of Rights of Stockholders." Ultimately, the value of each share of MediaOne
Common Stock will be principally determined in the trading markets and could be
influenced by many factors, including the terms and conditions of the Separation
and the Dex Alignment, the operations of MediaOne, the ability of MediaOne to
finance its future capital requirements, the growth and expansion of MediaOne's
business, investors' expectations of MediaOne's prospects, trends and
uncertainties affecting the media industry as a whole, future issuances and
repurchases of MediaOne Common Stock and general economic and other conditions.
There can be no assurance that the trading value of each share of MediaOne
Common Stock immediately after the Separation will be consistent with the
trading value of each share of Media Stock immediately before the Separation.
The trading value of the MediaOne Common Stock could be higher or lower than the
trading value of Media Stock, and U S WEST is unable to estimate whether such
difference (whether favorable or unfavorable) will be material to holders of
MediaOne Common Stock.
CERTAIN LIMITATIONS ON CHANGES IN CONTROL OF MEDIAONE
The MediaOne Restated Certificate (as defined herein) and the Bylaws of
MediaOne (the "MediaOne Bylaws") will continue to contain certain provisions
present in the U S WEST Restated Certificate and the U S WEST Bylaws which could
have the effect of delaying, deferring or preventing a change in control of
MediaOne or the removal of MediaOne management, of deterring potential acquirors
from making an offer to stockholders of MediaOne and of limiting any opportunity
to realize premiums over prevailing market prices for the MediaOne Common Stock
in connection therewith. Such provisions include a classified board of
directors, a provision prohibiting stockholder action by written consent, a
provision prohibiting stockholders from calling special meetings, a provision
which requires the approval of 80% of the stockholders to remove a director, and
a requirement that certain business combinations be approved by 80% of the
stockholders. In addition, the MediaOne Rights (as defined herein) will permit
disinterested stockholders to acquire additional shares of MediaOne or of an
acquiring company at a substantial discount in the event of certain described
changes of control. See "Chapter 7: Capital Stock--Certain Antitakeover
Considerations."
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE
Some of the information presented in or in connection with this Proxy
Statement constitutes "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Although U S WEST believes
that its expectations are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance that
actual results will not differ materially from its expectations. Factors that
could cause actual results to differ from expectations include: (i) greater than
anticipated competition from new entrants into the cable and wireless
communications markets; (ii) changes in demand for MediaOne's products and
services; (iii) regulatory changes affecting the cable and telecommunications
industries; (iv) a change in economic conditions in the various markets served
by MediaOne's operations, including international markets, that could adversely
affect the level of demand for cable, wireless or other services offered by
MediaOne; (v) greater than anticipated competitive activity requiring new
pricing for services; (vi) higher than anticipated start-up costs associated
with new business opportunities; (vii) higher than anticipated employee levels,
capital expenditures and operating expenses; (viii) consumer acceptance of
broadband services, including telephony and data services, and wireless
services; (ix) competition from new providers of wireless services in MediaOne's
wireless markets; (x) increases in fraudulent activity with respect to broadband
and wireless services; or (xi) delays in the development of anticipated
technologies, or the failure of such technologies to perform according to
expectations.
22
CHAPTER 2: RISK FACTORS
<PAGE>
CHAPTER 3: THE SEPARATION
DESCRIPTION OF THE SEPARATION
Pursuant to the Separation, the Communications Group and the Media Group
will become independent public companies. As part of the Separation, Dex--the
domestic directories business of the Media Group--will be aligned with the
Communications Group. The Separation will be implemented pursuant to the terms
of a Separation Agreement (the "Separation Agreement") to be entered into
between U S WEST and New U S WEST. The Separation Agreement sets forth the terms
of the Separation and certain other post-Separation arrangements and agreements
between New U S WEST and MediaOne. Certain material provisions of the Separation
Agreement are summarized herein. A copy of the Separation Agreement is filed as
an exhibit to the New U S WEST Registration Statement (as defined herein). This
summary is qualified in its entirety by reference to the full and complete text
of the Separation Agreement. See "Chapter 8: The Annual Meeting and Certain
Other Matters-- Where You Can Find More Information."
THE SEPARATION
In order to effect the Separation, pursuant to the Separation Agreement and
subject to the terms and conditions thereof, (i) U S WEST will redeem each
issued and outstanding share of Communications Stock (other than shares of
Communications Stock held as treasury stock by U S WEST) for one share of New U
S WEST Common Stock (the "Communications Redemption") and (ii) distribute as a
dividend (the "Dex Dividend") on each outstanding share of Media Stock (other
than shares of Media Stock held as treasury stock by U S WEST) a fraction of a
share of New U S WEST Common Stock equal to the Dex Dividend Number (which will
be determined in the manner described below under "--The Dex Alignment"). As
only whole shares of New U S WEST Common Stock will be issued, cash in lieu of
fractional shares of New U S WEST Common Stock will be issued to holders of
Media Stock pursuant to the Dex Dividend.
The Separation will become effective at such time after the satisfaction or
waiver of all of the conditions set forth in the Separation Agreement as
determined by the U S WEST Board (the "Separation Time"). See "--Conditions to
the Separation." The date on which the Separation Time occurs (the "Separation
Date") will also be fixed by the U S WEST Board as (i) the date on which the
Communications Stock will be redeemed pursuant to the Communications Redemption,
(ii) the record date for determining the holders of Media Stock entitled to
receive the Dex Dividend and (iii) the date as of which the Dex Dividend will be
paid to holders of Media Stock. From and after the Separation Time, each
outstanding share of Media Stock will remain outstanding and will thereafter
represent one share of MediaOne Common Stock. Each share of Communications Stock
held as treasury stock by U S WEST will be cancelled. Each share of Media Stock
held as treasury stock by U S WEST will remain outstanding as one share of
MediaOne Common Stock held as treasury stock by MediaOne. The Dex Dividend will
not be issued with respect to shares of Media Stock held as treasury stock by U
S WEST.
As a result of the Separation, New U S WEST (which is currently an indirect
wholly owned subsidiary of New U S WEST named "USW-C, Inc.") will become an
independent public company comprising the current businesses of the
Communications Group and Dex and will be renamed "U S WEST, Inc." Following the
Separation, U S WEST will continue as an independent public company comprised of
the current businesses of the Media Group other than Dex and will be renamed
"MediaOne Group, Inc." The following charts present in simplified form the
organizational structure of U S WEST prior to the Separation and the
organizational structures of New U S WEST and MediaOne after the Separation.
23
CHAPTER 3: THE SEPARATION
<PAGE>
[Charts depicting structure of U S WEST before the Separation and New U S WEST
and MediaOne after the Separation.]
THE DEX ALIGNMENT
As part of the Separation, the directories business of Dex will be aligned
with New U S WEST. The U S WEST Board, in consultation with U S WEST's
management and its financial advisors, has determined that the fair value of Dex
is $4.75 billion (the "Dex Value"). See "--Background of the Separation" and
"--Opinions of Financial Advisors." The business of Dex is currently attributed
to the Media Group and, as a result, the value of this business is intended to
be reflected in the Media Stock. In connection with the Dex Alignment, U S WEST
will issue to holders of Media Stock an aggregate of $850 million in value (the
"Dex Equity Value") of shares of New U S WEST Common Stock pursuant to the Dex
Dividend. The Dex Equity Value equals the Dex Value net of the $3.9 billion of
Dex Indebtedness currently allocated to the Media Group that will be refinanced
by New U S WEST in connection with the Separation. For a description of the
manner in which the Dex Indebtedness will be refinanced by New U S WEST, see
"--Treatment of Indebtedness."
The fraction of a share of New U S WEST Common Stock which will be
distributed per share of Media Stock pursuant to the Dex Dividend (the "Dex
Dividend Number") will equal the quotient of (i) the Dex Equity Value (I.E.,
$850 million) divided by (ii) the product of (x) the number of shares of Media
Stock outstanding immediately prior to the Separation Time (other than shares of
Media Stock held as treasury stock by U S WEST) multiplied by (y) the average
market value of the Communications Stock over the period of 20 trading days
ending on the fifth trading day prior to the Separation Date. Assuming the
Separation was consummated on January 30, 1998, based upon $46.36 (the average
market price of the Communications Stock for the 20 trading days ending 5
trading days prior to such date) and the number of shares of Media Stock
outstanding as of January 30, 1998, the Dex Dividend
24
CHAPTER 3: THE SEPARATION
<PAGE>
Number would have equalled 0.03, which would have had a value of $1.43 (based on
$47 5/8--the market price of the Communications Stock on February 5, 1998).
THE REORGANIZATION
Prior to the Separation, U S WEST will effect certain internal stock and
asset transfers, intercompany debt assumptions and other restructurings,
mergers, contributions and assumptions, the purpose and effect of which will be
to separate Dex from the other businesses of the Media Group and to contribute
to New U S WEST all of the assets and liabilities of U S WEST relating to the
businesses of the Communications Group and Dex, as well as certain other assets
and liabilities of U S WEST (the "Reorganization"). In addition, substantially
all of the outstanding indebtedness guaranteed by U S WEST (as well as
indebtedness as to which U S WEST is the obligor) will be refinanced pursuant to
the Refinancing (as defined herein). See "--Treatment of Indebtedness."
Prior to the Reorganization, U S WEST will cause New U S WEST to amend and
restate its Certificate of Incorporation (as so amended and restated, the "New U
S WEST Restated Certificate") to, among other things, authorize two billion
shares of New U S WEST Common Stock. Following such amendment and restatement
and as part of the Reorganization, New U S WEST will issue to U S WEST a number
of shares of New U S WEST Common Stock equal to the sum of (i) the number of
shares of Communications Stock that will be issued and outstanding immediately
prior to the Separation Time plus (ii) the aggregate number of shares of New U S
WEST Common Stock to be issued to holders of Media Stock pursuant to the Dex
Dividend. Such shares of New U S WEST Common Stock will then be distributed by U
S WEST to holders of Communications Stock and Media Stock pursuant to the
Separation.
CHARTER AMENDMENTS
In order to consummate the Separation, the U S WEST Restated Certificate
will be amended prior to the Separation Time to, among other things, (i) permit
the Communications Redemption and the Dex Dividend and (ii) following
consummation of the Separation, (a) delete all references in the U S WEST
Restated Certificate to the Communications Stock (which will no longer be
outstanding as a result of the Communications Redemption), (b) amend certain
terms of the Media Stock set forth in the U S WEST Restated Certificate that
will no longer be necessary due to the fact that the Media Stock will no longer
be a Targeted Stock and (c) change the name of U S WEST to "MediaOne Group,
Inc." (collectively, the "Charter Amendments"). The Charter Amendments described
in clause (i) above will be set forth in a certificate of amendment, in the form
attached as Annex A-1 to this Proxy Statement, to be filed immediately prior to
the Separation Time and the Charter Amendments described in clause (ii) above
will be set forth in a Restated Certificate of Incorporation of MediaOne, in the
form attached as Annex A-2 to this Proxy Statement, to be filed immediately
following the Separation Time.
Pursuant to the Delaware General Corporation Law (the "DGCL") and the U S
WEST Restated Certificate, the Charter Amendments are required to be approved
and adopted by (i) the holders of a majority of the voting power of the
outstanding shares of Communications Stock and Media Stock, voting as a single
class, (ii) the holders of a majority of the outstanding shares of
Communications Stock, voting as separate class, and (iii) the holders of a
majority of the outstanding shares of Media Stock, voting as a separate class. A
vote in favor of the Separation at the Annual Meeting will also constitute a
vote in favor of the Charter Amendments. See "Chapter 8: The Annual Meeting and
Certain Other Matters--The Annual Meeting--Matters to Be Considered at the
Annual Meeting." Consummation of the Separation is conditioned upon the approval
and adoption of the Charter Amendments by U S WEST's stockholders and the
effectiveness of the Charter Amendments. See
"--Conditions to the Separation."
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CHAPTER 3: THE SEPARATION
<PAGE>
DELIVERY OF SHARES
Shares of Communications Stock and Media Stock are currently held in either
certificated form or in uncertificated book-entry form through accounts
maintained under the U S WEST Shareowner Investment Plan (the "U S WEST SIP").
Prior to the Separation, New U S WEST will establish a shareowner investment
plan (the "New U S WEST SIP") and, as of the Separation Time, holders of
Communications Stock and Media Stock who hold their shares through the U S WEST
SIP will receive the shares of New U S WEST Common Stock to which they are
entitled pursuant to the Separation in uncertificated book-entry form through an
account that will be opened on their behalf under the New U S WEST SIP. Holders
of Media Stock who hold their shares in uncertificated form through the U S WEST
SIP will receive certificates representing their shares of MediaOne Common Stock
and will not be permitted to hold shares of MediaOne Common Stock in
uncertificated book-entry form. Following the Separation, stockholders holding
shares through the New U S WEST SIP will receive statements from New U S WEST
which will indicate their holdings of New U S WEST Common Stock as of the
Separation Time. NO ACTION WILL BE REQUIRED BY STOCKHOLDERS WHO HOLD THEIR
SHARES THROUGH THE U S WEST SIP TO RECEIVE THE SHARES TO WHICH THEY ARE ENTITLED
PURSUANT TO THE SEPARATION.
Stockholders who hold shares of Communications Stock and Media Stock in
certificated form will receive the shares of New U S WEST Common Stock to which
they are entitled in uncertificated book-entry form through a direct
registration system to be established by New U S WEST, unless a stockholder
elects to receive a certificate representing such shares. Stockholders who hold
shares of Media Stock in certificated form will receive new certificates
representing the shares of MediaOne Common Stock to which they are entitled. As
soon as reasonably practicable after the Separation Time, each holder of record
as of the Separation Date of certificates representing shares of Communications
Stock or Media Stock will receive a letter of transmittal, an affidavit of loss
and instructions for use in surrendering such certificates or completing such
affidavit of loss in exchange for shares of New U S WEST Common Stock in
uncertificated book-entry form (or, at the election of a stockholder,
certificates representing shares of New U S WEST Common Stock) and certificates
representing shares of MediaOne Common Stock. Following such surrender,
stockholders who elect to receive shares of New U S WEST Common Stock in
uncertificated book-entry form will receive a notice from New U S WEST
indicating their holdings of New U S WEST Common Stock and providing certain
other information required by the DGCL. STOCKHOLDERS SHOULD NOT SEND THEIR
CERTIFICATES AT THIS TIME. STOCKHOLDERS SHOULD SEND CERTIFICATES ONLY AFTER THEY
RECEIVE, AND IN ACCORDANCE WITH THE INSTRUCTIONS ACCOMPANYING, A LETTER OF
TRANSMITTAL.
Dividends or other distributions declared after the Separation Time will not
be paid with respect to any shares of New U S WEST Common Stock issuable to a
holder of a certificate representing shares of Communications Stock or Media
Stock until such certificate or an affidavit of loss is surrendered for exchange
by such holder. Stockholders who are entitled to receive shares of New U S WEST
Common Stock in connection with the Separation with a value greater than or
equal to $15 million will not receive such shares until such stockholders make
any required filings under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended. Shares of New U S WEST Common Stock issuable to stockholders
required to make such filings will be held in escrow by New U S WEST's transfer
agent until such time as New U S WEST receives evidence from such stockholders
that such filings have been made. Stockholders should consult their legal
advisors for further information.
CONDITIONS TO THE SEPARATION
Consummation of the Separation is subject to the fulfillment of each of the
following conditions: (i) the consummation of all of the transactions
contemplated by the Separation Agreement to be performed on or prior to the
consummation of the Separation, including the Reorganization and the
Refinancing; (ii) a Registration Statement of New U S WEST on Form S-4 under the
Securities Act of 1933, as amended (the "Securities Act"), registering the
shares of New U S WEST Common Stock to
26
CHAPTER 3: THE SEPARATION
<PAGE>
be distributed in the Separation having been declared effective by the
Securities and Exchange Commission (the "Commission"); (iii) a Registration
Statement of New U S WEST on Form 8-A under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), registering the New U S WEST Common Stock under
the Exchange Act having become effective; (iv) an amendment to U S WEST's
Registration Statement on Form 8-B under the Exchange Act amending certain terms
of the Media Stock having become effective; (v) the Separation and the Charter
Amendments having been approved and adopted by the stockholders of U S WEST and
the Charter Amendments having been filed with the Secretary of State of the
State of Delaware in accordance with the DGCL; (vi) the New U S WEST Common
Stock having been approved for listing on the NYSE and the PSE, subject to
official notice of issuance; (vii) there not being issued any order, injunction
or decree by any governmental authority that remains in effect preventing the
consummation of the Separation; (viii) all consents of, approvals of, notices to
and filings with any governmental authority or any other person necessary to
consummate the Reorganization or the Separation having been obtained and being
in full force and effect; (ix) U S WEST having provided the NYSE and the PSE
with prior written notice of the Separation Date as required by the Exchange Act
and the rules and regulations of the NYSE and the PSE; (x) the receipt by U S
WEST of the IRS Ruling and the IRS Ruling being in full force and effect at the
Separation Time; and (xi) the execution by U S WEST and New U S WEST (or their
applicable subsidiaries) of certain agreements contemplated by the Separation
Agreement.
Subject to applicable laws, any of the conditions to the Separation may be
waived at any time prior to the Separation Time for any reason, in the sole
discretion of the U S WEST Board. In addition, even if all of the above
conditions are satisfied, the Separation Agreement may be amended or terminated,
and the Reorganization, the Refinancing and the Separation may be abandoned, at
any time prior to the Separation Time for any reason, in the sole discretion of
the U S WEST Board.
BACKGROUND OF THE SEPARATION
In 1993, U S WEST adopted a strategy to become a leading provider of
interactive integrated communications, entertainment and information services to
business and residential customers over wired broadband and wireless networks in
the Communications Group Region and in other selected domestic and international
markets. In furtherance of this strategy, U S WEST Communications announced its
intention to build a broadband communications network capable of providing
voice, data and video services to customers within the Communications Group
Region and began a preliminary test of such network in Omaha, Nebraska. In
addition, U S WEST began to acquire and develop interests in and form joint
ventures involving networks in other domestic and international markets. As part
of this effort, U S WEST acquired a 25.51% interest in Time Warner Entertainment
Company, L.P. ("TWE") in September 1993.
In 1995, U S WEST separated its businesses into the Communications Group and
the Media Group and created the Communications Stock and the Media Stock. The
Targeted Stocks were intended to provide U S WEST with the flexibility it
required in order to continue to execute its strategy by allowing U S WEST to
finance its extensive capital requirements on a consolidated basis while
permitting enhanced value recognition through separate equity valuations of the
Communications Group and the Media Group, which were in different stages of
development and had different financial and growth characteristics. In addition,
the creation of the Media Stock provided U S WEST with a non-dividend paying
currency that could be used by U S WEST to make future acquisitions. At the time
of the creation of the Targeted Stocks, the Media Group included three principal
lines of businesses: cable and telecommunications, wireless communications and
multimedia content and services. The Dex business was included in the Media
Group because of its strategic fit with the Media Group's multimedia content and
services businesses, which also included U S WEST's international directory
businesses.
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CHAPTER 3: THE SEPARATION
<PAGE>
During 1996, strategic and competitive factors affecting the
telecommunications and cable industries changed significantly as a result of the
passage of the Telecommunications Act, the development of new technologies and
the increase in importance of the Internet. With the promulgation of FCC rules
under the Telecommunications Act, it became apparent that telecommunications
companies and cable companies would continue to be regulated differently for the
foreseeable future and that there would not be a convergence of the regulatory
frameworks of such industries as previously anticipated. Furthermore, it became
apparent that there would be high cost and technological hurdles associated with
cable and telecommunications companies building broadband networks using common
architectures and that, as a result, convergence of the respective technologies
used by the cable and telecommunications industries was unlikely. In addition,
growth of the data market, accompanied by the widespread use of the Internet and
the World Wide Web, began to require the telecommunications and cable industries
to modify their strategies for serving this market.
In 1996, the Communications Group completed its broadband network trials in
Omaha, Nebraska. While the Omaha broadband trial was a marketing success that
produced high rates of subscriber penetration, the cost of upgrading the
telephone network to provide video and interactive services was prohibitively
expensive. As a result, the Communications Group initiated a new strategy in the
fall of 1996 that focused on other technologies, including Digital Subscriber
Loop "xDSL" technology.
In November 1996, the Media Group's business was expanded through the
acquisition of Continental. Following this acquisition, the Media Group
increased the focus of its operations and objectives on the development of
broadband communications networks and reduced its emphasis on directories
businesses such as Dex and wireless communications businesses. As part of this
change in emphasis, the Media Group has sold a substantial portion of its
international directory businesses during the past year and has entered into the
AirTouch Transaction.
In light of these regulatory, technological and strategic developments, the
U S WEST Board formed a special committee (the "Special Committee") for the
purpose of reviewing strategic alternatives for the Communications Group and the
Media Group. The members of the Special Committee were Allen F. Jacobson, Allan
D. Gilmour, Pierson M. Grieve and Grant A. Dove. The Special Committee was
charged with the task of evaluating strategic alternatives for the Media Group
and the Communications Group as well as U S WEST, as a whole, with the goal of
increasing stockholder value in light of these developments.
The Special Committee met on November 6, 1996, December 6, 1996, January 20,
1997, February 7, 1997, March 13, 1997 and April 25, 1997. A separation of the
Communications Group and the Media Group into independent companies and actions
with respect to Dex were among the alternatives the Special Committee
considered. The Special Committee consulted with financial advisors, industry
consultants and legal counsel. The Special Committee considered various
alternatives for Dex, including (i) the alignment of Dex with the Communications
Group in exchange for cash, stock or other value, (ii) the sale of Dex to a
third party, (iii) the spin-off of Dex to holders of Media Stock as a separate
public company and (iv) the retention of Dex by the Media Group. In reviewing
these alternatives, the Special Committee considered a number of issues,
including the tax and accounting treatment of any transaction and the impact of
any transaction on the cash flows and earnings of the Communications Group and
the Media Group. At these meetings, management made presentations on the
benefits of aligning Dex with the Communications Group, specifically from a
strategic standpoint. In particular, management noted that an alignment of Dex
with the Communications Group would enable the Communications Group to offer a
broader product offering to compete more effectively and maximize its
distribution and marketing assets. In addition, management noted that such a
transaction would enable the Media Group to reduce its debt. Management also
reviewed the effects of the Dex Alignment on each group's earnings and cash
flow. At the April 25 meeting, after receiving presentations from management and
Lazard Freres and SBC Warburg Dillon Read, the Special Committee determined to
recommend to the U S WEST Board that Dex be aligned with the Communications
Group on terms
28
CHAPTER 3: THE SEPARATION
<PAGE>
consistent with the terms discussed under "--The Dex Alignment." The Special
Committee concluded that it was not prepared to make any decisions with respect
to a separation of the Communications Group and the Media Group until it had
additional information on the technological, regulatory, financial and
competitive factors affecting both the telecommunications and media industries
as well as other information relating to credit, taxes, accounting and other
issues.
Because the Special Committee was not yet prepared to make a decision with
respect to a separation of the Communications Group and the Media Group, the U S
WEST Board initially considered and approved the alignment of Dex with the
Communications Group in a transaction separate from the Separation. The U S WEST
Board held meetings by teleconference on May 2 and May 14, 1997 to consider the
recommendation of the Special Committee to align Dex with the Communications
Group. In addition to the U S WEST directors, the May 2 meeting was attended by
Charles M. Lillis, Executive Vice President of U S WEST and President and Chief
Executive Officer of the Media Group, Solomon D. Trujillo, Executive Vice
President of U S WEST and President and Chief Executive Officer of the
Communications Group, Charles P. Russ III, Executive Vice President--Law, Public
Policy and Human Resources, General Counsel and Secretary of U S WEST, Michael
P. Glinsky, Executive Vice President and Chief Financial Officer of U S WEST,
and other senior executives of U S WEST, the Communications Group and the Media
Group. The May 14 meeting was attended by all of the persons present at the May
2 meeting other than Messrs. Lillis and Trujillo. In addition, portions of the
May 14 meeting were attended by representatives of Lazard Freres and SBC Warburg
Dillon Read, U S WEST's financial advisors, and Weil, Gotshal & Manges LLP, U S
WEST's legal advisor. At these meetings, management reviewed the terms of an
alignment of Dex with the Communications Group, including the amount of leverage
which would be associated with Dex, the tax treatment and the accounting
implications, and the anticipated benefits of such a transaction to both the
Communications Group and the Media Group. It was noted that transfers of assets
such as Dex are permitted under the U S WEST Restated Certificate and management
policies adopted by the U S WEST Board in connection with the issuance of the
Targeted Stocks. At the May 2 meeting, Mr. Jacobson made a presentation to the U
S WEST Board as to the findings of the Special Committee and the terms of the
proposed alignment of Dex with the Communications Group and discussed the
financial effects and strategic benefits to both the Communications Group and
Media Group. Mr. Glinsky made a presentation to the U S WEST Board as to the
anticipated accounting treatment of the transaction.
At the May 14 meeting, the U S WEST Board received presentations by
representatives of Lazard Freres and SBC Warburg Dillon Read on their valuation
of Dex and the opinions of Lazard Freres and SBC Warburg Dillon Read as to the
fairness, from a financial point of view, to the holders of Communications Stock
and Media Stock, of the alignment of Dex with the Communications Group in
consideration for the allocation to the Communications Group of $3.9 billion of
debt allocated to the Media Group and the issuance to holders of Media Stock of
$850 million of Communications Stock. These representatives presented their
valuation analysis of the Dex business. In addition, these representatives
discussed the potential financial benefits to the Communications Group and Media
Group and holders of Communications Stock and Media Stock of an alignment of Dex
with the Communications Group on the proposed terms and the increased financial
flexibility which each group could obtain as a result of the transaction. These
presentations were followed by discussions by the U S WEST Board with respect to
the strategic fit of the Dex business with the Communications Group and the
terms of the transaction. At the conclusion of these discussions, the U S WEST
Board approved the Special Committee's recommendation and authorized the
alignment of Dex with the Communications Group on the terms described above
either as part of a transaction entered into by U S WEST and AirTouch in May
1997 pursuant to which AirTouch would acquire the Media Group's domestic
wireless business on terms different than the terms of the AirTouch Transaction
(the "Original AirTouch Transaction") or in a stand-alone transaction in the
event that the Original AirTouch Transaction was not consummated. In approving
the alignment of Dex with the Communications Group, the U S WEST Board concluded
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<PAGE>
that such transaction would be fair to and in the best interests of U S WEST and
the holders of Communications Stock and Media Stock.
As a consequence of changes to the Internal Revenue Code of 1986, as amended
(the "Code"), that were enacted into law on August 5, 1997, the Original
AirTouch Transaction was terminated and, as a result, the alignment of Dex with
the Communications Group did not occur as part of that transaction. Following
such termination, U S WEST continued to pursue the alignment of Dex with the
Communications Group in a stand-alone transaction. In addition, members of U S
WEST's management continued to explore the possibility of a separation of the
Communications Group and the Media Group. In furtherance of this effort, U S
WEST retained Bain & Company, Inc. ("Bain") in May 1997 to assess U S WEST's
overall strategy as part of its annual strategic review to be held in the fall
of 1997. Bain was asked to address three broad issues: (i) the likelihood of
technological convergence of telecommunications companies and cable companies;
(ii) the impact of principal industry trends on the businesses of the
Communications Group and the Media Group; and (iii) whether the Targeted Stock
structure was still a viable structure for U S WEST to execute its strategy in
view of changes in the industry. As a result of Bain's analysis and further
investigations by U S WEST's management, the strategic advantages of a
separation of the Communications Group and the Media Group became apparent and
management of U S WEST determined to actively pursue the Separation.
In a series of meetings held by Messrs. McCormick, Russ and Glinsky with
each member of the U S WEST Board in September 1997, the merits of a separation
of the Communications Group and the Media Group were discussed. These
discussions were followed by meetings of the U S WEST Board on October 1-3, 1997
and October 25, 1997, at which the Separation was proposed and reviewed.
At the October 1-3 meeting, U S WEST's management reported its
recommendation that U S WEST proceed with the Separation and that the Dex
Alignment be included as part of the Separation. In addition to the U S WEST
directors, the October 1-3 meeting was attended by Messrs. Lillis, Trujillo,
Russ, Glinsky, and other senior executives of U S WEST, the Communications Group
and the Media Group. Representatives of Lazard Freres and SBC Warburg Dillon
Read, U S WEST's financial advisors, Weil, Gotshal & Manges LLP, U S WEST's
legal advisor, as well as Bain, were also present for portions of the meeting.
At the meeting, Mr. Trujillo reviewed the Communications Group's operations,
financial performance, projected growth, technological advances and strategic
growth plan as well as the regulatory and competitive factors affecting the
Communications Group's business and growth strategy. Mr. Lillis next presented
the Media Group's financial performance, international and domestic operations,
regulatory environment, competitive and technological challenges and growth
strategy.
Following these presentations, representatives of Bain gave a presentation
as to the evolution of U S WEST's strategy since 1992 and discussed Bain's view
that, while the Targeted Stock structure had achieved its objectives up until
that time, because of changes in the regulatory framework, technological
developments and consolidation within each of the telecommunications industry
and the cable industry, the Separation was necessary in order to permit the
Communications Group and the Media Group to more effectively execute their
strategies, compete in the marketplace and operate their businesses in a manner
that maximizes stockholder value. Bain's representatives noted that, because of
the Targeted Stock structure, the Communications Group and the Media Group were
already operating as distinct businesses with separate management structures, as
a result of which a separation of the Communications Group and the Media Group
could be accomplished with relative ease. Bain's representatives also reviewed
the growing number of business conflicts and limitations arising from the common
ownership of the Communications Group and the Media Group by U S WEST and the
benefits of including the Dex Alignment as part of the Separation.
Representatives of Bain next reviewed the possible alternative strategic options
for the Communications Group and the Media Group, including (i) continuing the
current Targeted Stock structure and possible ways of avoiding conflicts in
connection with such structure and (ii) recombining the Communications Stock and
the Media Stock into a single class of
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<PAGE>
common stock of U S WEST and thereby eliminating the Targeted Stock structure.
Such representatives also discussed the relative degree to which each of these
alternatives would effectively address the recent changes in technology, the
industry and the regulatory environment, and presented Bain's conclusion that
the Separation would be the alternative that would most effectively address the
strategic objectives of the Communications Group and the Media Group. A
representative of Bain then summarized the conclusions of Bain's analysis of
each of the principal issues analyzed by Bain as described above. Bain concluded
that because of technological changes and the passage of the Telecommunications
Act, the telecommunications and cable industries were diverging and that the
telecommunications and cable industries would not converge as originally
anticipated by U S WEST at the time it formulated its 1992 strategy. In
addition, it was Bain's view that any attempt at convergence could be
detrimental to the interests of the Communications Group and the Media Group.
Bain also determined that, as a result of changes in the competitive
marketplace, the Communications Group and the Media Group would realize few
synergies in the future and would require different and, in certain
circumstances, competing partners. It was Bain's finding that the current
Targeted Stock structure of U S WEST would not provide the Communications Group
and the Media Group with the flexibility to meet the challenges which would be
faced in the future as a result of changes in technology, regulation and the
industry.
Following Bain's presentation, representatives of Lazard Freres and SBC
Warburg Dillon Read gave a presentation as to the current market perception of
the Communications Group and the Media Group and the recent stock performance of
the Communications Stock and the Media Stock. In addition, these representatives
discussed the markets' reactions to other recent spin-offs involving large
corporations and noted that spin-offs have generally received a favorable
response from the financial markets and have generated greater focus on
individual business units. Representatives of Lazard Freres and SBC Warburg
Dillon Read also discussed the anticipated benefits of the proposed separation
of the Communications Group and the Media Group to holders of the Communications
Stock and Media Stock, including increased operating flexibility, the
elimination of complexities associated with Targeted Stocks and a clarification
of each group's strategy.
At the October 1-3 meeting, the U S WEST Board considered a number of other
issues relating to the Separation in detail, including: (i) the structure by
which the Separation would occur; (ii) the fact that the Separation would be
tax-free to U S WEST and its stockholders; (iii) the credit implications of the
Separation, and in particular the credit ratings which would be assigned to New
U S WEST and MediaOne by rating agencies following the Separation; (iv) the
ability of U S WEST to allocate certain of its indebtedness between the two
companies and the costs associated therewith; (v) the long-range plans of the
Communications Group and the Media Group, and in particular the ability of New U
S WEST and MediaOne to finance their respective operating and capital
requirements following the Separation; (vi) the potential value impact of the
Separation on the trading prices of the New U S WEST Common Stock and the
MediaOne Common Stock, including value impacts associated with (a) the
clarification of corporate strategies and elimination of potential conflicts,
(b) a potential increase in the cash flow multiple at which the MediaOne Common
Stock would trade as compared to the cash flow multiple at which the Media Stock
traded at that time and (c) a potential increase in the earnings multiple at
which the New U S WEST Common Stock would trade as compared to the earnings
multiple at which the Communications Stock traded at that time; (vii) the
financial impact of the Dex Alignment, which would remove from the Media Group
an asset that no longer fit with its strategy; and (viii) the accounting
treatment of the Dex Alignment as a transfer of interests by entities under
common control which, because of the historical earnings performance of Dex, was
expected to increase the earnings per share of New U S WEST as compared to the
historic earnings per share of the Communications Stock.
Following these various presentations and the consideration of the factors
described above, the U S WEST Board directed U S WEST's management to finalize
the structure of the Separation and determined to hold a special meeting on
October 25, 1997 to consider approval of the Separation.
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<PAGE>
At the October 25 meeting, the U S WEST Board met to consider approval of
the Separation. In addition to the U S WEST directors, the October 25 meeting
was attended by Messrs. Lillis, Trujillo, Russ and Glinsky, Frank H. Eichler,
Vice President of Public Policy and Regulatory Law and President of Corporate
Development of U S WEST, James T. Anderson, Vice President and Treasurer of U S
WEST, and other senior executives of U S WEST, the Communications Group and the
Media Group, as well as representatives of Lazard Freres and SBC Warburg Dillon
Read, U S WEST's financial advisors, and Weil, Gotshal & Manges LLP, U S WEST's
legal advisor. Also in attendance were representatives of Lehman Brothers Inc.
("Lehman") and Merrill Lynch & Co. ("Merrill"), U S WEST's financial advisors in
connection with the Refinancing (as defined herein). At the meeting, Mr. Eichler
made a presentation to the U S WEST Board as to the proposed structure of the
Separation, including the terms of the Dex Alignment and the Reorganization. Mr.
Eichler noted that the structure would be tax-free to U S WEST and its
stockholders. Mr. Eichler indicated that the structuring of the Separation as a
split-off of the Communications Group instead of a split-off of the Media Group
would minimize regulatory and other approvals required to consummate the
Separation. Mr. Eichler also reviewed the timing of the Separation and discussed
the principal agreements which would be required to implement the transaction.
Mr. Eichler noted that a transition team comprised of representatives of U S
WEST, the Communications Group and the Media Group would be formed to oversee
the implementation of the Separation and to ensure the fairness of the terms of
the transaction to both the Communications Group and the Media Group (the
"Transition Team"). Following this presentation, Mr. Anderson reviewed U S
WEST's debt portfolio and discussed the implications of a separation of the
Communications Group and the Media Group on U S WEST's public debt securities as
well as the credit-worthiness of the Communications Group and Media Group as
independent companies. In this regard, it was Mr. Anderson's view that the
Communications Group's credit rating would not be adversely affected by a
separation transaction and that the Media Group's credit rating would be in line
with its peers and would permit the Media Group to have access to the capital
markets to finance its capital requirements. In addition, Mr. Anderson reviewed
the anticipated costs and expenses of the Refinancing and the tax and accounting
treatment of such costs and expenses. Representatives of Lehman and Merrill were
available to answer questions from the directors regarding the Refinancing. Mr.
Glinsky described the anticipated accounting treatment of the Separation,
including the Dex Alignment, and noted that the assets to be contributed to New
U S WEST would be accounted for by New U S WEST at the Separation at the
historical values at which they were carried by U S WEST prior to the
Separation. A representative of Weil, Gotshal & Manges LLP reviewed certain
matters relating to directors' responsibilities and the legal process necessary
to consummate the various aspects of the Separation.
Representatives of Lazard Freres and SBC Warburg Dillon Read then presented
certain financial analyses regarding the Separation, including the Dex
Alignment, as described under "--Opinions of Financial Advisors." These
representatives indicated that Lazard Freres and SBC Warburg Dillon Read
expected to be in a position to render their respective opinions as to the
fairness of the Separation to the holders of Communications Stock and Media
Stock upon finalization of the specific terms of the Separation, including the
final allocation of assets, liabilities and expenses between New U S WEST and
MediaOne.
After reviewing and discussing the foregoing matters and acting in reliance
on the presentations made and the advice of Lazard Freres and SBC Warburg Dillon
Read that they expected to be able to render fairness opinions as described
herein, the U S WEST Board adopted resolutions determining that the Separation
was in the best interests of U S WEST and its stockholders and authorizing U S
WEST's management to take all actions necessary to implement the Separation. The
U S WEST Board also unanimously determined to recommend to holders of
Communications Stock and Media Stock that such holders approve the Separation at
the Annual Meeting. In addition to considering the various factors described
above, the U S WEST Board also considered and relied upon various other factors
in making this determination. The U S WEST Board placed principal reliance on
the conclusion
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CHAPTER 3: THE SEPARATION
<PAGE>
that the strategic objectives of the Communications Group and the Media Group
would be achieved through the Separation without significant adverse
consequences for MediaOne and New U S WEST and that, other than as a result of
the Dex Alignment, New U S WEST would have substantially the same assets and
liabilities as those currently attributed to the Communications Group and
MediaOne would have substantially the same assets and liabilities as those
currently attributed to the Media Group. In addition, the U S WEST Board relied
on the fact that the Communications Group and the Media Group currently operate
as distinct business units with separate management organizations and processes.
With respect to the Dex Alignment, the U S WEST Board considered that the Dex
Dividend, together with the refinancing of the Dex Indebtedness by New U S WEST,
would provide to holders of Media Stock the fair value of Dex. The U S WEST
Board also relied upon the fact that the Transition Team would supervise the
Separation process in order to ensure its fairness to U S WEST and its
stockholders.
The U S WEST Board considered the fact that a transaction such as the
Separation is currently contemplated and permitted by the U S WEST Restated
Certificate. The U S WEST Restated Certificate currently permits U S WEST to
effect a transaction in which the Communications Stock is redeemed for the stock
of a subsidiary holding all of the assets of the Communications Group. In
addition, the U S WEST Board is permitted under the U S WEST Restated
Certificate and management policies adopted by the U S WEST Board in connection
with the issuance of the Targeted Stocks to transfer assets such as Dex between
the Communications Group and the Media Group. The U S WEST Board also considered
the fact that the Separation would be submitted for approval not only by all of
U S WEST's common stockholders voting together as a single class in accordance
with their respective voting rights, but also by separate class votes of the
holders of the Communications Stock and Media Stock.
Following the October 25 meeting, the Transition Team, together with U S
WEST's financial, legal and accounting advisors, commenced the formulation of
the specific terms of the Separation and began the preparation of the Separation
Agreement and related agreements. The Transition Team is comprised of Mr.
Anderson, Vice President and Treasurer of U S WEST, Allan R. Spies, who will be
Executive Vice President and Chief Financial Officer of New U S WEST, Mark D.
Roellig, who will be Executive Vice President, General Counsel and Secretary of
New U S WEST, Mr. Eichler, who will be Executive Vice President, General Counsel
and Secretary of MediaOne, and Richard A. Post, who will be Executive Vice
President and Chief Financial Officer of MediaOne. As part of its efforts, the
Transition Team developed specific proposals to be presented to the U S WEST
Board with respect to allocations between New U S WEST and MediaOne of
employees, assets and liabilities of U S WEST not specifically associated with
either group and costs and expenses associated with the Separation.
The U S WEST Board held a meeting on February 6, 1998 to approve the
specific terms of the Separation proposed by the Transition Team and to approve
forms of the Separation Agreement and related agreements and the Charter
Amendments. In addition to the U S WEST directors, the February 6 meeting was
attended by Messrs. Lillis, Trujillo, Russ and Glinsky and by the members of the
Transition Team. Portions of the February 6 meeting were also attended by Lazard
Freres and SBC Warburg Dillon Read, U S WEST's financial advisors, and Weil,
Gotshal & Manges LLP, U S WEST's legal advisor.
At the meeting, Mr. Eichler summarized the proposed terms of the Separation
developed by the Transition Team, including the proposed allocation of certain
assets, liabilities and employees of U S WEST and certain costs and expenses
associated with the Separation. Mr. Eichler noted that the Transition Team was
comprised of an equal number of representatives of New U S WEST and MediaOne, as
well as a representative of U S WEST, and that it was the Transition Team's view
that the proposed terms of the Separation, including the above-mentioned
allocations, were fair to the Communications Group and the Media Group and the
holders of Communications Stock and Media Stock. Mr. Post, on behalf of the
Media Group, and Mr. Spies, on behalf of the Communications
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<PAGE>
Group, reported on the deliberations of the Transition Team regarding the
specific terms of the Separation, including the factors considered in finalizing
the allocation of assets, liabilities and employees and costs and expenses
between New U S WEST and MediaOne. Mr. Post and Mr. Spies noted that they were
satisfied that each group's interests had been properly represented in
connection with the transition process. Mr. Eichler noted that an independent
actuarial firm had been retained in connection with the allocation of U S WEST's
pension assets. Mr. Glinsky reviewed the pro forma financial statements of New U
S WEST and MediaOne which give effect to the terms of the Separation. A
representative of Weil, Gotshal & Manges LLP reviewed certain corporate
governance matters relating to the consideration of the terms of the Separation,
including the procedures adopted by the Transition Team to ensure the fairness
of the transition process to both groups.
Following these discussions, representatives of Lazard Freres and SBC
Warburg Dillon Read delivered the written opinions of Lazard Freres and SBC
Warburg Dillon Read to the U S WEST Board as to the fairness, from a financial
point of view, to the holders of Communications Stock and the holders of Media
Stock of (i) the Separation Consideration to be received by the holders of
Communications Stock and the holders of Media Stock in the Separation
Transactions pursuant to the Separation Agreement and (ii) the allocation of the
Dex Indebtedness to New U S WEST and the distribution of the Dex Dividend in
connection with the Dex Alignment pursuant to the Separation Agreement. Copies
of the fairness opinions of Lazard Freres and SBC Warburg Dillon Read, which set
forth the full text of such opinions as well as the assumptions made, matters
considered and limits of the review undertaken, are attached as Annex B-1 and
B-2, respectively, to this Proxy Statement and are incorporated herein by
reference. For further information about such fairness opinions and the related
presentations made by representatives of Lazard Freres and SBC Warburg Dillon
Read to the U S WEST Board, see "--Opinions of Financial Advisors."
Following these presentations, the U S WEST Board approved the terms of the
Separation presented to them at the meeting and approved the forms of the
Separation Agreement and related agreements and the forms of the Charter
Amendments. In addition, the U S WEST Board determined to recommend to holders
of Communications Stock and Media Stock that such holders approve and adopt the
Charter Amendments at the Annual Meeting.
REASONS FOR THE SEPARATION
GENERAL
Since November 1, 1995, when U S WEST implemented its Targeted Stock
structure, the Communications Group and the Media Group have actively managed
their respective businesses in light of the rapidly changing environment of the
telecommunications and cable television industries. These rapid changes have
produced a competitive environment that is materially different from the one
that existed in November 1995. Owing to developments in technology, the
marketplace and the regulatory arena, the potential for both operating and
financial synergies between the Communications Group and the Media Group has
been greatly reduced. Though U S WEST and many of its competitors had originally
expected a gradual convergence of the telecommunications and cable television
industries, each industry has evolved in a manner that has made convergence
unlikely. For a period of time that is likely to extend well into the future,
the strategies of telephone and cable television companies will be based on
distinct technologies, separate sets of customers and radically different
regulatory environments. These strategies therefore will evolve separately. U S
WEST believes that these different strategies will be most effectively executed
by, and that the Communications Group and the Media Group will be able to more
effectively compete as, independent companies that are not constrained by the
conflicts inherent in a single corporate structure. For reasons that are related
to these developments, U S WEST also believes that Dex will fit better
strategically with New U S WEST than with MediaOne.
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<PAGE>
TECHNOLOGICAL DEVELOPMENTS
The telephone and cable television industries have historically been
separate businesses, driven by separate technologies. Telephone companies have
used twisted copper wires to provide communications services, while cable
companies have used coaxial cable to provide video services. When U S WEST
developed its 1993 strategy, U S WEST believed that the technology for cable and
telephone lines would evolve into a common architecture that would be
cost-effective to construct and install and enable customers, through a common
"pipe," to obtain integrated telephone, data and video services. U S WEST's
strategy and its implementation of the Targeted Stock structure were in large
measure based on this belief. See "--Background of the Separation."
Though customers may eventually still obtain integrated services over a
single pipe, it is no longer apparent that the common pipe will be the result of
an evolution by telephone and cable companies toward a common architecture.
Several developments, including the following, have made it more likely that
telephone and cable companies will continue to provide their respective services
over different types of transmission facilities: (i) greater than anticipated
costs and time needed to deploy technology alternatives in their networks for
video services by telephone companies; (ii) greater than anticipated time to
implement new technologies by cable companies in providing telephone services
over cable networks; and (iii) development of xDSL technology which has the
potential for telephone companies to use twisted-pair copper wires to provide
voice, data and video services.
These technological developments have made it unlikely that the
Communications Group and the Media Group will find the network-related synergies
that had been anticipated in 1993. Using separate technologies and separate
transmission facilities, they are developing networks that, instead of
converging, remain quite different from one another. As a result, there is
little prospect of cost synergies in the operation of these networks within a
single corporate structure. Nor is there any foreseeable prospect that the two
networks will produce common product sets, or product sets that are similar
enough to make common branding advantageous.
DEVELOPMENTS IN THE MARKETPLACE
While, since 1993, U S WEST and certain of its competitors have pursued a
strategy involving a common broadband architecture, the broader communications,
data and video industries have begun strategies that differ from what U S WEST
and other industry participants had anticipated in 1993. The explosive growth of
the data market over the past two years, accompanied by the widespread use of
the Internet and the WorldWide Web, requires the telephone and cable industries
to modify their strategies for serving this market. Instead of focusing on a
common broadband architecture, both industries are aggressively trying to win
the race for high-speed access to the home, and, within each geographic market,
there is a race between the telephone and cable companies to prevail in the data
market and provide integrated telephone, data and video services. In this
environment, U S WEST believes that a competitive advantage will not be obtained
from expensive and time-consuming efforts to build a common broadband
architecture. Rather, competitive advantage will be driven by a different
paradigm that places a premium on speed, flexibility and time to market. Using
different technologies, and therefore different industry strategies, the
Communications Group and the Media Group are each participating in this
competition for the data market.
In the absence of an evolution to a common network architecture, telephone
and cable companies are continuing to serve different sets of customers and to
offer separate and distinct sets of products and services. While cable companies
remain focused primarily on providing hybrid fiber-coax broadband services,
telephone companies serve customers ubiquitously through the use of twisted
copper wires. As a result, U S WEST must divide its focus between two distinct
and competing means of providing integrated telephone, data and video services,
with few marketing or operational synergies to be had within a single corporate
structure. U S WEST believes that the Communications Group and
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the Media Group would be better focused on these separate businesses if they
could pursue them as independent companies.
In the new competitive environment of the telephone and cable industries, U
S WEST also believes that both telephone companies and cable companies will find
it necessary to partner with industry peers in order to provide standardized
products and achieve economies of scale. In the cable industry, for example,
there are ten different cable modem standards (the device that connects a
computer to the cable network and the protocols that allow a computer to
communicate with other computers). However, cable standards are under discussion
by cable industry participants. The same is true with xDSL technology for the
telephone industry. The telephone companies and cable companies are in
competition with each other to create common standards for the unique
technologies being deployed, and to win the race to provide integrated
telephone, data and video services to the home. Industry participants are
beginning to cooperate in partnerships--first within their own industry (cable
companies with cable companies, telephone companies with telephone companies)
and then with other industry participants such as computer companies, equipment
companies and content companies--to create the scale and scope necessary to
bring new products to market. The Communications Group will need to work with
others to develop standards and purchasing scale for interconnection systems and
xDSL, for long distance access, and for the development of business customer
applications and solutions development. The Media Group will need to work with
others to develop standards and purchasing scale for networks and operating
systems which support data and telephone products over cable architectures. In
addition, the Media Group will need national partners for branding and content
syndicates in its cable business. Cable companies need to partner with other
cable companies and industry participants and telephone companies need to
partner, and are partnering, with other telephone and industry participants in
order to succeed. For the foreseeable future, these partnerships are not likely
to cross the lines between the telephone and cable industries.
As the Communications Group and the Media Group will need to form alliances
with different sets of partners, these partnerships are likely to conflict with
one another if the two groups exist within a single corporate structure. If the
Communications Group works with other local telephone companies to accelerate
data and video offerings, it will be accelerating the ability of local telephone
companies to compete with the Media Group. If, on the other hand, the Media
Group works with other participants in the cable industry, or with computer or
software companies, in order to accelerate the growth of its data business, it
will be helping the competitors of the Communications Group. So long as the
Communications Group and the Media Group remain in a single corporate structure,
the existence of these conflicts is likely to inhibit both Groups from entering
into useful and productive partnering arrangements.
The failure of the telephone and cable industries to converge has also
placed a handicap on the marketing positions of the Communications Group and the
Media Group. A key element in the competition between telephone companies and
cable companies is the strength and success of each industry's marketing
position. The marketing position of both telephone companies and cable companies
will require each to distinguish their products and services on the basis of
selection of technology, network reliability and customer service. Inherent
differences in these choices will create differing market positions.
REGULATORY DEVELOPMENTS
The Telecommunications Act and related FCC rules, as well as state
legislative and regulatory actions and court decisions, have resulted in a
regulatory environment substantially different from what U S WEST and other
industry participants had anticipated in 1993. Expecting the telephone and cable
industries to move toward convergence, U S WEST also expected that the
regulatory framework for both industries would converge. The Telecommunications
Act, however, has made it apparent that telephone companies and cable companies
will continue to be regulated differently for a long period of
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time. Unlike cable companies, telephone companies will continue to be subject to
strict regulations in terms of the services they can offer and the terms,
conditions and pricing structure under which these services can be provided.
A consequence of these separate regulatory frameworks is that the public
policy positions of telephone and cable companies are, and will continue to be,
different. Local telephone companies, including the Communications Group, favor
regulatory parity, such as requiring telephone and cable companies to contribute
to the Universal Service Fund. Cable companies are not currently required to
contribute to the Universal Service Fund and local telephone companies are
seeking to have cable companies contribute to such fund, thereby creating a
conflict between the groups. The cable companies are likely to support the
long-distance carriers in their efforts to "open" the local telephone companies'
networks to provide alternative providers with the ability to offer local
services through the resale of services of telephone companies such as the
Communications Group. These efforts could delay the entry of telephone companies
into the long-distance market, thereby creating a conflict between the groups.
The developing regulatory conflicts between the groups create difficulties
for U S WEST when it is called upon to support the public policy positions of
either the Communications Group or the Media Group. In some instances, full
support of the public policy position of one Group would jeopardize the public
policy position of the other. This limitation is of concern in an environment
where increasingly important regulatory matters are subject to continuous
change. As separate, independent companies, the Communications Group and the
Media Group would not be subject to this limitation.
DEX ALIGNMENT
Given the changes that have occurred in the telecommunications industry
since 1993, U S WEST believes that Dex will fit better strategically with New U
S WEST than with MediaOne. Since its acquisition of Continental in 1996, the
Media Group's domestic competitive strategy has focused primarily on domestic
broadband opportunities. Operating all of its cable properties under the name of
"MediaOne," the Media Group has sought to provide its highly clustered customers
with access to hybrid fiber-coax networks that offer an increasing range of
services. This strategic focus does not involve Dex. Since the passage of the
Telecommunications Act, the strategic focus of the Communications Group has
centered on the expansion of its service offerings beyond traditional telephone
services. Like other telephone companies, the Communications Group believes that
additional service offerings will be necessary to successfully counter the
competition that is expected to continue to develop from the passage of the
Telecommunications Act. With the inclusion of Dex, New U S WEST will be better
positioned to offer its customers a broader product offering as it faces
increasing competition in its service territory and manage its brand and
customer relationships more effectively. In addition, the value of the more
mature Dex business, which is similar in maturity to the businesses of the
Communications Group, is likely to be better reflected in the New U S WEST
Common Stock than it is in the Media Stock. From the perspective of MediaOne,
the Dex Alignment will permit MediaOne to have $3.9 billion less of debt, thus
allowing MediaOne to pursue its strategy with greater flexibility. In view of
these advantages, U S WEST believes that the alignment of Dex with New U S WEST
will better position strategic assets with competitive strategies. Finally, U S
WEST believes that the Dex Alignment will minimize regulatory constraints on the
consummation of the Separation and enable the Communications Group to meet
certain of its regulatory obligations following the Separation in a cost-
efficient manner.
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RECOMMENDATION OF THE BOARD OF DIRECTORS
THE U S WEST BOARD HAS DETERMINED THAT THE SEPARATION IS IN THE BEST
INTERESTS OF U S WEST AND ITS STOCKHOLDERS AND IS FAIR TO THE HOLDERS OF BOTH
THE COMMUNICATIONS STOCK AND THE MEDIA STOCK. THE U S WEST BOARD HAS UNANIMOUSLY
APPROVED THE SEPARATION AND RECOMMENDS THAT HOLDERS OF COMMUNICATIONS STOCK AND
MEDIA STOCK APPROVE THE SEPARATION.
OPINIONS OF FINANCIAL ADVISORS
Lazard Freres and SBC Warburg Dillon Read (the "U S WEST Financial
Advisors") have acted as financial advisors to U S WEST in connection with the
Separation. Each of Lazard Freres and SBC Warburg Dillon Read delivered its
written opinion to the U S WEST Board on February 6, 1998 (the "Lazard Freres
Opinion" and the "SBC Warburg Dillon Read Opinion," respectively, and,
collectively, the "Opinions"), to the effect that, as of such date, and based on
and subject to various considerations set forth in the Opinions, the (i)
Separation Consideration to be received by the holders of Communications Stock
and the holders of Media Stock in the Separation Transactions pursuant to the
terms of the Separation Agreement is fair, from a financial point of view, to
the holders of Communications Stock and the holders of Media Stock, respectively
and (ii) the allocation to New U S WEST of $3.9 billion of indebtedness
currently attributed to the Media Group and the distribution of the Dex Dividend
in connection with the Dex Alignment pursuant to the terms of the Separation
Agreement, is fair, from a financial point of view, to the holders of
Communications Stock and the holders of Media Stock, respectively. As used in
this section of the Proxy Statement, (i) the term "Separation Transactions"
means, collectively (x) the Dex Alignment, including the refinancing of the Dex
Indebtedness by New U S WEST and the distribution of the Dex Dividend to holders
of Media Stock, and (y) the Communications Redemption, and (ii) the term
"Separation Consideration to be received by the holders of Communications Stock
and the holders of Media Stock in the Separation Transactions" means (x) with
respect to holders of Communications Stock, the receipt of one share of New U S
WEST Common Stock for one share of Communications Stock pursuant to the
Communications Redemption and (y) with respect to the holders of Media Stock,
the receipt of the Dex Dividend and the retention of shares of MediaOne Common
Stock.
THE FULL TEXT OF THE LAZARD FRERES OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY LAZARD FRERES, IS ATTACHED HERETO AS ANNEX B-1. THE FULL
TEXT OF THE SBC WARBURG DILLON READ OPINION, WHICH SETS FORTH THE ASSUMPTIONS
MADE, GENERAL PROCEDURES FOLLOWED, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN BY SBC WARBURG DILLON READ, IS ATTACHED HERETO AS ANNEX B-2.
THE OPINIONS SHOULD BE READ CAREFULLY AND IN THEIR ENTIRETY BY THE HOLDERS OF
COMMUNICATIONS STOCK AND THE HOLDERS OF MEDIA STOCK. THE OPINIONS ARE LIMITED TO
THE FAIRNESS, FROM A FINANCIAL POINT OF VIEW, TO THE HOLDERS OF COMMUNICATIONS
STOCK AND MEDIA STOCK OF (I) THE SEPARATION CONSIDERATION TO BE RECEIVED BY THE
HOLDERS OF COMMUNICATIONS STOCK AND THE HOLDERS OF MEDIA STOCK IN THE SEPARATION
AND (II) THE ALLOCATION TO NEW U S WEST OF $3.9 BILLION OF INDEBTEDNESS
CURRENTLY ATTRIBUTED TO THE MEDIA GROUP AND THE DISTRIBUTION OF THE DEX DIVIDEND
IN CONNECTION WITH THE DEX ALIGNMENT, AND DO NOT ADDRESS THE MERITS OF THE
UNDERLYING DECISIONS OF U S WEST TO ENGAGE IN THE SEPARATION TRANSACTIONS AND
THE DEX ALIGNMENT, OR ANY OF THE TRANSACTIONS RELATED THERETO OR ANY OTHER
ASPECTS OF THE TRANSACTIONS CONTEMPLATED BY THE SEPARATION AGREEMENT, OR
CONSTITUTE A RECOMMENDATION TO ANY HOLDER OF COMMUNICATIONS STOCK OR MEDIA STOCK
AS TO HOW SUCH HOLDER SHOULD VOTE WITH RESPECT TO THE SEPARATION TRANSACTIONS,
OR THE TRANSACTIONS RELATED THERETO. THE OPINIONS ALSO DO NOT CONSTITUTE AN
OPINION OR IMPLY ANY CONCLUSION OF THE U S WEST FINANCIAL ADVISORS AS TO THE
LIKELY TRADING RANGE OF THE NEW U S WEST COMMON STOCK OR THE MEDIAONE COMMON
STOCK FOLLOWING CONSUMMATION OF THE SEPARATION OR THE PRICE FOR WHICH DEX WOULD
BE SOLD TO A THIRD PARTY PURCHASER. THE OPINIONS ARE NECESSARILY BASED ON
ECONOMIC, MONETARY, MARKET
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<PAGE>
AND OTHER CONDITIONS AS THEY WERE IN EFFECT ON, AND THE INFORMATION MADE
AVAILABLE AS OF, THE DATE OF THE OPINIONS. THE SUMMARY OF THE OPINIONS SET FORTH
IN THIS PROXY STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL
TEXT OF THE OPINIONS ATTACHED HERETO AS ANNEX B-1 AND ANNEX B-2.
The U S WEST Financial Advisors also provided a written presentation to the
U S WEST Board regarding the financial and comparative analyses performed in
connection with the preparation of the Opinions and discussed such analyses with
the U S WEST Board at its February 6, 1998 meeting.
In connection with rendering the Opinions, the U S WEST Financial Advisors,
among other things: (i) reviewed a draft of the Separation Agreement; (ii)
analyzed certain historical business and financial information relating to Dex,
the Communications Group, the Media Group and U S WEST, including the Annual
Reports to Stockholders and Annual Reports on Form 10-K of U S WEST for the five
years ended December 31, 1996; (iii) reviewed certain financial forecasts and
other data provided to the U S WEST Financial Advisors by U S WEST relating to
the business of Dex, the Communications Group, the Media Group and U S WEST (the
"Financial Forecasts"), including certain financial forecasts for MediaOne and
New U S WEST prepared by management of U S WEST; (iv) reviewed certain pro forma
financial statements for MediaOne and New U S WEST (the "Pro Forma Financial
Statements") prepared by management of U S WEST; (v) reviewed reported prices
and trading activities for the Communications Stock and the Media Stock; (vi)
reviewed the terms of the Communications Stock and the Media Stock as set forth
in the U S WEST Restated Certificate as in effect on the date of the Opinions;
(vii) reviewed a draft of this Proxy Statement in the form provided to them (the
"Draft Proxy Statement"); (viii) held discussions with members of the senior
management of Dex, the Communications Group, the Media Group and U S WEST with
respect to the businesses, prospects and strategic objectives of Dex, the
Communications Group, the Media Group and U S WEST and the expected impact of
the Reorganization, the Separation Transactions and the Refinancing on such
matters; and (ix) conducted such other financial studies, analyses and
investigations as the U S WEST Financial Advisors deemed appropriate.
The U S WEST Financial Advisors assumed and relied upon, without assuming
any responsibility for verification, the accuracy and completeness of all of the
financial and other information provided to, discussed with, or reviewed by or
for the U S WEST Financial Advisors, or publicly available for purposes of the
Opinions. In that regard, the U S WEST Financial Advisors assumed, with U S
WEST's consent, that the Financial Forecasts and the Pro Forma Financial
Statements had been reasonably prepared on a basis reflecting the best currently
available estimates and judgments of U S WEST, the Communications Group, the
Media Group, and relied on the Financial Forecasts and the Pro Forma Financial
Statements in rendering their Opinions. The U S WEST Financial Advisors neither
acted as appraisers nor made or obtained any independent evaluations or
appraisals of the assets or liabilities of Dex, the Media Group, the
Communications Group or U S WEST, nor did the U S WEST Financial Advisors
conduct a physical inspection of the properties and facilities of Dex, the
Communications Group, the Media Group or U S WEST. The U S WEST Financial
Advisors assumed that under generally accepted accounting principles following
the Separation the assets and liabilities of New U S WEST and MediaOne would be
reflected at U S WEST's historical book basis and that there would not be any
revaluations or the creation of goodwill or other intangible assets as a
consequence of the consummation of the Separation Transactions or the
transactions related thereto. The U S WEST Financial Advisors assumed that for
U.S. tax purposes no income or gain would be recognized by the holders of
Communications Stock, the holders of Media Stock, U S WEST, MediaOne, New U S
WEST or any subsidiaries of U S WEST, MediaOne or New U S WEST in connection
with the Separation Transactions, the Reorganization, the Refinancing or any
transactions related thereto. The U S WEST Financial Advisors assumed that the
Separation Transactions, the Reorganization, the Refinancing and the
transactions related thereto would be consummated in the manner set forth in the
Separation Agreement and that, in all respects material to their analysis, the
Refinancing would be completed on the terms reflected in the Pro Forma Financial
Statements and
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CHAPTER 3: THE SEPARATION
<PAGE>
that the aggregate costs and expenses related to the Separation Transactions,
the Reorganization, the Refinancing and the transactions relating thereto would
not exceed, in any respect material to their analysis, the amounts reflected in
the Pro Forma Financial Statements and, in all respects material to their
analysis, would be allocated between MediaOne and New U S WEST in the manner
reflected in the Pro Forma Financial Statements. In addition, the U S WEST
Financial Advisors assumed that the terms of the New U S WEST Common Stock, the
MediaOne Common Stock, the New U S WEST Restated Certificate, the MediaOne
Restated Certificate, the New U S WEST Rights Agreement and the MediaOne Rights
Agreement would not vary, in any respect material to their analysis, from the
descriptions thereof contained in the Draft Proxy Statement. The U S WEST
Financial Advisors also assumed that the consummation of the Separation
Transactions, the Reorganization, the Refinancing and the transactions relating
thereto would not result in any default or similar event under any instrument of
indebtedness (other than indebtedness of U S WEST to be repaid pursuant to the
Refinancing) or other contract of U S WEST or any of its subsidiaries that would
not be waived.
No limitations were imposed by U S WEST or the U S WEST Board with respect
to the investigations made or procedures followed by the U S WEST Financial
Advisors in rendering the Opinions, except that the U S WEST Financial Advisors
were not authorized by U S WEST or the U S WEST Board to solicit, nor did the U
S WEST Financial Advisors solicit, third-party indications of interest with
respect to a business combination or other extraordinary transaction involving
Dex, the Communications Group or the Media Group, or any of their respective
assets.
In connection with rendering the Opinions to the U S WEST Board, the U S
WEST Financial Advisors performed a variety of financial and comparative
analyses, the material portions of which are summarized below. As described
below, certain of the analyses were performed assuming, first, that the AirTouch
Transaction would be consummated substantially in the manner set forth in the
AirTouch Merger Agreement and assuming, second, that the AirTouch Transaction
would not be consummated. See "Chapter 6: Information About MediaOne--Business
of MediaOne--AirTouch Transaction." The summary of such analyses set forth below
does not purport to be a complete description of the analyses underlying the
Opinions or of the U S WEST Financial Advisors' presentation to the U S WEST
Board. In addition, the U S WEST Financial Advisors believe that their analyses
must be considered as a whole and that selecting portions of such analyses and
the factors considered therein, without considering all such analyses and
factors, could create an incomplete view of the analyses and the processes
underlying the Opinions. The preparation of a fairness opinion is a complex
process involving subjective judgments and is not necessarily susceptible to
partial analysis or summary description. Analyses and estimates of the values of
companies do not purport to be appraisals or necessarily reflect the prices at
which companies or their securities actually may be sold. The range of valuation
for any particular analysis should not be taken to be the view of the U S WEST
Financial Advisors of the actual value of the Communications Stock or the Media
Stock.
OVERVIEW OF ANALYSES OF THE SEPARATION TRANSACTIONS
DEX ALIGNMENT--VALUATION. The Financial Advisors analyzed the value being
attributed to Dex in connection with the Dex Alignment.
DISCOUNTED CASH FLOW ANALYSIS. Using a discounted cash flow analysis, the U
S WEST Financial Advisors calculated a range of value of Dex based on the
implied total net present value of the estimated future unlevered free cash
flows (defined as earnings before interest, taxes, depreciation and
amortization, minus unlevered cash taxes minus capital expenditures and changes
in working capital) that Dex could produce on a stand-alone basis. The U S WEST
Financial Advisors determined an implied total net present value reference range
for Dex based on the sum of (a) the discounted value (using various discount
rates ranging from 10.50% to 11.25%) of the estimated free cash flows of Dex for
the five year period of 1998 through 2002 based on the Financial Forecasts, plus
(b) the net present
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CHAPTER 3: THE SEPARATION
<PAGE>
value of the free cash flows of Dex after 2002 (using various perpetuity growth
rates ranging from 2.5% to 3.0%). This analysis resulted in an implied total net
present value reference range for Dex of approximately $4.7 billion to $5.4
billion.
LEVERAGE BUYOUT ANALYSIS. The U S WEST Financial Advisors also performed a
pro forma leveraged buyout analysis on Dex utilizing the Financial Forecasts and
arrived at a range of value of $4.5 billion to $4.75 billion, using EBITDA exit
multiples of 7.0x and 8.0x and assuming (i) $1.9 billion in senior debt and $2.0
billion in subordinated debt, at estimated market interest rates of 8.5% and
11.0%, respectively, (ii) 85% leverage and (iii) that no goodwill would be
created in any such transaction (in order to approximate the Dex Alignment).
Based on such analysis, the U S WEST Financial Advisors calculated internal
rates of return on equity ranging approximately from mid to high 20%.
DEX ALIGNMENT--IMPACT ON NEW U S WEST EPS AND CASH FLOW. The U S WEST
Financial Advisors calculated the pro forma effects of the Dex Alignment on the
New U S WEST earnings per share ("EPS") and cash flow, based on the Financial
Forecasts. The analysis indicated a potential EPS accretion of 10.7%, 12.4%,
13.5%, 14.7% and 14.8% for the years from 1998 through 2002, respectively. The U
S WEST Financial Advisors also calculated that based on the Financial Forecasts
the Dex Alignment could potentially increase New U S WEST's net cash flow
(defined as EBITDA minus taxes, capital expenditures and changes in working
capital) by $166 million, $198 million, $231 million, $261 million and $290
million for the years from 1998 through 2002, respectively. The U S WEST
Financial Advisors reported that, if the potential earnings accretion were to
become realized, New U S WEST's stock price, assuming a constant price to
earnings ("P/E") ratio, could increase accordingly.
DEX ALIGNMENT--IMPACT ON MEDIAONE EBITDA PER SHARE AND EPS. The U S WEST
Financial Advisors estimated the pro forma effects of the Dex Alignment on
MediaOne's EBITDA per Share and EPS based on Financial Forecasts. For such
analysis, the U S WEST Financial Advisors first assumed that (i) MediaOne would
continue to hold a 25.51% equity interest in TWE and (ii) the AirTouch
Transaction would be consummated. Based on such assumptions, the analysis
indicated a potential dilution in book EBITDA per share of (43.6%), (40.4%),
(37.0%), (32.9%) and (28.1%) for the years from 1998 through 2002, respectively.
The U S WEST Financial Advisors calculated, based on such assumptions, a
potential EPS dilution of (33.5%), (41.2%), (81.6%) and (73.5%) for the years
from 1998 through 2000, respectively, and for 2002. The U S WEST Financial
Advisors also calculated the pro forma effects of the Dex Alignment on
MediaOne's EBITDA per share and EPS, assuming that (i) MediaOne would continue
to hold a 25.51% equity interest in TWE and (ii) the AirTouch Transaction would
not be consummated. Based on such assumptions, the analysis indicated a
potential dilution in book EBITDA per share of (30.9%), (28.6%), (27.1%),
(25.0%) and (22.3%) for the years from 1998 through 2002, respectively. The U S
WEST Financial Advisors also calculated, based on such assumptions, a potential
EPS dilution of (39.7%), (56.3%), (209.8%) and (43.7%) for the years from 1998
though 2000, respectively, and for 2002. However, the U S WEST Financial
Advisors reported that the Dex Alignment would provide the following benefits to
MediaOne and MediaOne's stockholders: (a) based on the Financial Forecasts, the
Dex Alignment could potentially increase MediaOne's future EBITDA growth rates
(i) by 6.4%, 6.7%, 7.7% and 8.7% for the years from 1999 through 2002,
respectively, assuming the consummation of the AirTouch Transaction and (ii) by
3.9%, 2.3%, 3.3% and 4.3% for the years from 1999 and through 2002, assuming the
AirTouch Transaction was not consummated, (b) the transfer of $3.9 billion in
debt to the Communications Group would decrease MediaOne's interest charges and
enhance MediaOne's credit profile, thereby enhancing its access, liquidity and
pricing in the credit markets and (c) the holders of Media Stock would receive
$850 million of New U S WEST Common Stock.
SEPARATION--IMPACT ON COMMUNICATIONS STOCK PRICE. The U S WEST Financial
Advisors reviewed data regarding the P/E ratio of the Communications Stock and
the P/E ratio of an index of selected companies they deemed comparable or
otherwise relevant to their analysis (the "LEC Index") for the
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CHAPTER 3: THE SEPARATION
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thirty trading days ended October 22, 1997 (prior to the announcement of the
proposed Separation), using estimated earnings for 1997, and the thirty trading
days ended January 26, 1998, using estimated earnings for 1998. The LEC Index
included: Ameritech Corporation, BellSouth Corporation, SBC Communications,
Inc., Bell Atlantic Corporation and GTE Corporation. For the thirty trading days
ended October 22, 1997 and January 26, 1998, the Communication Group's P/E ratio
was 15.0x and 17.0x, respectively, while the LEC Index's P/E Ratio was 16.4x and
17.5x, respectively. The U S WEST Financial Advisors reported that, assuming New
U S WEST's P/E ratio following the Separation increases to more closely approach
that of its primary comparable companies, New U S WEST's trading price could
increase accordingly. Such potential increase would be in addition to the
potential stock price effect of the increase in EPS caused by the Dex Alignment.
See "--Dex Alignment--Impact on New U S WEST Group EPS and Cash Flow."
SEPARATION--IMPACT ON MEDIA STOCK PRICE. The U S WEST Financial Advisors
reviewed data regarding the cable asset value to estimated cable EBITDA ratio
(the "EBITDA Multiple") of (i) the Media Group, (ii) Cox Communications, Inc.
("Cox"), which the U S WEST Financial Advisors believed to be the Media Group's
closest peer and (iii) an index of comparable cable companies (including Cox)
(the "Cable Index"), in each case, for the thirty trading days ended October 22,
1997, using estimated EBITDA for 1997, and the thirty trading days ended January
26, 1998, using estimated EBITDA for 1998. The Cable Index included: Adelphia
Communications Corporation, Cablevision Systems Corporation, Comcast Corporation
("Comcast"), Cox, TCA Cable TV, Inc. and Tele-Communications, Inc. ("TCI"). For
the thirty trading days ended October 22, 1997 and January 26, 1998, the Media
Group's EBITDA Multiple was 7.8x and 9.2x, respectively, Cox's EBITDA Multiple
was 10.1x and 13.3x, respectively, and the Cable Index's EBITDA Multiple was
9.5x and 10.5x, respectively. The U S WEST Financial Advisors calculated that,
assuming MediaOne's EBITDA Multiple following the Separation were to more
closely approach its primary comparable, Cox, MediaOne's trading price could
increase accordingly.
SEPARATION--IMPACT ON CREDIT STATISTICS. The U S WEST Financial Advisors
estimated the effects of the Separation (including the Dex Alignment) on the
credit statistics of the Communications Group as a standalone entity based on
the Financial Forecasts. The analysis indicated that the Communication Group's
(i) pretax interest coverage ratio would be 4.3x, 4.2x and 4.6x for the years
1997 through 1999, respectively, (ii) FFO Interest Coverage (defined as net
income from continuing operations plus depreciation, amortization, deferred
income taxes, interest and other non-cash items divided by interest expense)
would be 6.2x, 6.1x and 6.7x, respectively and (iii) net cash flow to total debt
would be 26%, 29% and 35%, respectively. The U S WEST Financial Advisors
compared these statistics to Standard and Poor's Corporation's ("S&P's") rating
guidelines for telecommunications companies and concluded that, assuming the pro
forma ratios were achieved, based on the S&P rating guidelines New U S WEST
would likely have an S&P credit rating of A- following the Separation.
The U S WEST Financial Advisors estimated the effects of the Separation
(including the Dex Alignment) on the credit statistics of the Media Group based
on Financial Forecasts. Assuming the consummation of the AirTouch Transaction,
the analysis indicated that the Media Group's (i) EBITDA to interest ratio would
be 2.9x, 2.2x and 2.0x for the years 1997 through 1999, respectively, (ii) total
debt to EBITDA ratio would be 6.0x, 9.3x and 8.6x, respectively, (iii) Adjusted
Total Debt (defined as total debt adjusted for certain credits for certain debt
and preferred instruments) to EBITDA ratio would be 5.4x, 5.6x and 5.1x,
respectively, (iv) FFO Interest Coverage would be 4.0x, 2.4x and 3.1x,
respectively and (v) net cash flow to total debt would be 17%, 7% and 12%,
respectively. Assuming the AirTouch Transaction was not consummated, the
analysis indicated that the Media Group's (i) EBITDA to interest ratio would be
2.9x, 2.9x and 2.8x for the years 1997 through 1999, respectively, (ii) total
debt to EBITDA would be 6.0x, 6.4x and 5.9x, respectively, (iii) Adjusted Total
Debt to EBITDA ratio would be 5.4x, 5.0x and 4.7x, respectively, (iv) FFO
Interest Coverage would be 4.0x, 2.8x and 3.4x, respectively, and (v) net cash
flow total debt would be 17%, 9% and 14%, respectively. The U S WEST
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Financial Advisors compared these statistics to the credit statistics of the
following cable companies: Cox, Comcast, TCI and TWE (the "Cable Comparables"),
who had S&P ratings of A-, BBB-, BBB-and BBB-, respectively. The U S WEST
Financial Advisors reported that, based on financial results for the 12 months
ended September 30, 1997, (i) Cox's (a) EBITDA to interest ratio was 3.1x, (b)
total debt to EBITDA ratio was 5.4x, (c) FFO Interest Coverage was 3.7x and (d)
net cash flow to total debt was 16%; (ii) Comcast's (a) EBITDA to interest ratio
was 2.5x, (b) total debt to EBITDA ratio was 4.9x, (c) FFO Interest Coverage was
2.4x and (d) net cash flow to total debt was 12%; (iii) TCI's (a) EBITDA to
interest ratio was 2.4x, (b) total debt to EBITDA ratio was 5.6x, (c) FFO
Interest Coverage was 2.4x and (d) net cash flow to total debt was 9%; and (iv)
TWE's (a) EBITDA to interest ratio was 5.2x, (b) total debt to EBITDA ratio was
3.0x, (c) FFO Interest Coverage was 4.9x and (d) net cash flow to total debt was
25%. The U S WEST Financial Advisors also noted that Cox's and TWE's businesses
include significant non-cable assets and that TWE's rating is impacted by parent
company leverage. The U S WEST Financial Advisors concluded that, assuming the
pro forma ratios were achieved, based on S&P's rating guidelines and on the
ratings and ratios of the Cable Comparables, MediaOne would likely have an S&P
credit rating of at least BBB- following the Separation and should have access
to the institutional term credit markets with liquidity and pricing in line with
the Cable Comparables.
No company utilized as a comparison in the above analyses is identical to
either New U S WEST or MediaOne. In evaluating the companies comprising the LEC
Index, the Cable Index and the Cable Comparables, the U S WEST Financial
Advisors made judgments and assumptions with regard to industry performance,
general business, economic, market and financial conditions and other matters,
many of which are beyond the control of U S WEST, New U S WEST and MediaOne,
such as the impact of competition on U S WEST , New U S WEST and MediaOne and
their respective industries, industry growth and the absence of any material
adverse change in the financial condition and prospects of U S WEST, New U S
WEST or MediaOne or the industry, or in the financial markets in general.
The U S WEST Financial Advisors are internationally recognized investment
banking firms that regularly engage in the valuation of companies and their
securities in connection with mergers and acquisitions, negotiated
underwritings, competitive bids, secondary distributions of listed and unlisted
securities and corporate, estate and other purposes. U S WEST retained the U S
WEST Financial Advisors as financial advisors because of their reputation,
expertise in the valuation of companies and substantial experience in
transactions such as the Separation.
In addition to the financial advisory services referred to below, each of
the U S WEST Financial Advisors has from time to time provided investment
banking and related services to U S WEST for which such U S WEST Financial
Advisor has received customary fees. In the ordinary course of their business,
the U S WEST Financial Advisors or their respective affiliates may actively
trade the securities of the Communications Group and the Media Group for their
own account and for the accounts of their customers and, accordingly, at any
time may hold a long or short position in such securities.
U S WEST has entered into separate engagement letters with each of Lazard
Freres and SBC Warburg Dillon Read, each dated September 1, 1997, relating to
the services to be provided by Lazard Freres and SBC Warburg Dillon Read in
connection with the Separation and the transactions related thereto. Pursuant to
the engagement letters, U S WEST has agreed to pay each of Lazard Freres and SBC
Warburg Dillon Read a fee of up to $ in connection with the Separation
and the transactions related thereto, payable as follows: $ was paid to
each of Lazard Freres and SBC Warburg Dillon Read upon the signing of the
engagement letters, $ was paid to each of Lazard Freres and SBC Warburg
Dillon Read upon public announcement of the Separation, $ is payable to
each of Lazard Freres and SBC Warburg Dillon Read upon a vote of the holders of
Communications Stock and the Media Stock to approve the Separation and $
is payable to each of Lazard Freres and SBC Warburg Dillon Read upon
consummation of the Separation.
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U S WEST's Board of Directors was aware of this fee structure and took it into
account in considering the Opinions and in approving the Separation and the
transactions related thereto and contemplated thereby. U S WEST also agreed to
reimburse the U S WEST Financial Advisors for the reasonable fees and
disbursements of their respective counsel and for their reasonable expenses and
to indemnify the U S WEST Financial Advisors against certain liabilities,
including liabilities under the federal securities laws, arising in any manner
out of or in connection with their engagement.
ACCOUNTING TREATMENT
MediaOne will account for the Separation as a discontinuance of the
businesses comprising New U S WEST. The measurement date for discontinued
operations accounting purposes will be the date as of which U S WEST stockholder
approval, all necessary regulatory approvals and a favorable IRS Ruling are
obtained. On such date, MediaOne will recognize a gain on the distribution of
New U S WEST. Because the distribution is non pro-rata, as compared with the
businesses previously attributed to U S WEST's two classes of stockholders, it
will be accounted for at fair value. As of January 30, 1998, the gain (net of
Separation costs) totals approximately $23.6 billion.
This Proxy Statement includes unaudited pro forma condensed combined
financial statements of MediaOne which reflect the discontinuance of the
businesses of New U S WEST, the distribution of the New U S WEST Common Stock to
U S WEST's stockholders, the refinancing of the Dex Indebtedness by New U S
WEST, transfers of certain assets and liabilities of U S WEST to New U S WEST
and allocations of certain costs and expenses in connection with the Separation,
the Continental Acquisition and certain related transactions and the AirTouch
Transaction. See "Chapter 6: Information About MediaOne."
Following the Separation, New U S WEST will account for the assets of New U
S WEST at the historical values at which they were carried by U S WEST prior to
the Separation. This Proxy Statement includes historical and pro forma financial
information of New U S WEST which present New U S WEST's combined financial
position, results of operations and cash flows as if it were a separate entity
for all periods presented. In addition, the unaudited pro forma condensed
combined financial statements of New U S WEST included in this Proxy Statement
give effect to the refinancing of the Dex Indebtedness by New U S WEST and the
issuance of the Dex Dividend in connection with the Dex Alignment, transfers of
certain assets and liabilities of U S WEST to New U S WEST and allocations of
certain costs and expenses in connection with the Separation. See "Chapter 5:
Information About New U S WEST."
REGULATORY REQUIREMENTS
U S WEST has filed with the IRS a request for a private letter ruling
substantially to the effect that, among other things, the distribution of the
New U S WEST Common Stock to holders of Communications Stock and Media Stock and
certain aspects of the Reorganization will qualify as a tax-free split-off to U
S WEST and its stockholders under Section 355 and other Sections of the Code.
See "--Certain U.S. Federal Income Tax Consequences."
Consummation of the Separation will require numerous filings with the FCC
related to the transfer of various types of FCC licenses and authorizations held
by various subsidiaries and partnerships of U S WEST. All necessary applications
seeking FCC approval were filed in January 1998.
U S WEST is not aware of any material governmental approvals or actions that
may be required for consummation of the Separation other than as described
above. Should any other approval or actions be required, it is presently
contemplated that such approval or action would be sought. There can be no
assurance, however, that any such approval or action, if needed, could be
obtained and would not be conditioned in a manner that would cause U S WEST to
abandon or modify the terms of the Separation.
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INTEREST OF CERTAIN PERSONS IN THE SEPARATION
STOCK OWNERSHIP
Individuals who are directors or executive officers of U S WEST and the
individuals who will be directors or executive officers of MediaOne or New U S
WEST who currently own shares of Communications Stock and Media Stock will
receive shares of New U S WEST Common Stock and MediaOne Common Stock in
connection with the Separation in respect of the shares of Communications Stock
and Media Stock held by them. See "Chapter 8: The Annual Meeting and Certain
Other Matters-- Security Ownership of Certain Beneficial Owners and Management."
In addition, such individuals hold options to acquire shares of Communications
Stock and restricted shares of Communications Stock and options to acquire
shares of Media Stock and restricted shares of Media Stock. Such options and
restricted shares will become options to acquire shares of New U S WEST Common
Stock and MediaOne Common Stock and restricted shares of New U S WEST Common
Stock and/or MediaOne Common Stock pursuant to the arrangements described under
"--Employee Benefits and Compensation Matters."
For certain information concerning the management and executive compensation
arrangements of MediaOne and New U S WEST after the Separation, see "Chapter 6:
Information About MediaOne" and "Chapter 5: Information About New U S WEST."
SEVERANCE AGREEMENTS
U S WEST has maintained change of control severance agreements between it
and a number of its executive officers and has entered into such agreements (as
amended, the "Severance Agreements") with each of Messrs. McCormick, Russ and
Glinsky (the "Executives"), in order to encourage the continued service and
dedication of the Executives in the performance of their duties, notwithstanding
the possibility, threat or occurrence of a change of control of U S WEST.
Pursuant to the Severance Agreements, each Executive will be entitled to certain
benefits described below if a Change of Control (as defined in the Severance
Agreements) occurs and, within the three-year period following such Change of
Control, (i) such Executive's employment with U S WEST is terminated by U S WEST
other than for Cause (as defined in the Severance Agreements) or (ii) such
Executive resigns his employment with U S WEST for Good Reason (as defined in
the Severance Agreements).
The benefits to which each Executive will be entitled under the Severance
Agreements include: (i) payment of any accrued but unpaid salary; (ii) payment
of bonuses and grants under the short-term and long-term incentive plans of U S
WEST in which the Executive participates (calculated as if a change of control
has occurred under each such plan); (iii) payment of the grant value of the most
recent annual grants to the Executive under the long-term incentive plans of U S
WEST in which the Executive participates; and (iv) a payment equal to three
times the sum of (x) the Executive's annual base salary, (y) the Executive's
annual bonus under any short-term incentive plan of U S WEST in which the
Executive participates (calculated as if 100% of performance targets have been
achieved, unless the actual achievement percentage exceeds 100%, in which case
the actual performance level will apply) and (z) the grant value of the most
recent annual grants to the Executive under the long-term incentive plans of U S
WEST in which the Executive participates. In addition, pursuant to the Severance
Agreements: (i) if not already vested, each Executive will be deemed to be fully
vested under all of U S WEST's retirement plans, with the age and years of
service of each Executive increased by three years for purposes of determining
benefits thereunder; (ii) all unvested stock options held by each Executive will
vest and become fully exercisable; and (iii) each Executive will be entitled to
continued health care benefits on terms substantially similar to the retiree
health care benefits U S WEST would provide if the Executive were eligible for
retiree health care benefits immediately prior to the Change of Control, as well
as certain limited perquisites. Any benefits payable under the Severance
Agreements are required to be grossed-up to the extent an Executive would be
subject to an excise tax under
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CHAPTER 3: THE SEPARATION
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Section 4999 of the Code due to the receipt thereof. U S WEST does not believe
that any gross-up payments will be required under the Severance Agreements as a
result of the Separation.
Consummation of the Separation will constitute a Change of Control within
the meaning of the Severance Agreements and, under the terms of these
agreements, each Executive will be entitled to receive all of the benefits
described above following consummation of the Separation. It is estimated that
the incremental amounts which will be payable to Messrs. McCormick, Russ and
Glinsky under the Severance Agreements in excess of the amounts which would
otherwise be payable to them absent the Separation would be approximately
$ , $ and $ , respectively (calculated as of , 1998).
Following consummation of the Separation, New U S WEST and MediaOne will be
jointly and severally liable for U S WEST's obligations to the Executives under
their respective Severance Agreements.
In consideration for the foregoing, each of the Executives has agreed that,
for a period of one year from the Separation Time, in the case of Messrs. Russ
and Glinsky, or three years from the Separation Time, in the case of Mr.
McCormick, subject to continued performance by New U S WEST and MediaOne of
their obligations under the Severance Agreements, each Executive will not (a)
engage, directly or indirectly, whether as principal, agent, distributor,
representative, consultant, employee, partner, stockholder, limited partner or
other investor (other than an investment of not more than (i) two percent (2%)
of the stock or equity of any corporation the capital stock of which is publicly
traded or (ii) two percent (2%) of the ownership interest of any limited
partnership or other entity) or otherwise, within the United States of America,
in any business which is competitive with the business conducted by U S WEST
(or, following the Separation, New U S WEST and MediaOne), except as a member of
the board of directors of New U S WEST or MediaOne, (b) solicit or entice or
endeavor to solicit or entice away from U S WEST (or such successors) any person
who was an officer, employee or sales representative of U S WEST, either for his
own account or for any individual, firm or corporation, whether or not such
person would commit any breach of his contract of employment by reason of
leaving the service of U S WEST (or such successors), or employ, directly or
indirectly, any person who was an officer, employee or sales representative of U
S WEST or who by reason of such position at any time is or may be likely to be
in possession of any confidential information or trade secrets relating to the
businesses or products of U S WEST, or (c) solicit or entice or endeavor to
solicit or entice away from U S WEST (or such successors) any customer or
prospective customer of U S WEST (or such successors), either for the
Executive's own account or for any individual, firm or corporation. For certain
information regarding the current compensation of the Executives, see "Chapter
4: Other Matters to be Considered at the Annual Meeting--U S WEST Director and
Executive Officer Information."
STOCK EXCHANGE LISTINGS
The Communications Stock is currently listed and traded on the NYSE and the
PSE under the symbol "USW" and the Media Stock is currently listed and traded on
the NYSE and the PSE under the symbol "UMG". As a result of the Separation, the
Communications Stock will cease to be outstanding and will be delisted from the
NYSE and the PSE. Application will be made by New U S WEST to list the New U S
WEST Common Stock on the NYSE and the PSE under the symbol "USW" as of the
Separation Time. Following consummation of the Separation, the Media Stock
(which will thereafter represent MediaOne Common Stock) will continue to be
listed and traded on the NYSE and the PSE under the symbol "UMG."
DIVIDEND POLICY
If the Separation is completed, it is anticipated that New U S WEST will pay
dividends on the New U S WEST Common Stock initially at a quarterly rate of
$0.535 per share, which is the same
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CHAPTER 3: THE SEPARATION
<PAGE>
dividend currently paid on the Communications Stock. While the New U S WEST
Board is not expected to change this dividend policy, it has the right to do so
at any time.
Dividends are not currently paid on the Media Stock. If the Separation is
completed, it is anticipated that the MediaOne Board will continue this policy
for the foreseeable future and not declare dividends on the MediaOne Common
Stock. Instead, the MediaOne Board will retain future earnings, if any, of
MediaOne for the development of the businesses of MediaOne.
TREATMENT OF INDEBTEDNESS
As of September 30, 1997, U S WEST and its subsidiaries had outstanding
approximately $16.8 billion of indebtedness. Such indebtedness consists of
approximately $5.4 billion of indebtedness of U S WEST Communications (the
"Communications Indebtedness"), $2.7 billion of indebtedness of Continental (the
"Continental Indebtedness") and approximately $8.7 billion of indebtedness
issued or guaranteed by U S WEST (the "U S WEST Indebtedness"). The U S WEST
Indebtedness includes approximately $7.0 billion of indebtedness of U S WEST
Capital Funding, Inc., (the "Capital Funding Indebtedness"), $1.1 billion of
Trust Securities issued by U S WEST Financing I and U S WEST Financing II,
Delaware business trusts, and $600 million of other indebtedness issued or
guaranteed by U S WEST. Of the U S WEST Indebtedness, approximately $8.4 billion
has historically been allocated to and is reflected on the balance sheet of the
Media Group (including the Dex Indebtedness) and approximately $300 million has
historically been allocated to and is reflected on the balance sheet of the
Communications Group. All of the $300 million of U S WEST Indebtedness allocated
to the Communications Group is Capital Funding Indebtedness.
Following the Separation, all of the Communications Indebtedness will
continue to be obligations of U S WEST Communications, which will be a
subsidiary of New U S WEST, and all of the Continental Indebtedness will
continue to be obligations of Continental, which will be a subsidiary of
MediaOne, subject to the rights of holders of certain private notes included in
the Continental Indebtedness to require repayment of such notes following
consummation of the Separation.
In connection with the Separation, New U S WEST and MediaOne will seek to
refinance all $8.7 billion of the U S WEST Indebtedness through a combination of
tender offers, prepayments, defeasance, consent solicitations and/or exchange
offers (the "Refinancing"). In the Refinancing, a subsidiary of New U S WEST
will refinance approximately $4.2 billion of U S WEST Indebtedness, consisting
of the $300 million of U S WEST Indebtedness currently allocated to the
Communications Group plus the Dex Indebtedness (the "New U S WEST
Indebtedness"), and a subsidiary of MediaOne will refinance approximately $4.5
billion of U S WEST Indebtedness, consisting of the U S WEST Indebtedness
currently allocated to the Media Group other than the Dex Indebtedness (the
"MediaOne Indebtedness"). New U S WEST and MediaOne will also incur additional
indebtedness to fund certain of the costs and expenses of the Separation,
including any differences between the market and face value of the U S WEST
Indebtedness. The New U S WEST Indebtedness will be comprised of commercial
paper, as well as medium and long-term securities which may be issued by a
subsidiary of New U S WEST in exchange for a portion of the U S WEST
Indebtedness. The MediaOne Indebtedness will be comprised of commercial paper
and commercial bank debt, as well as medium and long-term securities which may
be issued by a subsidiary of MediaOne in exchange for a portion of the U S WEST
Indebtedness. In addition, a portion of the U S WEST Indebtedness that is not
refinanced may be retained by MediaOne as part of the MediaOne Indebtedness.
As a result of the Separation, New U S WEST and its subsidiaries will have
approximately $9.8 billion of indebtedness, consisting of the New U S WEST
Indebtedness, the Communications Indebtedness and indebtedness incurred by New U
S WEST to fund the costs and expenses of the Separation, and MediaOne and its
subsidiaries will have approximately $7.3 billion of indebtedness, consisting of
the MediaOne Indebtedness, the Continental Indebtedness and indebtedness
incurred by MediaOne to
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CHAPTER 3: THE SEPARATION
<PAGE>
fund the costs and expenses of the Separation. Following consummation of the
Separation, it is expected that New U S WEST and MediaOne will issue medium and
long-term securities to refinance a portion of the short-term commercial paper
and bank debt incurred by them in connection with the Refinancing. U S WEST,
after consultation with and based upon the advice of its financial advisors,
believes that New U S WEST and MediaOne have sufficient financing capability to
accomplish the refinancings described above.
As a result of the AirTouch Transaction, U S WEST's indebtedness will be
reduced by $1.4 billion. This $1.4 billion of indebtedness is currently included
in the U S WEST Indebtedness allocated to the Media Group. If the AirTouch
Transaction is consummated prior to the consummation of the Separation, the U S
WEST Indebtedness (and the amount of U S WEST Indebtedness to be refinanced by
MediaOne in connection with the Separation) will be reduced by approximately
$1.4 billion. If the AirTouch Transaction is consummated after the Separation is
consummated, the MediaOne Indebtedness will be reduced by approximately $1.4
billion. Following the Separation, MediaOne intends to monetize the AirTouch
securities it receives in the AirTouch Transaction and use a portion of the
proceeds of such monetization to further reduce the MediaOne Indebtedness. See
"Chapter 6: Information About MediaOne--Business of MediaOne--AirTouch
Transaction."
TREATMENT OF PREFERRED STOCK
Currently, U S WEST has three series of preferred stock outstanding: Series
C Cumulative Redeemable Preferred Stock ("U S WEST Series C Preferred Stock"),
Series D Convertible Preferred Stock ("U S WEST Series D Preferred Stock") and
Series E Convertible Preferred Stock ("U S WEST Series E Preferred Stock" and,
together with the Series C Preferred Stock and Series D Preferred Stock, the "U
S WEST Preferred Stock"). In connection with the Separation, each class of U S
WEST Preferred Stock will remain outstanding and, following consummation of the
Separation, will represent shares of preferred stock of MediaOne. After the
Separation Time, the U S WEST Series D Preferred Stock and the U S WEST Series E
Preferred Stock will continue to be convertible into shares of Media Stock
(which will thereafter constitute shares of MediaOne Common Stock) pursuant to
the terms thereof. Holders of U S WEST Preferred Stock will not be entitled to
receive the Dex Dividend. In connection with the Separation, the conversion rate
of the U S WEST Series D Preferred Stock will be appropriately adjusted by
MediaOne pursuant to the terms of the U S WEST Series D Preferred Stock to
reflect the fact that holders of U S WEST Series D Preferred Stock will not
receive the Dex Dividend. No such adjustments will be required to the terms of
the U S WEST Series C Preferred Stock or the U S WEST Series E Preferred Stock.
Currently, there are 50,000 shares of U S WEST Series C Preferred Stock
outstanding, 20 million shares of U S WEST Series D Preferred Stock outstanding
and 994,082 shares of U S WEST Series E Preferred Stock outstanding. The U S
WEST Series C Preferred Stock, U S WEST Series D Preferred Stock and U S WEST
Series E Preferred Stock are referred to herein after the Separation as
"MediaOne Series C Preferred Stock", "MediaOne Series D Preferred Stock" and
"MediaOne Series E Preferred Stock", respectively. For a description of the
terms of the MediaOne Series C Preferred Stock, MediaOne Series D Preferred
Stock and MediaOne Series E Preferred Stock, see "Chapter 7: Capital
Stock--MediaOne Capital Stock." For a discussion of the treatment of the
outstanding Trust Securities of U S WEST Financing I and U S WEST Financing II,
see "--Treatment of Indebtedness."
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of New U S WEST Common Stock received by holders of
Communications Stock and Media Stock in the Separation will be freely
transferable, except that shares of New U S WEST Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of U S WEST prior to the Separation may be resold by them only
in transactions permitted by the resale provisions of Rule 145 promulgated under
the Securities Act (or Rule 144 in
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<PAGE>
the case of such persons who become affiliates of New U S WEST) or as otherwise
permitted under the Securities Act. Persons who may be deemed to be affiliates
of U S WEST are generally defined as individuals or entities that control, are
controlled by, or are under common control with, U S WEST and include certain
executive officers and directors of U S WEST.
CERTAIN U.S. FEDERAL INCOME TAX CONSEQUENCES
The Separation is conditioned upon receipt by U S WEST of the IRS Ruling
substantially to the effect that, among other things, the distribution by U S
WEST of the New U S WEST Common Stock to the holders of Communications Stock and
Media Stock (the "Distribution") will qualify as a tax-free split-off to U S
WEST and its stockholders under Section 355 of the Code. The following is a
summary of the material federal income tax consequences to U S WEST and U S WEST
stockholders expected to result from the Distribution:
/ / A U S WEST stockholder will not recognize any income, gain or loss as a
result of the Distribution, except, as described below, in connection
with the receipt by a holder of Media Stock of cash instead of
fractional shares of New U S WEST.
/ / A holder of Media Stock will apportion the tax basis for such holder's
Media Stock on which New U S WEST Common Stock is distributed between
the Media Stock and the New U S WEST Common Stock received in the
Distribution (including any fractional shares of the New U S WEST Common
Stock deemed received) in proportion to the relative fair market values
of such Media Stock and New U S WEST Common Stock on the Separation
Date.
/ / The tax basis of the shares of New U S WEST Common Stock received by a
holder of Communications Stock in redemption of the Communications Stock
held by such holder will be the same as the basis of such Communications
Stock on the Separation Date.
/ / The holding period for the New U S WEST Common Stock received by a
holder of Media Stock in the Distribution will include the period during
which such holder held the Media Stock on which New U S WEST Common
Stock is distributed, provided that such Media Stock is held as a
capital asset by such holder on the Separation Date.
/ / The holding period for the New U S WEST Common Stock received by a
holder of Communications Stock in the Distribution will include the
period during which such holder held the Communications Stock redeemed,
provided that such Communications Stock is held as a capital asset by
such holder on the Separation Date.
/ / A holder of Media Stock who receives cash instead of fractional shares
will be treated as if such holder received a fractional share of New U S
WEST Common Stock as part of the Distribution and then such fractional
share was redeemed by New U S WEST. Accordingly, such stockholder will
recognize gain or loss equal to the difference between the cash so
received and the portion of the tax basis in New U S WEST Common Stock
that is allocable to such fractional share, which gain or loss will be
capital gain or loss, provided that such fractional share was held as a
capital asset at the time of the Distribution.
/ / U S WEST will not recognize any income, gain or loss as a result of the
Distribution.
Current Treasury regulations require each U S WEST stockholder who receives
New U S WEST Common Stock pursuant to the Distribution to attach to his or her
federal income tax return for the year in which the Distribution occurs a
detailed statement setting forth such data as may be appropriate in order to
show the applicability of Section 355 of the Code to the Distribution. U S WEST
will provide the appropriate information to each stockholder of record as of the
Separation Date.
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THE SUMMARY OF U.S. FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR
GENERAL INFORMATION ONLY AND MAY NOT BE APPLICABLE TO STOCKHOLDERS WHO RECEIVED
THEIR SHARES OF COMMUNICATIONS STOCK OR MEDIA STOCK THROUGH THE EXERCISE OF AN
EMPLOYEE STOCK OPTION OR OTHERWISE AS COMPENSATION OR WHO ARE NOT CITIZENS OR
RESIDENTS OF THE UNITED STATES OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT
UNDER THE CODE. ALL STOCKHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN TAX LAWS.
EMPLOYEE BENEFITS AND COMPENSATION MATTERS
U S WEST STOCK OPTIONS AND OTHER AWARDS
Stock options, restricted stock and phantom stock awards (collectively,
"Stock Awards") with respect to Communications Stock ("Communications Stock
Awards") and Media Stock ("Media Stock Awards") currently are outstanding under
the U S WEST 1994 Stock Plan, the U S WEST Media Group 1996 Stock Plan, the U S
WEST Media Group 1997 Stock Plan and the U S WEST Communications Group 1997
Stock Plan (the "U S WEST Stock Plans"). These Stock Awards will be adjusted or
substituted as a result of the Separation. The treatment of Stock Awards that
are outstanding prior to the Separation is designed to preserve, as a general
matter, the economic value of each award. Under the U S WEST Stock Plans, in the
event of any consolidation, combination, liquidation, reorganization,
recapitalization, stock dividend, stock split, split-up, spin-off, combination
of shares or exchange of shares, the Human Resources Committee of the U S WEST
Board may make such adjustments in the stock subject to awards under the plan as
such committee deems appropriate. Pursuant to that provision, Stock Awards
granted under the U S WEST Stock Plans will be adjusted or substituted to
reflect the Separation, including the Dex Dividend.
ADJUSTMENTS TO MEDIA STOCK AWARDS
Stock options for Media Stock, whether held by those individuals who will
become employees of MediaOne or New U S WEST, will continue to remain
outstanding as stock options for MediaOne Common Stock following the Separation,
except that the number of shares subject to and the exercise price of such stock
options will be adjusted to reflect the fact that holders of such stock options
will not receive the Dex Dividend. Option holders who will continue employment
with New U S WEST will not forfeit the options as a result of their termination
of employment with U S WEST in connection with the Separation as long as they
are employed by New U S WEST.
Restricted Media Stock held by those individuals who will become employees
of MediaOne will remain outstanding as restricted MediaOne Common Stock. In
addition, such individuals will receive the Dex Dividend payable with respect to
such restricted Media Stock in unrestricted shares of New U S WEST Common Stock.
Restricted Media Stock held by those individuals who will become employees of
New U S WEST will be replaced immediately prior to the Separation with
substitute restricted Communications Stock having a value equal to 1.0645 of the
value of the Media Stock replaced. Each such share of restricted Communications
Stock will then be replaced with a share of restricted New U S WEST Common Stock
in the Separation.
Phantom stock units for Media Stock held by those individuals who will
become employees of MediaOne will continue as phantom stock units for MediaOne
Common Stock after the Separation, except that the number of shares of MediaOne
Common Stock reflected in such phantom stock units will be increased by the
value of the Dex Dividend. Phantom stock units for Media Stock held by those
individuals who will become employees of New U S WEST will be replaced
immediately prior to the Separation with substitute phantom stock units for
Communications Stock based on the market value at
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CHAPTER 3: THE SEPARATION
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such time. Each such phantom unit for Communications Stock will then be replaced
with a phantom unit for New U S WEST Common Stock in the Separation.
Except as described above, all of the terms and conditions of the Media
Awards, including the restrictions on option exercisability and expiration dates
and vesting of restricted stock, will remain in effect following the Separation.
As of , 1998, there were outstanding approximately million
shares of Media Stock subject to options and approximately million shares of
restricted Media Stock, of which approximately million options and
million restricted shares were held by individuals who will become employees of
New U S WEST.
TREATMENT OF COMMUNICATIONS STOCK AWARDS
Stock options for Communications Stock, whether held by those individuals
who will become employees of New U S WEST or MediaOne, will be replaced with
substitute options in respect of New U S WEST Common Stock under the 1998 New U
S WEST Stock Plan discussed below under "--New U S WEST Compensation Plans."
Option holders who will continue employment with MediaOne will not forfeit the
options as a result of the fact that they are not employed by New U S WEST
following the Separation so long as they are employed by MediaOne.
Restricted Communications Stock held by those individuals who will become
employees of New U S WEST will be replaced with substitute restricted New U S
WEST Common Stock. Restricted Communications Stock held by those individuals who
will become employees of MediaOne will be replaced immediately prior to the
Separation with substitute restricted Media Stock having a value equal to 1.0645
of the value of the Communications Stock replaced. Each such share of restricted
Media Stock will remain outstanding following the Separation as a share of
restricted MediaOne Common Stock. In addition, such holders will receive the Dex
Dividend in respect of such shares of restricted Media Stock in unrestricted
shares of New U S WEST Common Stock.
Phantom stock units for Communications Stock held by those individuals who
will become employees of New U S WEST will be replaced with substitute phantom
stock units for New U S WEST Common Stock. Phantom stock units for
Communications Stock held by those individuals who will become employees of
MediaOne will be converted immediately prior to the Separation into phantom
stock units for Media Stock based on the market value at such time. Such phantom
stock units will continue as phantom stock units for MediaOne Common Stock after
the Separation, except that the number of shares of MediaOne Common Stock
reflected in such phantom stock units will be increased by the value of the Dex
Dividend.
Except as described above, each substitute New U S WEST Common Stock option
and restricted share of New U S WEST Common Stock issued will have the same
terms and conditions, exercise price, vesting and restrictions as the
Communications Stock Awards which it replaces.
As of , 1998, there were approximately million shares of
Communications Stock subject to stock options and approximately million
shares of restricted Communications Stock, of which approximately million
options and million restricted shares were held by individuals who will
become employees of MediaOne.
TREATMENT OF STOCK AWARDS HELD BY OTHER INDIVIDUALS
At , 1998, approximately Communications Stock options,
Media Stock options, shares of restricted Communications Stock and
shares of restricted Media Stock were held by certain executive officers
who will not continue their employment either with New U S WEST or MediaOne.
These stock options and restricted stock will be adjusted or substituted as
described above (treating such individuals as employees of New U S WEST for this
purpose) and will
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CHAPTER 3: THE SEPARATION
<PAGE>
become fully vested and exercisable under the terms of such executives'
severance agreements. See "--Interest of Certain Persons in the Separation."
NEW U S WEST COMPENSATION PLANS
Effective prior to the Separation, New U S WEST will adopt the 1998 U S WEST
Stock Plan (the "1998 New U S WEST Stock Plan"), under which New U S WEST may
grant to its employees awards in the form of stock options, stock appreciation
rights and restricted stock, as well as substitute stock options and restricted
stock awards. The 1998 New U S WEST Stock Plan will be administered by the Human
Resources Committee of the New U S WEST Board (the "New U S WEST Human Resources
Committee"), and is designed to enable New U S WEST to retain key employees and
to directly link their incentives to the performance of New U S WEST Common
Stock. The 1998 New U S WEST Stock Plan will be substantially similar to the
current U S WEST Stock Plans. For a more complete description of the 1998 New U
S WEST Stock Plan, see "Chapter 4: Other Matters to be Considered at the Annual
Meeting--Proposal to Approve the 1998 New U S WEST Stock Plan." The text of the
1998 New U S WEST Stock Plan is set forth in full in Annex C.
Effective prior to the Separation, New U S WEST will adopt the U S WEST
Long-Term Incentive Plan (the "New U S WEST LTIP"). The New U S WEST LTIP is
intended to provide key executives of New U S WEST with incentive compensation
based upon the sum of regular cash dividends, if any, paid on New U S WEST
Common Stock, and the achievement of pre-established, objective performance
goals. Eligibility under this plan will be limited to executives and key
employees of New U S WEST selected by the New U S WEST Human Resources
Committee. The New U S WEST LTIP will be substantially similar to the current U
S WEST Long-Term Incentive Plan. For a more complete description of the New U S
WEST LTIP, see "Chapter 4: Other Matters to be Considered at the Annual
Meeting--Proposal to Approve the New U S WEST Long-Term Incentive Plan." The
text of the New U S WEST LTIP is set forth in full in Annex D.
Effective prior to the Separation, New U S WEST will adopt the U S WEST
Executive Short-Term Incentive Plan (the "New U S WEST ESTIP" and, together with
the 1998 New U S WEST Stock Plan and the New U S WEST LTIP, the "New U S WEST
Compensation Plans"). Under the New U S WEST ESTIP, New U S WEST may provide
certain officers of New U S WEST with the opportunity to earn annual cash awards
based upon the accomplishment of corporate objectives and individual
contributions to business results. Eligibility under this plan will be limited
to the Chief Executive Officer of New U S WEST and any individuals employed by
New U S WEST at the end of any calendar year who appear in the Summary
Compensation Table of New U S WEST's Annual Proxy Statement to Stockholders for
that year. The New U S WEST ESTIP will be substantially similar to the current U
S WEST Executive Short-Term Incentive Plan. For a more complete description of
the New U S WEST ESTIP, see "Chapter 4: Other Matters to be Considered at the
Annual Meeting--Proposal to Approve the New U S WEST Executive Short-Term
Incentive Plan." The text of the New U S WEST ESTIP is set forth in full in
Annex E.
Approval of the New U S WEST Compensation Plans is being sought to establish
New U S WEST's ability to deduct, for federal income tax purposes, compensation
paid pursuant to the exercise of stock options and in respect of other stock
awards. Under Section 162(m) of the Code, stockholder approval of
performance-based compensation plans is necessary to qualify for the
performance-based compensation exception to the limitation on a company's
ability to deduct compensation paid to certain specified individuals in excess
of $1 million.
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TREATMENT OF U S WEST SAVINGS PLAN/ESOP
The U S WEST Savings Plan/ESOP (the "Savings Plan/ESOP"), which covers
eligible employees of U S WEST and its subsidiaries, is a tax-qualified profit
sharing, stock bonus and 401(k) plan with an employee stock ownership plan
("ESOP") component.
Effective as of the Separation Date, sponsorship of the Savings Plan/ESOP
will be transferred to New U S WEST (the "New U S WEST Savings Plan/ESOP"),
which will thereafter cover eligible employees of New U S WEST. Effective as of
the Separation Date, MediaOne will adopt an additional plan (the "MediaOne
Savings Plan/ESOP") covering eligible employees of MediaOne, and existing
account balances of such MediaOne employees will be transferred from the Savings
Plan/ESOP to the MediaOne Savings Plan/ESOP. Shares of Communications Stock and
Media Stock owned by the Savings Plan/ESOP that have been allocated to the
accounts of participants in the MediaOne Savings Plan/ ESOP as of the Separation
Date will be transferred from the Savings Plan/ESOP to the MediaOne Savings
Plan/ESOP as shares of New U S WEST Common Stock and MediaOne Common Stock. The
proportion of MediaOne Common Stock to New U S WEST Common Stock that will be
transferred to participants' accounts in the MediaOne Savings Plan/ESOP may be
adjusted prior to such transfer so that the ESOP portion of the MediaOne Savings
Plan/ESOP (the "MediaOne ESOP") will hold a higher value of MediaOne Common
Stock than New U S WEST Common Stock. Shares of Communications Stock and Media
Stock owned by the Savings Plan/ESOP that have been allocated to accounts of
participants in the New U S WEST Savings Plan/ESOP as of the Separation Date
will become shares of New U S WEST Common Stock and MediaOne Common Stock in the
New U S WEST Savings Plan/ESOP. The proportion of New U S WEST Common Stock to
MediaOne Common Stock that will remain in the ESOP portion of the New U S WEST
Savings Plan/ESOP (the "New U S WEST ESOP") may be adjusted prior to the
transfer of participants' account balances to the MediaOne ESOP so that the New
U S WEST ESOP will hold a higher value of New U S WEST Common Stock than
MediaOne Common Stock.
The MediaOne ESOP, acting through an independent fiduciary, will, over the
two-year period beginning on the Separation Date, divest itself of all shares of
New U S WEST Common Stock. The New U S WEST ESOP, acting through an independent
fiduciary, will, over the two-year period beginning on the Separation Date,
divest itself of MediaOne Common Stock. Each of the MediaOne ESOP and the New U
S WEST ESOP shall use commercially reasonable efforts to sell the stock of the
company which does not sponsor the plan ("Non-employer Stock") in a manner that
would be least likely to affect stock price, including offering the other ESOP
the right to purchase such Non-employer Stock. Subject to fiduciary duties and
legal requirements, neither ESOP will sell in any one day more than 20% of the
average daily trading volume of Non-employer Stock, using the average daily
volume in the two months preceding such sale.
It is currently anticipated that, upon consummation of the Separation, the
New U S WEST ESOP will hold approximately 20 million shares of MediaOne Common
Stock, and that the MediaOne ESOP will hold approximately 480,000 shares of New
U S WEST Common Stock.
For a period of at least five years following the Separation Time,
participants in the New U S WEST Savings Plan/ESOP and the MediaOne Savings
Plan/ESOP will not be required to dispose of investments of Non-Employee Stock
not held in the ESOP.
Following the Separation Time, New U S WEST Employees who participate in the
New U S WEST Savings Plan/ESOP will receive their employer match in shares of
New U S WEST Common Stock and will not be permitted to make any further
investment in shares of MediaOne Common Stock, unless they elect to invest their
employee contributions in shares of MediaOne Common Stock through the Personal
Choice Retirement Account. Similarly, MediaOne Employees who participate in the
MediaOne Savings Plan/ESOP will receive their employee match in shares of
MediaOne Common Stock and will not be permitted to make any further investment
in shares of
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<PAGE>
New U S WEST Common Stock, unless they elect to invest their employee
contributions in shares of New U S WEST Common Stock through the Personal Choice
Retirement Account.
U S WEST PENSION PLAN
U S WEST currently maintains the U S WEST Pension Plan (the "U S WEST
Pension Plan"), a defined benefit pension plan that covers approximately 63,000
active employees and 56,000 former employees of U S WEST, including retirees.
Effective immediately prior to the Separation Time, New U S WEST will assume
sponsorship of the U S WEST Pension Plan (the "New U S WEST Pension Plan").
Effective as of the Separation Date, MediaOne will establish a new defined
benefit pension plan for eligible MediaOne Employees (the "MediaOne Pension
Plan"). In connection with the Separation, a portion of the existing assets of
the U S WEST Pension Plan will be transferred at fair value to the MediaOne
Pension Plan such that, immediately following consummation of the Separation,
the ratio of plan assets to plan liabilities, calculated on a projected benefit
obligations basis as determined by independent actuaries, will be the same for
the New U S WEST Pension Plan and the MediaOne Pension Plan. The U S WEST
Pension Plan currently has approximately $12 billion of assets. If the AirTouch
Transaction is consummated prior to the Separation Time, it is anticipated,
subject to final adjustments, that the MediaOne Pension Plan will receive
between $190 million and $210 million of such assets, with the remainder of such
assets being retained by the New U S WEST Pension Plan. If the AirTouch
Transaction is consummated after the Separation Time, it is anticipated, subject
to final adjustments, that the MediaOne Pension Plan will receive between $240
million and $270 million of such assets, with the remainder of such assets being
retained by the New U S WEST Pension Plan. It is currently anticipated that the
benefit expense and required cash contributions by New U S WEST to the New U S
WEST Pension Plan and by MediaOne to the MediaOne Pension Plan after the
Separation will be materially the same as the benefit expense and required cash
contributions of the Communications Group and the Media Group to the U S WEST
Pension Plan prior to the Separation.
Each of the New U S WEST Pension Plan and the MediaOne Pension Plan will
recognize all service rendered on or prior to the Separation Date with U S WEST
and its subsidiaries for all purposes of determining eligibility, vesting and
benefit accrual to the same extent such service was recognized under the U S
WEST Pension Plan immediately prior to the Separation Time.
RETIREE MEDICAL AND LIFE INSURANCE BENEFIT PLANS
U S WEST currently maintains an employee welfare benefit program that
includes retiree medical and life insurance benefits for its employees. Under
such program, U S WEST maintains three funded retiree medical and life insurance
benefits trusts. One of these trusts covers hourly employees only and will be
transferred in its entirety to New U S WEST. The remaining two trusts will be
transferred to New U S WEST and MediaOne will establish new trusts. A portion of
the assets of the U S WEST trusts will be transferred at fair value to the
MediaOne trusts based upon the same methodology used to transfer assets of the U
S WEST Pension Plan to the MediaOne Pension Plan, except that the liabilities
will be calculated by independent actuaries using the accumulated post
retirement benefit obligations basis. It is anticipated that approximately $5
million and $3 million, respectively, will be transferred by the U S WEST trusts
to the MediaOne trusts out of the total assets of $225 million and $600 million,
respectively, of the U S WEST trusts. Retiree medical and life insurance
benefits for retirees other than retirees who are employed by Continental and
MediaOne's other cable subsidiaries will become the responsibility of New U S
WEST after the Separation Time.
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<PAGE>
OTHER
Pursuant to the Employee Matters Agreement, the liability of U S WEST for
the employee benefits matters discussed above and certain other matters will be
allocated among New U S WEST and MediaOne. See "--Relationship Between New U S
WEST and MediaOne After the Separation-- Employee Matters Agreement." As a
result, each of New U S WEST and MediaOne will have certain direct and indirect
liabilities and obligations to certain individuals who were employed by U S WEST
prior to the Separation Date, including U S WEST retirees.
APPRAISAL RIGHTS
Stockholders of U S WEST will not be entitled to appraisal rights under
Delaware law in connection with the Separation.
RELATIONSHIP BETWEEN NEW U S WEST AND MEDIAONE AFTER THE SEPARATION
GENERAL
Following consummation of the Separation, New U S WEST and MediaOne will be
independent companies and neither will have any ownership interest in the other.
In connection with the Separation, New U S WEST and MediaOne and their
respective subsidiaries will enter into a series of agreements governing their
relationship subsequent to the Separation and providing for the allocation of
tax and certain other liabilities and obligations arising from periods prior to
the Separation. Copies of the forms of such agreements are filed as exhibits to
the New U S WEST Registration Statement. In addition, U S WEST intends to file
forms of such agreements as exhibits to a future filing by U S WEST under the
Exchange Act. See "Chapter 8: The Annual Meeting and Certain Other
Matters--Where You Can Find More Information." Set forth below is a description
of certain terms of such agreements.
SEPARATION AGREEMENT
U S WEST and New U S WEST will enter into the Separation Agreement providing
for, among other things, certain corporate transactions required to effect the
Reorganization, the Refinancing and the Separation and other arrangements
between New U S WEST and MediaOne subsequent to the Separation.
The Separation Agreement will provide for, among other things, assumptions
of liabilities and cross-indemnities designed to allocate generally, effective
as of the Separation Time, financial responsibility for the liabilities arising
out of or relating to the businesses of the Communications Group and Dex to New
U S WEST, and the businesses of the Media Group other than Dex to MediaOne. In
addition, the Separation Agreement will provide for the allocation generally of
other liabilities and obligations of U S WEST that are not specifically related
to any of U S WEST's businesses and for the costs and expenses associated with
the Separation.
The Separation Agreement will also provide for various agreements and
relationships between New U S WEST and MediaOne subsequent to the Separation,
including agreements with respect to records retention, cash collection,
cooperation with respect to governmental notices and filings and
confidentiality.
Pursuant to the Separation Agreement, all right, title and interest in the
name "U S WEST", whether alone or in combination with one or more words, will be
transferred to New U S WEST. Subject to certain exceptions, from and after the
Separation Time, MediaOne will no longer use the name "U S WEST" in the
operation of its businesses. In addition, MediaOne has agreed in the Separation
Agreement to cause each of its subsidiaries whose corporate name includes "U S
WEST" to change its corporate name to delete any reference therein to the name
"U S WEST."
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<PAGE>
TAX SHARING AGREEMENT
U S WEST and New U S WEST will enter into a tax sharing agreement (the "Tax
Sharing Agreement") that will govern the allocation between U S WEST and New U S
WEST of federal, state, local and foreign tax liabilities and related tax
matters such as the preparation and filing of tax returns and the conduct of
audits and other tax proceedings, for taxable periods before and after the
Separation Time.
In general, the Tax Sharing Agreement will provide that (i) New U S WEST
will be responsible for, and will indemnify U S WEST against, tax liabilities
relating to the Communications Group, for taxable periods ending on or prior to
the Separation Time, and (ii) MediaOne will be responsible for, and will
indemnify New U S WEST against, tax liabilities relating to the Media Group, for
taxable periods ending on or prior to the Separation Time.
In addition, New U S WEST will be liable for, and will indemnify U S WEST
against, all tax liabilities incurred by U S WEST and any of its subsidiaries as
a result of any event, action, or failure to act, wholly or partially within the
control of New U S WEST or any of its subsidiaries, including any event, action
or failure to act that results in a breach of any representation made to the IRS
in connection with the IRS Ruling, or any other event related to the acquisition
of New U S WEST Common Stock, resulting in taxes imposed on U S WEST and any of
its subsidiaries with respect to any action taken pursuant to the Separation and
the Reorganization. U S WEST will be liable for, and will indemnify New U S WEST
against, all tax liabilities incurred by New U S WEST and any of its
subsidiaries as a result of any event, action, or failure to act wholly or
partially within the control of U S WEST or any of its subsidiaries, including
any event, action or failure to act that results in a breach of any
representation made to the IRS in connection with the IRS Ruling, or any other
event related to the acquisition of New U S WEST Common Stock, resulting in
taxes imposed on New U S WEST and any of its subsidiaries with respect to any
action taken pursuant to the Separation and the Reorganization.
EMPLOYEE MATTERS AGREEMENT
New U S WEST and MediaOne will enter into an employee benefits agreement
(the "Employee Matters Agreement") providing for the allocation of retirement,
medical, disability and other employee and non-employee benefit and compensation
plans between New U S WEST and MediaOne. The Employee Matters Agreement will
provide for the treatment of certain benefit and compensation plans as described
under "--Employee Benefits and Compensation Matters."
Under the Employee Matters Agreement, current employees of the business to
be transferred to New U S WEST, and employees of U S WEST designated as
employees of the Communications Group, will become employees of New U S WEST and
its subsidiaries. Current employees of the businesses to be retained by
MediaOne, and employees of U S WEST designated as employees of the Media Group,
will be employees of MediaOne and its subsidiaries. Liabilities relating to
former employees who were actively employed by Continental (or its predecessors)
and MediaOne's other cable subsidiaries, and liabilities relating to any other
former employees of the Media Group who do not have a deferred benefit under the
U S WEST Pension Plan, the U S WEST Savings Plan/ESOP, the retiree medical plan
or the long-term disability plan (collectively, the "Deferred Benefit Plans"),
will be retained by MediaOne after the Separation. Liabilities relating to all
other former employees of U S WEST and its affiliates will be assumed by New U S
WEST, although MediaOne will reimburse New U S WEST for one-half of the benefit
or other employment related payments made from the general assets of New U S
WEST, if they are made to a former employee who terminated employment from U S
WEST between November 1, 1995 and the Separation Time and who has no deferred
benefit under the Deferred Benefit Plans after the Separation.
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CHAPTER 4: OTHER MATTERS TO BE CONSIDERED AT THE
ANNUAL MEETING
ELECTION OF DIRECTORS
At the Annual Meeting, stockholders will be asked to elect five directors to
the U S WEST Board. All of the directors to be elected are "Class I" directors
whose terms will expire in 2001. Unless otherwise instructed, proxies will be
voted for the election of the five nominees listed below. If a stockholder
returning a proxy does not wish shares to be voted for particular nominees, the
stockholder must so indicate in the space provided on the proxy card. If one or
more of the nominees becomes unavailable or unable to serve at the time of the
Annual Meeting, the shares to be voted for such nominee or nominees that are
represented by proxies will be voted for any substitute nominee or nominees
designated by the U S WEST Board or, if none, the size of the U S WEST Board
will be reduced. The U S WEST Board knows of no reason why any of the nominees
would be unavailable or unable to serve at the time of the Annual Meeting. THE U
S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" EACH OF THE NOMINEES LISTED
BELOW.
A brief listing of the principal occupations, other major affiliations and
ages of the five nominees for election as directors follows. Similar information
also follows for the remaining directors of U S WEST.
NOMINEES FOR ELECTION AS DIRECTORS IN CLASS I
(The term of this class of Directors expires at the 2001 Annual Meeting)
GRANT A. DOVE, Managing Partner of Technology Strategies and Alliances since
1992. Executive Vice President of Texas Instruments from 1982 to 1987. Director
of Control Systems International, Inc., Cooper Cameron Corporation, Forefront
Group, Inc., InterVoice, Inc., Mircoelectronics and Computer Technology
Corporation, and Netspeed, Inc. Director and Chairman of Optek Technology, Inc.
Director of U S WEST since 1988. Age 69.
ALLEN F. JACOBSON, retired. Chairman and Chief Executive Officer of
Minnesota Mining & Manufacturing Company from 1986 to 1991. Director of Deluxe
Corporation, Mobil Corporation, Potlatch Corporation, Sara Lee Corporation,
Silicon Graphics, Inc., and Valmont Industries, Inc. Director of U S WEST since
1983. Age 71.
CHARLES M. LILLIS, President and Chief Executive Officer of U S WEST Media
Group since 1995; Executive Vice President of U S WEST since 1987. Director of
Ascent Entertainment Group, Inc., and Supervalu, Inc. Age 56.
CHARLES P. RUSS, III, Executive Vice President, General Counsel and
Secretary of U S WEST since 1992; Executive Vice President for Human Resources
since 1995; Executive Vice President for Public Policy since 1997. Age 53.
LOUIS A. SIMPSON, President and Chief Executive Officer of GEICO Capital
Operations since 1993. Director of Chor, Inc., Potomac Electric Power Company,
Thompson PBE, Inc., and Western Asset Trust, Inc. Age [61].
DIRECTORS IN CLASS II
(The term of this class of Directors expires at the 1999 Annual Meeting)
PIERSON M. GRIEVE, retired. Chairman of the Board and Chief Executive
Officer of Ecolab, Inc. from 1983 through 1995. Director of Danka Business
Systems PLC, Norwest Corporation, and St. Paul Companies. Director of U S WEST
since 1990. Age 70.
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<PAGE>
GEORGE J. HARAD, Chairman of the Board of Boise Cascade Corporation since
1995; President and Chief Executive Officer since 1994; President and Chief
Operating Officer from 1991 to 1994. Director of Allendale Mutual Insurance
Company. Director of U S WEST since 1997. Age 53.
RICHARD D. MCCORMICK, Chairman of the Board since 1992; President and Chief
Executive Officer since 1991. Director of Norwest Corporation and UAL, Inc.
Director of U S WEST since 1986. Age 57.
MARILYN CARLSON NELSON, Vice Chair of Carlson Holdings, Inc, since 1991.
Director of Carlson Companies, Inc. and Exxon Corporation. Director of U S WEST
since 1993. Age 58.
SOLOMON D. TRUJILLO, President and Chief Executive Officer of U S WEST
Communications Group and Executive Vice President of U S WEST since 1995;
President and Chief Executive Officer of U S WEST Dex, Inc. from 1992 to 1995.
Director of BankAmerica Corporation and Dayton Hudson Corporation. Age 46.
DIRECTORS IN CLASS III
(The term of this class of Directors expires at the 2000 Annual Meeting)
ROBERT L. CRANDALL, Chairman of the Board, President and Chief Executive
Officer of AMR Corp. since 1985. Director of Halliburton Company and Sabre Group
Holdings, Inc. Director of U S WEST since 1997. Age 62.
ALLAN D. GILMOUR, retired. Vice Chairman of Ford Motor Co. from 1993 to
1995; Executive Vice President of Ford Motor Co. and President, Ford Automotive
Group, from 1990 to 1993. Director of The Dow Chemical Company, DTE Energy
Company, The Prudential Insurance Company of America, and Whirlpool Corporation.
Director U S WEST since 1992. Age 63.
FRANK POPOFF, Chairman of The Dow Chemical Company since 1992 and Chief
Executive Officer from 1987 to 1995. Director of American Express Company,
Chemical Financial Corporation, and United Technologies Corporation. Director of
U S WEST since 1993. Age 62.
JOHN "JACK" SLEVIN, Chairman of the Board of Comdisco, Inc. since 1996;
President and Chief Executive Officer since 1994; Executive Vice President and
Chief Operating Officer from 1993 to 1994. Age 61.
JERRY O. WILLIAMS, President and Chief Executive Officer of Grand Eagle
Companies, Inc. since 1992. Director of ECRM Inc. and Monotype Typography, Inc.
Director of U S WEST since 1988. Age 59.
Effective as of the Separation Time, Messr. Harad, Jacobson, McCormick,
Trujillo, Popoff and Williams and Ms. Nelson will resign as directors of U S
WEST and will become directors of New U S WEST. Messrs. Dove, Lillis, Russ,
Simpson, Grieve, Crandall, Gilmour and Slevin will continue as directors of
MediaOne following the Separation Time.
RATIFICATION OF ACCOUNTANTS
The U S WEST Board, upon recommendation of the Audit Committee of the U S
WEST Board, has appointed the firm of Arthur Andersen LLP, Certified Public
Accountants, as independent auditors to make an examination of the accounts of U
S WEST for calendar year 1998. THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS
VOTE "FOR" RATIFICATION OF THIS APPOINTMENT.
Representatives of Arthur Andersen LLP are expected to be present at the
Annual Meeting. They will have the opportunity to make a statement if they
desire, and will be available to respond to
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CHAPTER 4: OTHER MATTERS TO BE
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<PAGE>
questions. Following consummation of the Separation, Arthur Andersen LLP will
continue as independent auditors of MediaOne. The selection of New U S WEST's
auditors will be made after consummation of the Separation.
PROPOSAL TO APPROVE THE 1998 NEW U S WEST STOCK PLAN
Holders of Communications Stock and Media Stock are being asked to consider
and approve a related proposal to adopt the 1998 U S WEST Stock Plan to provide
for the granting by New U S WEST of stock awards in New U S WEST Common Stock
following the Separation.
Under the 1998 New U S WEST Stock Plan, grants of stock options and other
stock awards made after the Separation may be made with respect to New U S WEST
Common Stock in the same manner as currently permitted with respect to
Communications Stock. If the Separation is approved and implemented, outstanding
Communications Stock Awards previously granted under the Stock Plans will be
replaced with substitute awards in respect of New U S WEST Common Stock under
the 1998 New U S WEST Stock Plan. See "Chapter 3: The Separation--Employee
Benefits and Compensation Matters--Treatment of Communications Stock Awards."
DESCRIPTION OF 1998 NEW U S WEST STOCK PLAN
The 1998 New U S WEST Stock Plan is a stockholder-approved means of
affording eligible employees, executive officers, non-employee directors of New
U S WEST and certain outside advisors to New U S WEST with an opportunity to
acquire a proprietary interest in New U S WEST. Under the 1998 New U S WEST
Stock Plan, "eligible employee" is defined as any employee of New U S WEST or
its subsidiaries who is so employed on the date of the grant of an award. The
1998 New U S WEST Stock Plan provides for the grant of incentive stock options
and non-qualified stock options (with or without reload options), stock
appreciation rights ("SARs"), stock awards in the form of restricted stock or
grants of New U S WEST Common Stock, phantom units (and with respect to phantom
units and restricted stock awards, with or without dividend equivalent units),
or a combination thereof to eligible employees, eligible non-employees,
executive officers or outside directors of New U S WEST. The maximum aggregate
number of shares of New U S WEST Common Stock that may be granted in 1998 is
2,400,000 shares. The maximum aggregate number of shares of New U S WEST Common
Stock that may be granted in any other calendar year pursuant to the 1998 New U
S WEST Stock Plan is __ percent ( %) of the shares of New U S WEST Common Stock
outstanding on the first day of such calendar year. The maximum number of shares
of New U S WEST Common Stock for which awards may be granted to any individual
participant in any calendar year may not exceed five hundred thousand (500,000)
shares.
The 1998 New U S WEST Stock Plan will be administered by the New U S WEST
Human Resources Committee with respect to officers, executive officers and
outside directors and by the employee benefits committee (consisting of
employees appointed by the New U S WEST Human Resources Committee) (the "New U S
WEST Employee Benefits Committee") with respect to all other eligible employees
and eligible non-employees. For purposes of this description of the 1998 New U S
WEST Stock Plan, the term "New U S WEST Committee" shall mean the New U S WEST
Human Resources Committee or the New U S WEST Employee Benefits Committee or
their delegates, as applicable.
The New U S WEST Board shall have the right to amend, modify, suspend or
terminate the 1998 New U S WEST Stock Plan at any time, provided that, with
respect to Incentive Stock Options (as defined herein), no amendment will be
made that will (i) decrease the minimum option price in the case of any
Incentive Stock Option, or (ii) modify the provisions of the 1998 New U S WEST
Stock Plan with respect to Incentive Stock Options, unless such amendment is
made by or with the approval
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<PAGE>
of the stockholders or unless the New U S WEST Board receives an opinion of
counsel to New U S WEST that stockholder approval is not necessary with respect
to any modifications relating to Incentive Stock Options, and provided further
that no amendment will be made that will (i) increase the number of shares of
New U S WEST Common Stock that may be issued under the 1998 New U S WEST Stock
Plan, or (ii) permit the option price for any option to be less than fair market
value on the date such option is granted, unless such amendment is made by or
with the approval of stockholders. No amendment, modification, suspension or
termination of the 1998 New U S WEST Stock Plan will alter or impair any awards
previously granted under the 1998 New U S WEST Stock Plan, without the consent
of the holder thereof.
STOCK OPTIONS Options granted under the 1998 New U S WEST Stock Option Plan
may be either options that are intended to qualify for treatment as "incentive
stock options" under Section 422 of the Code ("Incentive Stock Options") or
options that do not so qualify ("Nonqualified Stock Options"). Incentive Stock
Options or Nonqualified Stock Options may be granted under the 1998 New U S WEST
Stock Plan to any person who is an eligible employee, officer or executive
officer of New U S WEST. In addition, Nonqualified Stock Options may be granted
under the 1998 New U S WEST Stock Plan to any person who is an eligible
non-employee of New U S WEST. The exercise price of Incentive Stock Options will
be at least the fair market value of a share of New U S WEST Common Stock on the
date of the grant (and not less than 110% of the fair market value in the case
of an Incentive Stock Option granted to an optionee owning 10% or more of New U
S WEST Common Stock). The exercise price of Nonqualified Stock Options will be
at least the fair market value of a share of New U S WEST Common Stock on the
date of the grant and may be granted with or without dividend equivalent rights;
provided, however, that with respect to Nonqualified Stock Options granted to
any executive officer, no dividend equivalent rights may be granted.
The term of an option may not exceed 10 years (or five years in the case of
an Incentive Stock Option granted to an optionee owning 10% or more of New U S
WEST Common Stock).
STOCK APPRECIATION RIGHTS The New U S WEST Committee may grant SARs to
eligible employees, officers, executive officers and eligible non-employees
either alone or in connection with an option granted pursuant to the 1998 New U
S WEST Stock Plan. An SAR granted in connection with an option may be exercised
only when the fair market value of the New U S WEST Common Stock exceeds the
option price of the related option. Such SAR entitles the participant to
surrender to New U S WEST unexercised, the related option, or any portion
thereof and to receive cash and/or shares of New U S WEST Common Stock having a
value equal to the excess of (i) the fair market value of one share of New U S
WEST Common Stock on the day of the surrender over (ii) the option price per
share of New U S WEST Common Stock multiplied by (iii) the number of shares of
New U S WEST Common Stock that may be exercised under the option. An SAR granted
singly shall entitle the participant to receive the excess of (i) the fair
market value of a share of New U S WEST Common Stock on the date of exercise
over (ii) the fair market value of a share of New U S WEST Common Stock on the
date of the grant of the SAR multiplied by (iii) the number of SARs exercised.
An SAR shall become a vested award upon (x) a participant becoming Disabled, or
(y) the death of a participant.
RESTRICTED STOCK The New U S WEST Committee may grant restricted stock to
eligible employees, eligible non-employees, officers and executive officers of
New U S WEST. No shares of restricted stock may be sold, transferred, assigned,
pledged, or otherwise encumbered or disposed of until the restrictions on such
shares have lapsed. The New U S WEST Committee will establish as to each award
of restricted stock the terms and conditions upon which the restrictions will
lapse, and, in its discretion, may accelerate the time at which such
restrictions lapse, or waive such restrictions.
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<PAGE>
Upon acceptance by a person of an award of restricted stock, subject to the
restrictions noted above, the person will have all the rights of a stockholder
with respect to such shares, including the right to vote such shares of
restricted stock and the right to receive all dividends paid on such restricted
stock. Certificates representing restricted stock will be held by New U S WEST
until the restrictions lapse.
PHANTOM UNITS The New U S WEST Committee may, in its sole discretion, grant
the right to earn phantom units to eligible employees, eligible non-employees,
officers and executive officers of New U S WEST. The New U S WEST Committee will
determine the criteria for the earning of phantom units. Upon satisfaction of
such criteria, a phantom unit will be deemed a "vested award," and, unless a
participant has elected to defer, shares of New U S WEST Common Stock
representing the phantom units will be distributed to the participant, unless
the New U S WEST Committee, with the consent of the participant, provides for
the payment of the phantom units in cash or partly in cash and partly in shares
of New U S WEST Common Stock equal to the value of the shares of New U S WEST
Common Stock which would otherwise be distributed to the participant.
ADJUSTMENT OF SHARES In the event there is any change in the New U S WEST
Common Stock by reason of any changes in the capital structure of New U S WEST,
the number or kind of shares or interests subject to an award and the per share
price or value thereof will be appropriately adjusted by the New U S WEST
Committee at the time of such event, provided that each participant's economic
position with respect to the award will not, as a result of such adjustment, be
worse than it had been immediately prior to such event.
CHANGE OF CONTROL The 1998 New U S WEST Stock Plan provides that in the
event of a change of control of New U S WEST (as defined in the 1998 New U S
WEST Stock Plan), all options and SARs will be fully exercisable as of the date
of the change of control and remain exercisable through their full term.
Restrictions applicable to outstanding awards of restricted stock will
immediately lapse and conditions applicable to phantom units will automatically
be deemed waived, and participants who receive such grants will become
immediately entitled to receipt of the New U S WEST Common Stock subject to such
grants, and the New U S WEST Committee, in its sole discretion, will have the
right to accelerate payment of any deferrals of vested phantom units.
FEDERAL INCOME TAX CONSEQUENCES
The statements in the following paragraphs of the principal federal income
tax consequences of awards granted under the 1998 New U S WEST Stock Plan are
based on statutory authority and judicial and administrative interpretations, as
of the date of this Proxy Statement, which are subject to change at any time
(possibly with retroactive effect). The law is technical and complex and the
discussion below represents only a general summary.
INCENTIVE STOCK OPTIONS. An employee who receives an Incentive Stock Option
pursuant to the 1998 New U S WEST Stock Plan does not recognize any taxable
income upon the grant of such option. Similarly, the exercise of an Incentive
Stock Option generally does not give rise to federal income tax to the employee,
provided that (i) the federal "alternative minimum tax," which depends on the
employee's particular tax situation, does not apply and (ii) the employee is
employed by New U S WEST from the date of grant of the option until three months
prior to the exercise thereof, except where such employment terminates by reason
of disability (where the three month period is extended to one year) or death
(where this requirement does not apply). If an employee exercises an Incentive
Stock Option after these requisite periods, the Incentive Stock Option will be
treated as a Nonqualified Stock Option and will be subject to the rules
described below under "--Non-Qualified Stock Options, Stock Appreciation Rights
and Phantom Units."
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If, after exercising an Incentive Stock Option, an employee disposes of the
shares so acquired more than two years from the date of grant and more than one
year from the date of transfer of the shares pursuant to the exercise of such
Incentive Stock Option (the "applicable holding period"), the employee generally
will recognize a capital gain or loss equal to the difference, if any, between
the amount received for the shares and the exercise price. If, however, an
employee does not hold the shares so acquired for the applicable holding
period--thereby making a "disqualifying disposition"--the employee would
recognize ordinary income equal to the excess of the fair market value of the
shares at the time the Incentive Stock Option was exercised over the exercise
price; the balance of any income received at the time of such disqualifying
disposition would be capital gain (provided the employee held such shares as a
capital asset at such time). If the disqualifying disposition is a sale or
exchange that would permit a loss to be recognized under the Code (were a loss
in fact to be realized), and the sales proceeds are less than the fair market
value of the shares on the date of exercise, the employee's ordinary income
therefrom would be limited to the gain (if any) realized on the sale.
An employee who exercises an Incentive Stock Option by delivering shares
previously acquired pursuant to the exercise of another Incentive Stock Option
before the expiration of their applicable holding period is treated as making a
"disqualifying disposition" of such shares. Upon the exercise of an Incentive
Stock Option with previously acquired shares after the applicable holding
period, it appears, despite some uncertainty, that the employee would not
recognize gain or loss with respect to such previously acquired shares.
NONQUALIFIED STOCK OPTIONS, STOCK APPRECIATION RIGHTS AND PHANTOM UNITS. An
individual who receives a grant of a Nonqualified Stock Option, an SAR, or a
phantom unit will not recognize any taxable income upon such grant. However, the
individual generally will recognize ordinary income upon exercise of a
Nonqualified Stock Option in an amount equal to the excess of the fair market
value of the shares at the time of exercise over the exercise price. Similarly,
upon the receipt of cash or shares pursuant to the exercise of an SAR, the
individual generally will recognize ordinary income in an amount equal to the
sum of the cash and the fair market value of the shares received; likewise, upon
the vesting of a phantom unit, the individual generally will recognize ordinary
income in an amount equal to the fair market value of the shares, plus cash, if
any, received.
As a result of Section 16(b) of the Exchange Act, under certain
circumstances, the timing of income recognition may be deferred (i.e., the
"Deferral Period") for any individual who is an officer or director of New U S
WEST or a beneficial owner of more than ten percent (10%) of any class of equity
securities of New U S WEST. Absent a Section 83(b) election (as described
below), recognition of income by the individual will be deferred until the
expiration of the Deferral Period, if any.
An individual who exercises a Nonqualified Stock Option by delivering New U
S WEST Common Stock to New U S WEST, other than New U S WEST Common Stock
previously acquired pursuant to the exercise of an Incentive Stock Option which
is treated as a "disqualifying disposition" as described above, will not
recognize gain or loss with respect to the exchange of such New U S WEST Common
Stock, even if the fair market value of the shares so delivered is different
from the individual's tax basis. The individual, however, will be taxed as
described above with respect to the exercise of the Nonqualified Stock Option as
if he or she had paid the exercise price in cash.
RESTRICTED STOCK. Absent a written election pursuant to Section 83(b) of
the Code filed with the IRS within 30 days after the date of transfer of such
shares (a "Section 83(b) election"), an individual who receives restricted stock
under the 1998 New U S WEST Stock Plan generally will recognize ordinary income
at the earlier of the time at which (i) the shares become transferable or (ii)
the restrictions that impose a substantial risk of forfeiture of such shares
lapse, in an amount equal to the excess of the fair market value (on such date)
of such shares over the consideration paid for such restricted stock, if any. If
a Section 83(b) election is made, the individual will recognize ordinary
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income, as of the transfer date, in an amount equal to the excess of the fair
market value of the shares as of that date over the price paid for such award,
if any.
CONSEQUENCES TO NEW U S WEST. New U S WEST will not be allowed a federal
income tax deduction upon the grant or exercise of an Incentive Stock Option or
the disposition, after the applicable holding period, of the shares acquired
upon exercise of an Incentive Stock Option. In the event of a disqualifying
disposition of shares acquired upon exercise of an Incentive Stock Option, New U
S WEST generally will be entitled to a deduction in an amount equal to the
ordinary income included by the employee, provided that such amount constitutes
an ordinary and necessary business expense to New U S WEST and is reasonable and
the limitations of Sections 280G and 162(m) of the Code (discussed below) do not
apply.
A federal income tax deduction generally will be allowed to New U S WEST in
an amount equal to the ordinary income included by the employee with respect to
his or her Nonqualified Stock Option, SAR, phantom unit, or restricted stock,
provided that such amount constitutes an ordinary and necessary business expense
to New U S WEST and is reasonable and the limitations of Sections 280G and
162(m) of the Code do not apply.
CHANGE OF CONTROL. In general, if the total amount of payments to an
individual that are contingent upon a "change of control" of New U S WEST (as
defined in Section 280G of the Code), including payments under the 1998 New U S
WEST Stock Plan that vest upon a "change of control," equals or exceeds three
times the individual's "base amount" (generally, such individual's average
annual compensation for the five calendar years preceding the change of
control), then, subject to certain exceptions, the payments may be treated as
"parachute payments" under the Code, in which case a portion of such payments
would be non-deductible to New U S WEST and the individual would be subject to a
20% excise tax on such portion of the payments.
CERTAIN LIMITATIONS ON DEDUCTIBILITY OF EXECUTIVE COMPENSATION. With
certain exceptions, Section 162(m) of the Code denies a deduction to publicly
held corporations for compensation paid to certain executive officers in excess
of $1 million per executive per taxable year. One such exception applies to
certain performance-based compensation provided that such compensation has been
approved by stockholders in a separate vote and certain other requirements are
met. New U S WEST believes that certain awards granted under the 1998 New U S
WEST Stock Plan should qualify for the performance-based compensation exception
to Section 162(m).
The foregoing summary of the 1998 New U S WEST Stock Plan is qualified in
its entirety by reference to the full proposed text of the 1998 New U S WEST
Stock Plan included in Annex C. The 1998 New U S WEST Stock Plan will become
effective at the Separation Time. This proposal is conditioned upon approval by
holders of Communications Stock and Media Stock of the Separation. If the
Separation is not approved by holders of Communications Stock and Media Stock or
implemented by the U S WEST Board, this proposal will not be implemented. The
approval of the Separation and this proposal by holders of Communications Stock
and Media Stock at the Annual Meeting will constitute approval of the 1998 New U
S WEST Stock Plan by stockholders of New U S WEST. THE U S WEST BOARD RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE 1998 NEW U S WEST STOCK PLAN.
PROPOSAL TO APPROVE THE NEW U S WEST LONG-TERM INCENTIVE PLAN
Holders of Communications Stock and Media Stock are being asked to consider
and approve a related proposal to adopt the New U S WEST LTIP.
The New U S WEST LTIP is intended to provide key executives of New U S WEST
with incentive compensation based upon the sum of regular cash dividends, if
any, paid on New U S WEST Common
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Stock, and the achievement of pre-established, objective performance goals.
Eligibility under the New U S WEST LTIP will be limited to executives and key
employees of New U S WEST selected by the New U S WEST Human Resources
Committee.
The New U S WEST LTIP includes three performance periods of three years that
conclude, respectively, on December 31 of 1998, 1999 and 2000. The New U S WEST
Human Resources Committee will assign Dividend Equivalent Units ("DEUs") to New
U S WEST LTIP participants with respect to each performance period that had been
assigned to such participant under the U S WEST Communications Group Long-Term
Incentive Plan. The New U S WEST Human Resources Committee may assign additional
DEUs on such other occasions as it may determine, the number of which will be
determined, based on New U S WEST's compensation strategy and philosophy at such
time. At the conclusion of each performance period, participants will be
entitled to receive a percentage of the product of their respective DEUs
multiplied by the aggregate value of dividends paid during the performance
period on one share of New U S WEST Common Stock. The percentage, which may not
exceed 150%, will be determined pursuant to a performance formula established by
the New U S WEST Human Resources Committee within 90 days of the commencement of
a performance period. The performance formula will be based on one or more of
New U S WEST's financial results, revenue, productivity and efficiency measures,
customer service, and employee and management satisfaction measures.
Payments, if any, following a performance period will be in the form of New
U S WEST Common Stock, and shall occur as soon as practicable following the
conclusion of the performance period. The number of shares issued for a
performance period will be determined by dividing the amount payable to a
participant for a performance period by the closing price of New U S WEST Common
Stock, averaged over a 20 trading day period commencing ten trading days prior
to the end of the performance period. Shares so paid may be restricted or
unrestricted, at the discretion of the New U S WEST Human Resources Committee. A
pool of 1,300,000 shares of New U S WEST Common Stock will be available for
issuance over the life of the New U S WEST LTIP, and the number of DEUs issued
to any participant for any performance period shall not exceed $500,000.
The foregoing summary of the New U S WEST LTIP is qualified in its entirety
by reference to the full text of the plan included in Annex D. The New U S WEST
LTIP will become effective at the Separation Time. This proposal is conditioned
upon approval by holders of Communications Stock and Media Stock of the
Separation. If the Separation is not approved by holders of Communications Stock
and Media Stock or implemented by the U S WEST Board, this proposal will not be
implemented. The approval of the Separation and this proposal by holders of
Communications Stock and Media Stock at the Annual Meeting will constitute
approval of the New U S WEST LTIP by stockholders of New U S WEST. THE U S WEST
BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" APPROVAL OF THE NEW U S WEST LTIP.
PROPOSAL TO APPROVE THE NEW U S WEST EXECUTIVE SHORT-TERM INCENTIVE PLAN
Holders of Communications Stock and Media Stock are being asked to consider
and approve a related proposal to adopt the New U S WEST ESTIP.
The New U S WEST ESTIP will provide certain officers of New U S WEST with
the opportunity to earn annual cash awards based upon the accomplishment of
corporate objectives and individual contributions to business results.
Eligibility under this plan will be limited to the Chief Executive Officer and
any individuals employed by New U S WEST at the end of any calendar year who
appear in the summary compensation table in New U S WEST's annual proxy
statement to stockholders for that year.
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Under this plan, participants will be eligible to receive equal shares of a
cash bonus pool, provided that the New U S WEST Human Resources Committee will
have the authority to reduce the share of any participant. The cash bonus pool
will be equal to one-quarter of one percent (0.25%) of cash provided by
operating activities of New U S WEST and its consolidated subsidiaries,
determined in accordance with the standards of the Financial Accounting
Standards Board, less any amount the New U S WEST Human Resources Committee
deems appropriate. In the event that the New U S WEST Human Resources Committee
elects to reduce the cash bonus pool to an amount that is less than 0.25% of
cash provided by operating activities, the amount by which the pool is reduced
may, at the New U S WEST Human Resources Committee's sole discretion, be added
to the cash bonus pool that is available for any subsequent year or years. In
determining the amount to be paid to a participant for any calendar year or
other applicable period, the New U S WEST Human Resources Committee will
consider a number of performance factors, including, but not limited to, New U S
WEST's net income and cash flow, quality indicators, and other operating and
strategic results. Any such reduction of a participant's share will not result
in an increase of another participant's share. Should a "change of control," as
that term is defined in the New U S WEST ESTIP, occur, the period for which the
cash bonus pool is established may be reduced, so that the end of such period
coincides with the date of the change of control.
The foregoing summary of the New U S WEST ESTIP is qualified in its entirety
by reference to the full proposed text of the New U S WEST ESTIP included in
Annex E. The New U S WEST ESTIP will become effective at the Separation Time.
This proposal is conditioned upon approval by holders of Communications Stock
and Media Stock of the Separation. If the Separation is not approved by holders
of Communications Stock and Media Stock or implemented by the U S WEST Board,
this proposal will not be implemented. The approval of the Separation and this
proposal by holders of Communications Stock and Media Stock at the Annual
Meeting will constitute approval of the New U S WEST ESTIP by stockholders of
New U S WEST. THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE NEW U S WEST ESTIP.
PROPOSAL TO APPROVE AN AMENDMENT TO THE U S WEST 1994 STOCK PLAN
Holders of Communications Stock and Media Stock are being asked to consider
and approve a related proposal to amend the U S WEST 1994 Stock Plan, which will
continue as the stock plan for MediaOne after the Separation (the "MediaOne
Stock Plan"). See "Chapter 3: The Separation-- Employee Benefits and
Compensation Matters."
The MediaOne Stock Plan is a stockholder-approved means of affording certain
eligible employees, executive officers, directors and certain outside advisors
with an opportunity to acquire a proprietary interest in U S WEST, which after
the Separation will become MediaOne. Through grants of stock options, restricted
and unrestricted stock and other instruments, the MediaOne Stock Plan aligns the
financial interests of participants with those of stockholders, and provides
participants with a strong incentive to maximize stockholder value. The maximum
number of shares that may be granted with respect to the Media Stock in any
calendar year under the MediaOne Stock Plan is three-quarters of one percent
(0.75%) of the Media Stock outstanding on the first day of that calendar year,
though in the event that fewer than the full number of shares available for
issuance in any calendar year is issued in that year, the shares not issued are
added to the shares available for issuance in any subsequent year or years. The
U S WEST Board recommends that stockholders approve an amendment to increase the
maximum number of shares that may be granted with respect to the Media Stock (or
MediaOne Common Stock after the Separation) in any calendar year under the
MediaOne Stock Plan from the current three-quarters of one percent (0.75%) to
one percent (1.0%) of the Media Stock (or MediaOne Common Stock after the
Separation) outstanding on the first day of that calendar year.
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This proposal is not conditioned upon approval by holders of Communications
Stock and Media Stock of the Separation. If this proposal is approved, the
MediaOne Stock Plan will be amended as described above regardless of whether the
Separation is approved by holders of Communications Stock and Media Stock or
implemented by the U S WEST Board. THE U S WEST BOARD RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" APPROVAL OF THE AMENDMENT TO THE MEDIAONE STOCK PLAN.
STOCKHOLDER PROPOSALS
Stockholder proponents have notified U S WEST of their intent to present the
following proposals and supporting statements at the Annual Meeting. The
adoption of the proposals would not, in itself, cause the implementation of the
action or policy called for by the proposal, but simply would constitute a
recommendation to the U S WEST Board.
U S WEST DIRECTOR AND EXECUTIVE OFFICER INFORMATION
BOARD OF DIRECTORS
Pursuant to the U S WEST Restated Certificate, the U S WEST Board consists
of three classes of directors. Each class of directors is subject to election by
stockholders every three years. The U S WEST Board has adopted a policy that
requires directors to retire at the annual meeting following the director's 72nd
birthday.
Regular meetings of the U S WEST Board take place six times during the year
and special meetings are scheduled as necessary. The U S WEST Board held 11
meetings in 1997. No incumbent Director attended fewer than 75 percent of the
aggregate of the total number of meetings of the U S WEST Board and all
Committees of the U S WEST Board on which such director served. Directors meet
their responsibilities not only by attending U S WEST Board and Committee
meetings but also through participation in informational sessions, informal
consultations, and communication with members of management on matters affecting
U S WEST.
For information with respect to the members of the U S WEST Board, see
"--Election of Directors."
COMMITTEES OF THE U S WEST BOARD
The U S WEST Board has established the following standing Committees.
AUDIT COMMITTEE. The Audit Committee held four meetings in 1997. The Audit
Committee members are Mr. Dove (Chair), Mr. Crandall, Mr. Grieve, Mr. Jacobson
and Ms. Nelson. The Audit Committee's purpose is to oversee U S WEST's
accounting and financial reporting policies and practices and to assist the U S
WEST Board in fulfilling its fiduciary and corporate accountability
responsibilities. U S WEST's internal auditors and independent certified public
accountants periodically meet with the Audit Committee and always have
unrestricted direct access to the Audit Committee members.
BOARD AFFAIRS COMMITTEE. The Board Affairs Committee held five meetings in
1997. The Committee members are Mr. Grieve (Chair), Mr. Jacobson, Ms. Nelson and
Mr. Popoff. The Board Affairs Committee serves as a nominating committee for the
U S WEST Board. The Committee also makes recommendations regarding director
compensation and committee structure and composition, and oversees corporate
governance. This committee will consider candidates for the U S WEST Board
recommended by stockholders if the names and qualifications of such candidates
are submitted in writing to the Secretary of U S WEST, Inc., 7800 East Orchard
Road, Suite 200, Englewood, Colorado 80111.
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FINANCE COMMITTEE. The Finance Committee held three meetings in 1997. The
Finance Committee members are Mr. Gilmour (Chair), Mr. Grieve, Mr. Harad, Ms.
Nelson and Mr. Williams. The Finance Committee is responsible for evaluating U S
WEST's growth strategies and financing for U S WEST's operations.
HUMAN RESOURCES COMMITTEE. The Human Resources Committee held six meetings
in 1997. The Human Resources Committee members are Mr. Popoff (Chair), Mr.
Gilmour, Mr. Harad and Mr. Williams. The Human Resources Committee is
responsible for assuring the appropriateness of the compensation and benefits of
the Executive Officers of U S WEST and its subsidiaries and for providing for
the orderly succession of management.
PUBLIC POLICY COMMITTEE. The Public Policy Committee held two meetings in
1997. The Public Policy Committee members are Mr. Crandall (Chair), Mr. Dove,
Mr. Jacobson and Mr. Popoff. The Public Policy Committee is responsible for
reviewing public policy issues generally.
DIRECTOR COMPENSATION
To attract and retain exceptionally qualified directors, U S WEST offers a
competitive director compensation package, with a strategic mix of elements
weighted toward equity ownership to align the interests of directors with the
long-term interests of stockholders. U S WEST considers equity ownership a
powerful influence to put decision-making in close contact with stockholder
interests and focus attention on directing U S WEST as owners. The remaining
compensation components consist of cash and non-cash benefits, described below.
Non-employee directors receive an annual retainer of $30,000 and a fee of
$1,200 for attendance at each U S WEST Board or Committee meeting. For multi-day
meetings, non-employee directors receive a fee of $1,200 per day. For additional
service as Committee chairs, the chairpersons of the standing Committees receive
an annual retainer of $4,500. Each non-employee director also receives an
allowance of up to $3,000 per year net of taxes for the purchase of
telecommunications and cable services and equipment.
Directors may elect to defer receipt of all or part of their retainers and
Committee fees in stock or in cash. Deferred amounts that otherwise would be
payable in common stock have been credited, in evenly divided proportions of
Communications Stock and Media Stock, in an account as phantom stock units, the
value of which rises and falls with the price of Communications Stock and Media
Stock. Additional stock units are credited to the account when a dividend is
declared on U S WEST common stock. Cash payments so deferred earn interest,
compounded quarterly, at a rate equal to the average interest rate for ten-year
United States Treasury notes for the previous quarter.
From time to time, on appropriate occasions, directors are asked to
participate in informational sessions or informal consultations regarding U S
WEST developments or otherwise to assist U S WEST with special projects or other
business matters in which they have expertise. For such sessions or
consultations of significant duration, directors are compensated with a cash
payment of $1,200. Directors routinely participate in informational sessions and
consultations of shorter duration without receiving any separate compensation.
Under the terms of the amended U S WEST 1994 Stock Plan approved by
stockholders, directors have received 400 shares of Communications Stock and 400
shares of Media Stock in each of their first five years of service. They also
have received annual grants of 3,000 stock options for each class of common
stock. These options have value for directors only if the price of U S WEST's
stock appreciates from the date of the option grant.
Non-employee directors who serve a minimum of five credited years on the U S
WEST Board (or one year, in the event of a change of control of U S WEST) are
entitled to a retirement benefit equal
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in value to the amount of their final-year retainer multiplied by the lesser of
ten or their number of years of service on the U S WEST Board. At the director's
discretion, this amount is paid in ten equal annual installments or a single
installment equal to its discounted present value.
Any director who is an employee of U S WEST or one of its subsidiaries
receives no compensation for serving as a director.
COMPENSATION OF EXECUTIVE OFFICERS
The following table discloses the compensation received by U S WEST's Chief
Executive Officer and the four other most highly paid executive officers for
services rendered for the three fiscal years ended December 31, 1997, 1996 and
1995.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted to the
named executive officers of U S WEST during 1997. U S WEST employed the
Black-Scholes option pricing model to develop the theoretical values set forth
under the "Grant Date Present Value" column. These stock options comprise a
portion of the named Executive Officers' total long-term compensation potential.
As such, the issued amounts are consistent with U S WEST's compensation
philosophy as outlined in the Report of the Human Resources Committee on
Executive Compensation. See "--Report of the Human Resources Committee."
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
The following table provides information concerning dividend equivalent
units granted to the five named executive officers of U S WEST during 1997 under
the U S WEST Communications Group Long-Term Incentive Plan. Each dividend
equivalent unit represents the right to receive an amount equal to the
cumulative dividends paid on Communications Stock during a performance period,
multiplied by a percentage representing the extent to which U S WEST
Communications Group achieves certain performance goals based on financial
results, revenue, productivity and efficiency, service and customer care,
employee satisfaction, and stock performance.
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U S WEST PENSION PLANS
The following table illustrates the maximum estimated annual benefits
payable to the named Executive Officers of U S WEST upon retirement pursuant to
the U S WEST Pension Plans, based upon the pension plan formula for specified
final average annual compensation and specified years of service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ANNUAL ------------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40 45
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 500,000........................... $ 112,500 $ 160,000 $ 187,500 $ 225,000 $ 262,500 $ 293,750 $ 325,000
600,000........................... 135,000 180,000 225,000 270,000 315,000 352,500 390,000
700,000........................... 157,500 210,000 262,500 315,000 367,500 411,250 455,000
800,000........................... 180,000 240,000 300,000 360,000 420,000 470,000 520,000
900,000........................... 202,500 270,000 337,500 405,000 472,500 528,750 585,000
1,000,000.......................... 225,000 300,000 375,000 450,000 525,000 587,500 650,000
1,100,000.......................... 247,500 330,000 412,500 495,000 577,500 646,250 715,000
1,200,000.......................... 270,000 360,000 450,000 540,000 630,000 705,000 780,000
1,300,000.......................... 292,500 390,000 487,500 585,000 682,500 763,750 845,000
1,400,000.......................... 315,000 420,000 525,000 630,000 735,000 822,500 910,000
1,500,000.......................... 337,500 450,000 562,500 675,000 787,500 881,250 975,000
1,600,000.......................... 360,000 480,000 600,000 720,000 840,000 940,000 1,040,000
1,700,000.......................... 382,500 510,000 637,500 765,000 892,500 998,750 1,105,000
</TABLE>
The calculation of "final average annual compensation," is the highest
average compensation for 60 consecutive months of the 120 consecutive-month
period preceding retirement and includes compensation that would appear under
the "Salary" and "Bonus" columns of the Summary Compensation Table. As of
December 31, 1997, Messrs. McCormick, Lillis, Trujillo, Russ and Glinsky had 36,
12, 23, 5 and 1 actual years of service, respectively. Mr. Lillis is eligible
for a variable percentage of his final average annual compensation (calculated
as his highest average compensation over any 60 consecutive-month period of his
employment) based upon his age at retirement, less any amounts payable under any
U S WEST pension plans. The applicable percentage is 40% at age 56 (his present
age), and increases by varying increments from year to year -- I.E., 5% per year
through age 58, and 1.5% per year thereafter. Mr. Russ is also eligible for a
variable percentage of his final average compensation, calculated as his highest
average compensation over any 60 consecutive-month period. The applicable
variable percentage for Mr. Russ is 41% at age 53 (his present age), and
increases by approximately 1.5% per year through age 65. In the event it is
greater, Mr. Russ alternatively may receive $14,000 for each of his first seven
years of service at U S WEST. Mr. Glinsky is eligible for supplemental service
credits under the U S WEST Mid-Career Pension Plan, which is available to
newly-hired executives who are age 35 or older and who meet certain eligibility
requirements. Given Mr. Glinsky's limited tenure with U S WEST, U S WEST has
agreed to credit Mr. Glinsky with 5 1/2 years of service.
Benefits set forth in the preceding table are computed as a straight-life
annuity and are subject to deduction for Social Security.
EXECUTIVE AGREEMENTS
U S WEST has entered into Severance Agreements with Messrs. Glinsky,
McCormick and Russ. For a description of these agreements, see "Chapter 4: The
Separation--Interests of Certain Persons in the Separation--Severance
Agreements." In addition, Messrs. Lillis and Trujillo are parties to similar
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agreements with U S WEST. The Separation will not constitute a "Change of
Control" under the severance agreements of Messrs. Lillis and Trujillo.
U S WEST has entered into executive severance agreements with certain of its
officers, including the executive officers other than the Chief Executive
Officer. These agreements set forth the severance benefits that would be payable
in certain circumstances other than a change of control, such as a termination
not for cause, termination in connection with a downsizing, or resignation of an
officer who elects not to accept reassignment to a non-comparable position. The
severance benefits payable in such circumstances, following the delivery of a
waiver and release of claims by the executive officer, include: (i) an amount
equal to two times base salary; (ii) the amounts that would be otherwise due
under the Executive Short-Term Incentive Plan and any long-term incentive plan,
in each case pro-rated to the date of termination and calculated on the basis of
full achievement of targeted performance levels; and (iii) financial counseling
services, or the cash value thereof, through the year following the year of
termination. The agreements also provide for the lapse of restrictions on
certain grants of common stock issued to the officer, and the accelerated
vesting of a pro-rated portion of the stock options issued to the officer.
Finally, the agreements include provisions for medical, dental and vision
benefits following termination, and provisions to protect confidentiality of U S
WEST information and to arbitrate employment disputes. In the event of a change
of control, the terms of the executive severance agreements will be superseded
by any applicable change of control agreement.
REPORT OF THE HUMAN RESOURCES COMMITTEE
STOCKHOLDER RETURN PERFORMANCE GRAPHS
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CHAPTER 5: INFORMATION ABOUT NEW U S WEST
BUSINESS OF NEW U S WEST
GENERAL
New U S WEST is a diversified communications company providing services
principally to customers in the Communications Group Region, which is comprised
of the states of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska,
New Mexico, North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming.
New U S WEST has operations in four principal areas: (i) telecommunications and
related services; (ii) wireless services; (iii) high-speed data and Internet
services; and (iv) directory services. The major component of New U S WEST is U
S WEST Communications, which provides communications services to more than 25
million residential and business customers in the Communications Group Region.
STRATEGY
New U S WEST's competitive strategy will address both the advantages and
challenges inherent in one of the fastest growing but least populated regions of
the country. In recent years, the Communications Group Region, with seven of the
ten fastest growing states in the United States, has experienced rapid growth.
At the same time, the Communications Group Region is one of the least densely
populated regions of the country. Though it comprises over forty percent of the
land mass of the contiguous 48 states, it has just over ten percent of the
population. This low population density, along with the fact that most of the
growth continues to occur outside of the top five Metropolitan Statistical
Areas, makes the Communications Group Region less attractive to facilities-based
competitors, such as CLECs and CAPs, than the regions of the other regional bell
operating companies (the "RBOCs"). Additionally, competitors are inclined to
target high value customers and therefore focus their efforts on other regions,
notwithstanding the Communications Group Region's rapid growth. However, lack of
population density also creates challenges. The vast geography of the
Communications Group Region adds considerably to investment and maintenance
costs, making the provision of ubiquitous service comparatively expensive. To
capitalize on these advantages and manage the challenges, New U S WEST has
adopted the following specific and mutually reinforcing strategies.
PROVIDE SUPERIOR SERVICE TO CUSTOMERS. Management believes that New U S
WEST is entering the competitive arena from a position of strength. U S WEST
Communications has one hundred years of experience in managing increasingly
complex networks and delivering complex bundled services to millions of
customers. It has the ability to provide telecommunications services to mass
markets and the advantage of long-term relationships with its customers. To
continue to capitalize on these strengths in a competitive environment, New U S
WEST must continue to provide competitive, quality service. To that end, U S
WEST Communications has accelerated its investment in service quality even in
the face of rapid and sustained growth. The results of this investment have
become evident. Orders for primary basic service held more than 30 days totaled
601 at year-end 1997, 864 at year-end 1996, and 1,887 at year-end 1995. This
improvement has occurred in spite of a substantial increase in service order
activity over the last two years. Following the Separation, New U S WEST intends
to continue its service improvement efforts, and to retain its customers by
providing superior service.
ENHANCE NETWORK CAPACITY AND CAPABILITY. New U S WEST intends to deliver
the products and services its customers want. The Communications Group currently
is utilizing a flexible network architecture as it upgrades and expands its
infrastructure. A key example of this effort is the deployment of "U S WEST
Network 21" in major metropolitan areas. Targeted deployment of this
leading-edge bi-directional SONET ring architecture offers unprecedented
survivability, reliability and flexibility for high-capacity services.
Deployment is complete in Denver, Phoenix, Seattle, Minneapolis/St. Paul,
Portland, Salt Lake City and Omaha, and is underway in other key cities. A
benefit of Network 21 is the size of the rings. New U S WEST's competitors
usually measure coverage in blocks, targeting core
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downtown locations. The geographic coverage of Network 21 is measured in
hundreds of square miles and connects users across vast metropolitan areas.
Taking advantage of capabilities like Network 21 and other network improvements,
New U S WEST seeks to keep in place an infrastructure that will enable it to
satisfy the needs of customers into the future.
BUILD CUSTOMER LOYALTY, EXPAND PORTFOLIO OF PRODUCTS AND SERVICES. New U S
WEST is focused on positioning itself as the premier service provider for
customers who want a comprehensive, affordable solution to their communications
needs. New U S WEST is taking steps to better understand and segment customers,
comprehend their wants and needs, develop specialized packages of communications
products and services for specific customer segments, deliver exceptional value
and provide full-service support. The Dex Alignment will provide New U S WEST
with an important new component in its integrated service offerings and an
enhanced opportunity to market its brand.
New U S WEST is also building a long-distance division that will primarily
focus on providing long-distance services between LATAs, with an emphasis on
calls that originate within the Communications Group Region. This division, U S
WEST Long Distance, will package its offerings with New U S WEST's existing
products and services. Based on FCC calling traffic analysis, about 13 percent
of the nation's long-distance traffic originates within the Communications Group
Region, and approximately 40 percent of this traffic both originates and
terminates within the Communications Group Region. Recent market data indicates
that the interLATA long-distance market within the Communications Group Region
currently amounts to approximately $10 billion, or approximately $6 billion net
of access charges. New U S WEST intends to begin offering interLATA
long-distance services in the Communications Group Region pending resolution of
litigation pertaining to the constitutionality of certain provisions of the
Telecommunications Act. New U S WEST currently offers limited out-of-region
long-distance services. The objective of the long-distance division is to become
the second largest long-distance provider within the Communications Group Region
in its first four years of operations.
ENSURE A FAIR COMPETITIVE ENVIRONMENT. New U S WEST must represent the
interests of its investors, creditors and customers as the FCC and PUCs
implement the policies embodied in the Telecommunications Act. Three important
rule-makings by the FCC impact every aspect of the local exchange business:
interconnection, universal service and access charge reform. Though the full
business impacts of these rules are not yet known, U S WEST has moved swiftly
and aggressively to challenge selected portions of the FCC's rules, including
provisions related to interconnection and interLATA long-distance services in an
effort to ensure a fair competitive environment.
BUSINESS
TELECOMMUNICATIONS AND RELATED SERVICES
New U S WEST provides telecommunications services to more than 25 million
residential, business and carrier customers in the Communications Group Region.
New U S WEST serves approximately 80% of the population of the Communications
Group Region and approximately 40% of its geographic area. The principal types
of telecommunications services offered by New U S WEST are (i) local exchange
services, (ii) exchange access services, and (iii) intraLATA long-distance
network services.
Local exchange services provide lines from telephone exchange offices to
customers' premises for the origination and termination of telecommunications
services within local exchange service territories as defined by PUCs. These
services include basic local exchange services provided through the regular
switched network, dedicated private line facilities for voice and special
services, such as transport of data, radio, and video services, switching
services for customers' internal communications through facilities owned by New
U S WEST, services for data transport that include managing and configuring
special service networks, and dedicated low and high-capacity public or private
digital networks. Other
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local exchange revenue is derived from intercept and directory assistance,
public telephones and various custom features such as Caller ID, Call Waiting,
Call Return and 3-Way Calling.
New U S WEST provides exchange access services by connecting the equipment
and facilities of its customers with the communications networks of IXCs,
wireless provider and other LECs, including CLECs. These connections are
provided by linking these carriers and customers through the public switched
network of New U S WEST or through dedicated private lines furnished by New U S
WEST.
New U S WEST provides intraLATA long-distance services within the
Communications Group Region. These services include intraLATA service beyond the
local calling area, Wide Area Telecommunications Service or "800" services for
customers with highly concentrated demand, and special services, such as
transport of data, radio and video. New U S WEST intends to begin offering
interLATA long-distance services in the Communications Group Region pending
resolution of litigation pertaining to the constitutionality of certain
provisions of the Telecommunications Act. New U S WEST currently offers limited
out-of-region long-distance services. See "--Regulation."
New U S WEST also provides other telecommunications products and services,
including customer premises equipment ("CPE") and certain other communications
services to business customers and governmental agencies both inside and outside
the Communications Group Region.
WIRELESS SERVICES
New U S WEST holds 10 MHz licenses to provide personal communications
services ("PCS") in 53 markets in the Communications Group Region. These
licenses, which cover approximately 20 million POPs (E.G., potential customers),
were purchased in an FCC auction held in January 1997. In December 1997, New U S
WEST purchased additional licenses for a majority of the Seattle market, which
cover an additional 4 million POPs. New U S WEST is constructing networks using
these licenses utilizing digital code division multiple access ("CDMA")
technology. New U S WEST launched wireless PCS services in Denver, Fort Collins,
Greeley, Colorado Springs, Portland, Salem and Vancouver in 1997 and expects to
launch services in three other major markets in 1998. These wireless services,
which are being marketed under the "Access 2 Advanced PCS Service" brand, enable
customers to use the same number for their mobile phone as for their home or
business phone.
HIGH-SPEED DATA AND INTERNET SERVICES
New U S WEST offers high-speed data and Internet services to customers
inside and outside the Communications Group Region. Through !NTERPRISE
Networking Services, New U S WEST provides high-speed data communications and
network services, including frame relay service, Transparent LAN service, ATM
Cell Relay Service, network integration solutions and other data-related
services to business customers both inside and outside of the Communications
Group Region. In 1997, New U S WEST introduced U S WEST Megabit Services, a
high-speed internet access service, and U S WEST.net, a standard internet access
service, in selected markets and expects to launch these services in additional
markets in 1998.
DIRECTORY SERVICES
New U S WEST, through Dex, publishes 295 White and Yellow Pages directories
in the Communications Group Region. Dex's business scope includes all facets of
directory-related production services such as market identification, analysis
and planning, advertising and sales, customer service, directory design,
printing and distribution, billing and collection, and product service
promotion. Dex's customers include businesses that purchase advertising in its
directories and other related products, and consumers who use directories and
other advertising and information services. Dex also provides directory
publishing services to other telephone companies on a contract basis, and
electronic directory services.
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New U S WEST incurred capital expenditures of approximately $2.6 billion in
1997 and expects to incur approximately $2.6 billion in 1998. The 1997 capital
expenditures were substantially devoted to the continued modernization of
telephone plant, to improve customer service, to accommodate additional line
capability in several states and to enter the wireless business.
COMPETITION
New U S WEST faces competition in the local exchange business, exchange
access and intraLATA long-distance markets, primarily from IXCs and LECs
(including CLECs and CAPs). CLECs and CAPs compete with New U S WEST by
providing customers with network services that connect to carrier facilities or
other business locations within a serving LATA. IXCs compete with New U S WEST
by providing intraLATA long-distance services. Such competition is eroding U S
WEST Communications' market share of intraLATA long-distance services, including
Wide Area Telephone Service and "800" services. IXCs are competing in this area
by offering lower prices and packaging these services on an intraLATA and
interLATA basis.
The Telecommunications Act has dramatically altered the competitive
landscape of the telecommunications industry by permitting competition among
local telephone companies, long-distance companies and cable companies. As a
result, it is expected that additional competitors will be introduced into New U
S WEST's markets who will offer services similar to those offered by New U S
WEST, including local exchange services. New U S WEST believes that these
competitors have initially targeted high-volume business customers in densely
populated urban areas and will selectively pursue business in smaller
communities. The resulting loss of local service customers could affect multiple
revenue streams and could have a material adverse effect on New U S WEST's
operations. Court and state regulatory commission deliberations on
interconnection rates and newly issued FCC rules on interstate access pricing
could also result in significant changes in revenues received from carriers. The
wireless services being introduced by New U S WEST will face competition from
the two cellular providers in each of the markets in which it operates as well
as from the other providers of PCS services in such markets. The high-speed data
and Internet access services offered by New U S WEST face competition from LECs,
IXCs, ISPs and other providers of data services in New U S WEST's markets. Dex
competes with various other providers of directory services, including providers
of electronic directory services.
Technological advancements will also increase competition in the future. New
competitive carriers that are affiliates of cable television companies and power
companies are expected to play a greater role in offering local exchange
services. In addition to local exchange services, competitors are expected to
offer services that will compete with those U S WEST Communications offers and
plans to offer, including video programming and high-speed data and Internet
services.
New U S WEST expects to counter the competition described above by expanding
services to include new retail as well as wholesale markets. Recently introduced
service offerings include wireless PCS, high-speed data and Internet services,
and interconnection services provided to competing providers of local services.
Planned future service offerings include interLATA long-distance services, while
interconnection services will be expanded. New U S WEST's ability to bundle
local, long-distance, wireless PCS and other services will provide a competitive
advantage, permitting it to offer one-stop shopping with a package of services
similar to those that can be offered by IXCs and LECs.
REGULATION
THE TELECOMMUNICATIONS ACT OF 1996
The Telecommunications Act eliminates the Modification of Final Judgment,
the antitrust consent decree entered into in 1984 by AT&T Corp. ("AT&T"). This
decree resulted in the divestiture by AT&T of its local telephone business and
the formation of U S WEST and the other RBOCs. The Telecommunications Act
permits local telephone companies, long-distance carriers and cable television
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companies to enter each others' lines of business. Under the Telecommunications
Act, the RBOCs are permitted to provide interLATA long-distance services by
opening their local networks to facilities-based competition and satisfying a
detailed list of requirements, including providing interconnection and number
portability. The Telecommunications Act also lifts the ban on cross-ownership
between cable television and telephone companies. The RBOCs are thereby
permitted to enter into the cable business within their respective service
regions so long as such entry is not achieved through the purchase of existing
cable companies. There is an exception to this rule in rural communities. The
Telecommunications Act also reaffirms the concept of universal service and
directs the FCC and state regulators to determine universal service funding
policy. The FCC and state regulators have been given the responsibility to
interpret and oversee implementation of large portions of the Telecommunications
Act.
On December 31, 1997, the U.S. District Court for the Northern District of
Texas (the "U.S. District Court") declared that the restrictions placed on RBOCs
relating to the provision of in-region interLATA long-distance services were
unconstitutional and discriminatory. The FCC, the Department of Justice, AT&T
and other IXCs have announced their intention to appeal this ruling to the Fifth
Circuit Court of Appeals and have requested a stay of the order pending a full
review. As a result of the U.S. District Court's ruling, absent stay or
reversal, New U S WEST intends to offer interLATA long-distances services in the
Communications Group Region in 1998.
The FCC issued an order (the "FCC Order") establishing a framework of rules
that enable the states and the FCC to implement the local competition provisions
of the Telecommunications Act in August of 1996. Key provisions that relate to U
S WEST Communications and other LECs include the requirements that they:
- provide interconnection to any requesting telecommunications carrier at
any technically feasible point, equal in quality to that provided by the
incumbent LEC;
- provide unrestricted access to network services on an unbundled basis;
- provide physical collocation of equipment necessary for interconnection at
incumbent LEC facilities, unless physical collocation is not practical for
technical reasons or because of space limitations;
- offer for resale at a discount any telecommunications services that the
LEC provides at retail to subscribers; and
- provide reciprocal compensation arrangements for wireline and wireless
local service providers.
INTERCONNECTION
The FCC Order established interconnection costing and pricing rules which,
from U S WEST's perspective, significantly impeded negotiations with new
entrants to the local exchange market, state public policy interconnection
rulemakings, and interconnection arbitration proceedings.
U S WEST appealed the FCC Order and sought a stay of certain of its
provisions, including certain pricing provisions, pending appellate review. On
July 18, 1997, the Eighth Circuit Court of Appeals (the "Eighth Circuit")
vacated significant portions of the FCC Order. Most significantly, the Eighth
Circuit ruled that jurisdiction over local interconnection prices rests with the
states, not the FCC. The Eighth Circuit also determined that the
Telecommunications Act does not require LECs to provide "superior" service to
their competitors or to "rebundle" network elements for their competitors. The
effect of the Eighth Circuit's decision is to have interconnection and unbundled
network element pricing be resolved through negotiations or state PUC
arbitration proceedings. Some of the FCC's unbundling rules, as well as its
"pick and choose" provisions, were also vacated by the Eighth
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Circuit. The Eighth Circuit is also reviewing the FCC's August 1997 order that
required shared transport be made available in combination with local switching
as an unbundled element. This review is pending.
On October 14, 1997, the Eighth Circuit clarified that incumbent
telecommunications providers are not required to make rebundled service
offerings available to competitors at unbundled element pricing. This decision
substantially reduces new entrants' ability to arbitrage between resale of
finished services and the pricing of unbundled network elements. On January 26,
1998, the U.S. Supreme Court agreed to review the Eighth Circuit decision.
Interconnection proceedings throughout local regulatory jurisdictions are
continuing. U S WEST Communications has secured approximately 220
interconnection agreements with 85 carriers as of December 31, 1997. At December
31, 1997, U S WEST Communications had completed or settled over 85 state
arbitrations. U S WEST Communications advocates that LECs have the right to
recover fully the costs of providing interconnection services and that they must
not be placed at a competitive disadvantage as local and long-distance markets
are opened to competition. U S WEST Communications is aggressively defending its
views in arbitration proceedings and, when necessary, in the courts. U S WEST
Communications cannot provide assurance that it will be able to fully recover
its costs related to providing interconnection services.
NUMBER PORTABILITY
The FCC has established a schedule for deployment of number portability
during 1998 which includes 10 markets in the Communications Group Region. The
FCC, however, has not issued cost recovery rules as required by the
Telecommunications Act. On October 23, 1997, U S WEST filed a petition in the
Tenth Circuit Court of Appeals (the "Tenth Circuit"), seeking an order which
would require the FCC to issue its cost recovery rules. The court denied U S
WEST's petition at the same time the FCC reported to the court that it intends
to issue its rules in February 1998. U S WEST Communications will also seek cost
recovery through state rate-making proceedings and interconnection cost recovery
dockets. U S WEST Communications expects its estimated costs to deploy number
portability will be significant over the next few years. Due to legal and
regulatory uncertainties, U S WEST Communications cannot provide assurance that
one-time costs of deploying number portability and other interconnect related
costs will ultimately be recovered.
UNIVERSAL SERVICE, FEDERAL ACCESS REFORM AND PRICE CAP ORDER
On May 7, 1997, the FCC announced three decisions that established rules to
implement the Universal Service provision of the Telecommunications Act (the
"Universal Service Order"), as well as rules to restructure the access charge
system (the "Access Reform Order") and the FCC's current price cap plan (the
"Price Cap Order").
UNIVERSAL SERVICE. Under the Universal Service Order, all providers of
interstate telecommunications services will contribute to universal service
funding, which will be based on retail telecommunications revenues. The
Universal Service Order deferred until January 1, 1999 establishing a new
explicit mechanism to support high-cost service in areas served by non-rural
telephone companies such as U S WEST Communications. Until the explicit
mechanism is put in place, the existing universal service support mechanisms
were left intact, except to the extent modified by the FCC's Access Reform and
Price Cap Orders discussed below.
The FCC's Universal Service Order also includes the establishment of two
separate funds to help connect eligible schools and libraries, and rural health
care providers, to the global telecommunications network. These funds were
initially capped at $2.25 billion and $400 million, respectively. The FCC has
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now directed that these funds be phased in during 1998. Additionally, the FCC
reduced the funding amount for the first six months of 1998 by approximately 50
percent.
On July 17, 1997, U S WEST filed a petition with the FCC for reconsideration
and clarification of certain issues in the Universal Service Order. Among other
things, U S WEST requested the FCC to reconsider: (i) establishing a national
fund to ensure high-cost support is sufficient and (ii) assessing contributions
as explicit end-user surcharges. Appeals of other issues addressed by the
Universal Service Order have been filed by various other companies.
FEDERAL ACCESS REFORM. The FCC has ordered a substantial restructuring of
interstate access pricing. A significant portion of the services that have been
charged using minutes-of-use pricing will now be charged using a combination of
minutes-of-use rates, flat-rate presubscribed interexchange carrier charges
("PICCs") and subscriber line charges ("SLCs"). Although an increase in the SLC
to multi-line business users occurred on July 1, 1997, the bulk of the mandated
pricing changes occurred on January 1, 1998. Additional mandated pricing changes
will also occur on January 1, 1999 through 2001. The net effect of these changes
will be to decrease minutes-of-use charges up to 60 percent and increase
flat-rate charges (i.e., PICCs and SLCs). Although the effects of the mandated
pricing changes beginning January 1, 1998 will initially be revenue neutral, the
Access Reform Order, coupled with the Price Cap Order, will over time,
significantly reduce the revenues New U S WEST derives from interstate access
charges. Competition from competitive LECs will also affect New U S WEST's
access revenues.
The Access Reform Order also continued in place the current rules by which
incumbent LECs may not assess interstate access charges on information service
providers and purchasers of unbundled network elements. The FCC will separately
address issues surrounding information service providers' usage of the public
switched network in a related notice of inquiry.
U S WEST and other incumbent LECs have appealed the Access Reform Order. U S
WEST's primary challenge is that the FCC acted unlawfully by exempting
purchasers of unbundled network elements from payment of interstate access
charges, while not providing for the immediate replacement of subsidies
contained within those same access charges. U S WEST's position is that the new
access charge structure is contrary to the universal service provisions of the
Telecommunications Act and fails to make subsidies explicit. This case is
pending in the Eighth Circuit and was argued on January 15, 1998.
PRICE CAP ORDER. New U S WEST's interstate services have been subject to
price cap regulation since January 1991. Price caps are an alternative form of
regulation designed to limit prices rather than profits. The FCC's previous
price cap plan (the "Price Cap Plan") included sharing of earnings in excess of
authorized levels and resulted in reduced access prices paid by IXCs to LECs.
The price cap index for most services was annually adjusted for inflation,
productivity level and exogenous costs. The Price Cap Plan provided for three
productivity options, including a no-sharing option, and for increased
flexibility for adjusting prices downward in response to competition.
The FCC's May 1997 Price Cap Order requires LECs that are subject to price
cap regulation to increase their price cap index productivity factor to 6.5
percent. The order eliminated the lower productivity factor options (i.e., 4.0
percent and 4.7 percent) that required sharing of earnings above a specified
level. The order further required LECs to set their 1997 price cap index
assuming that the 6.5 percent factor had been in effect at the time of the 1996
tariff filing.
Under the FCC's previous price cap plan, U S WEST Communications had elected
the lowest productivity factor, 4.0 percent, in its 1996 annual interstate
tariff filing. As a result, U S WEST Communications remained subject to the
sharing requirements for the first half of 1997. In May 1997, U S WEST
Communications requested a waiver of the price cap sharing rules for the first
half of 1997. On June 26, 1997, the FCC granted the waiver, resulting in U S
WEST Communications making a one-
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time exogenous cost adjustment of $22 million, which is reflected in the
financial statements of New U S WEST as a reduction of 1997 interstate access
revenues.
As mandated by the Price Cap Order, the price cap index in U S WEST
Communications' 1997 interstate access tariff filing was established assuming
that the 6.5 percent productivity factor had been in effect at the time of the
1996 tariff filing. The access rate reductions have an on-going annual revenue
impact of approximately $160 million which are being reflected through lower
interstate rates over twelve months beginning July 1, 1997.
On June 23, 1997, U S WEST petitioned the Tenth Circuit for a review of the
Price Cap Order. The Tenth Circuit has transferred review of the Price Cap Order
to the District of Columbia Court of Appeals. Among other things, U S WEST and
other appellants are requesting the District of Columbia Court of Appeals to
review the use of a 6.5 percent productivity factor and the retroactive
application of the 6.5 percent productivity factor to July 1, 1996 when
determining the price cap index for the 1997 price cap filing. This case will be
heard in 1998.
Due to legal and regulatory uncertainties, the impact of the
Telecommunications Act on New U S WEST's future results remains unclear.
EMPLOYEES
At December 31, 1997, the businesses of New U S WEST had 51,108 employees,
of which 43,749 are employees of U S WEST Communications and 3,540 are employees
of Dex. Approximately 70% of the employees of the businesses of New U S WEST are
represented by unions. Historically, New U S WEST has enjoyed good relations
with the unions in which its employees are members and with its employees who
are not members of unions. New U S WEST's principal collective bargaining
agreements expire in May, August and October 1998. Negotiations with respect to
future collective bargaining agreements are expected to commence in mid-1998.
REAL PROPERTY
The properties of New U S WEST do not lend themselves to description by
character and location of principal units. At December 31, 1997, the majority of
such property was utilized in providing telecommunications services by U S WEST
Communications. Substantially all of U S WEST Communications' central office
equipment is located in owned buildings situated on land owned in fee, while
many garages and administrative and business offices are in leased quarters.
LEGAL PROCEEDINGS
At U S WEST Communications, there are pending certain regulatory actions in
local regulatory jurisdictions that call for price decreases, refunds or both.
For a discussion of these actions see "New U S WEST Management's Discussion and
Analysis of Financial Condition and Results of Operations-- Contingencies." In
addition, the businesses of New U S WEST are currently subject to claims and
proceedings that have arisen in the ordinary course of business.
MANAGEMENT OF NEW U S WEST
BOARD OF DIRECTORS OF NEW U S WEST
Immediately after the Separation, it is expected that the New U S WEST Board
will consist of directors. Pursuant to the New U S WEST Restated
Certificate, the New U S WEST Board will consist of three classes of directors.
Each class of directors will be subject to election by stockholders every three
years. In addition, it is anticipated that the New U S WEST Board will adopt a
policy that requires directors to retire at the annual meeting following the
director's 72nd birthday.
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Prior to the Separation Time, U S WEST, as the sole stockholder of New U S
WEST, intends to elect the following directors of U S WEST to the New U S WEST
Board: Messrs. Harad, Jacobson, McCormick, Trujillo, Popoff and Williams and Ms.
Nelson. In addition, it is expected that will be elected by U
S WEST to the New U S WEST Board. The following is a brief listing of the
principal occupations, other major affiliations and ages of each such individual
who is not currently a member of the U S WEST Board. For information about such
individuals who are currently members of the U S WEST Board, see "Chapter 4:
Other Matters to be Considered at the Annual Meeting--U S WEST Director and
Executive Officer Information."
DIRECTOR COMPENSATION
New U S WEST has not yet determined the compensation which it will pay to
directors following the Separation. It is anticipated that such compensation
will be set shortly after consummation of the Separation.
COMMITTEES OF THE NEW U S WEST BOARD
Following the Separation, the New U S WEST Board will establish the standing
Committees listed below. No final determination has been made as to the
memberships of any such standing Committees.
AUDIT COMMITTEE. The Audit Committee's purpose will be to oversee New U S
WEST's accounting and financial reporting policies and practices and to assist
the New U S WEST Board in fulfilling its fiduciary and corporate accountability
responsibilities. New U S WEST's internal auditors and independent certified
public accountants will periodically meet with the Audit Committee and will
always have unrestricted direct access to the Audit Committee members.
FINANCE COMMITTEE. The Finance Committee will be responsible for evaluating
New U S WEST's growth strategies and financing for New U S WEST's operations.
HUMAN RESOURCES COMMITTEE. The Human Resources Committee will be
responsible to assure the appropriateness of the compensation and benefits of
the Executive Officers of New U S WEST and its subsidiaries and to provide for
the orderly succession of management.
PUBLIC POLICY COMMITTEE. The Public Policy Committee will be responsible
for reviewing public policy issues generally.
NEW U S WEST EXECUTIVE OFFICERS
Set forth below is information with respect to the current positions of the
individuals who have been selected to serve as executive officers of New U S
WEST upon consummation of the Separation. It is anticipated that these
individuals will be elected by the New U S WEST Board as of the Separation Time.
Unless otherwise indicated, the positions to be held by each such individual
will be similar to their current positions.
THOMAS A. BYSTRZYCKI, Executive Vice President and President--Wholesale
Markets Division of the Communications Group since 1997. Mr. Bystrzycki
previously served as Executive Vice President for Operations and Technology of
the Communications Group, and has held various operational and management
positions with U S WEST and its predecessors for over 20 years. Age 47.
DANA P. DUNNE, Vice President--Strategy of the Communications Group since
January, 1998. Before joining the Communications Group, Mr. Dunne was a Senior
Engagement Partner at McKinsey and Company, where since 1990 he served as one of
the leaders in that company's worldwide telecommunications and European
multimedia practices. Age 34.
79
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
ROBERT E. KNOWLING, JR., Executive Vice President--Operations and
Technology of the Communications Group since 1997. Mr. Knowling joined U S WEST
in 1996 and previously served as a Vice President for Network Operations of the
Communications Group. Mr. Knowling had previously been a Vice President at
Ameritech Corporation, where he was responsible for network operations and
business processes development. Age 42.
OSCAR MUNOZ, Vice President and Controller of the Communications Group
since 1997. Mr. Munoz previously served as a Vice President at Coca-Cola
Enterprises, Inc., where for ten years he held a number of financial positions
and was instrumental in reorganizing the firm's financial network. Age 39.
MARK D. ROELLIG, Vice President--Public Policy and Regulatory Laws of the
Communications Group since 1997. Following the Separation, Mr. Roellig will
become Executive Vice President, General Counsel and Secretary of New U S WEST.
Mr. Roellig has served as a Vice President of U S WEST since 1994, and has held
a variety of positions in the Law Department of U S WEST since 1983. Age 42.
JAMES A. SMITH, President of Dex since 1997. Mr. Smith has been a Vice
President of U S WEST since 1987, and has held a variety of operational,
marketing and management positions with U S WEST and its predecessors for 19
years. Age 45.
ALLAN R. SPIES, Vice President and Chief Financial Officer of the
Communications Group since 1997. Mr. Spies has been a Vice President of U S WEST
since 1995, and has held a variety of finance and management positions with U S
WEST and its predecessors for over 25 years. Age 49.
SOLOMON D. TRUJILLO, President and Chief Executive Officer of the
Communications Group since 1995. Mr. Trujillo previously served as President and
Chief Executive Officer of Dex. Mr. Trujillo joined the Mountain States
Telephone and Telegraph Company (U S WEST Communications' predecessor) in 1974
and has been affiliated with U S WEST and its predecessors since that time,
serving in various marketing, sales, finance and public policy positions. Age
46.
GREGORY M. WINN, Executive Vice President--Retail Markets Division of the
Communications Group since 1997. Mr. Winn has been a Vice President of U S WEST
since 1994, and has held a variety of marketing and sales positions with U S
WEST and its predecessors for over 25 years. Age 48.
COMPENSATION OF NEW U S WEST EXECUTIVE OFFICERS
The following table discloses the compensation received by New U S WEST's
Chief Executive Officer and the four other most highly paid executive officers
for services rendered for the fiscal year ended December 31, 1997.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on stock options granted to the
named executive officers of New U S WEST during 1997. U S WEST employed the
Black-Scholes option pricing model to develop the theoretical values set forth
under the "Grant Date Present Value" column. These stock options comprise a
portion of the named executive officers' total long-term compensation potential.
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CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND YEAR-END OPTION/SAR
VALUES
LONG-TERM INCENTIVE PLANS--AWARDS IN LAST FISCAL YEAR
The following table provides information concerning dividend equivalent
units granted to the five named executive officers of New U S WEST during 1997
under the U S WEST Communications Group Long-Term Incentive Plan. Each dividend
equivalent unit represents the right to receive an amount equal to the
cumulative dividends paid on Communications Stock during a performance period,
multiplied by a percentage representing the extent to which the Communications
Group achieves certain performance goals based on financial results, revenue,
productivity and efficiency, service and customer care, employee satisfaction,
and stock performance.
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<PAGE>
U S WEST PENSION PLANS
The following table illustrates the maximum estimated annual benefits
payable to the named executive officers of New U S WEST upon retirement pursuant
to the U S WEST Pension Plans, based upon the pension plan formula for specified
final average annual compensation and specified years of service:
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
FINAL AVERAGE ANNUAL ------------------------------------------------------------------------------------
COMPENSATION 15 20 25 30 35 40 45
- ------------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 500,000........................... $ 112,500 $ 160,000 $ 187,500 $ 225,000 $ 262,500 $ 293,750 $ 325,000
600,000........................... 135,000 180,000 225,000 270,000 315,000 352,500 390,000
700,000........................... 157,500 210,000 262,500 315,000 367,500 411,250 455,000
800,000........................... 180,000 240,000 300,000 360,000 420,000 470,000 520,000
900,000........................... 202,500 270,000 337,500 405,000 472,500 528,750 585,000
1,000,000.......................... 225,000 300,000 375,000 450,000 525,000 587,500 650,000
1,100,000.......................... 247,500 330,000 412,500 495,000 577,500 646,250 715,000
1,200,000.......................... 270,000 360,000 450,000 540,000 630,000 705,000 780,000
1,300,000.......................... 292,500 390,000 487,500 585,000 682,500 763,750 845,000
1,400,000.......................... 315,000 420,000 525,000 630,000 735,000 822,500 910,000
1,500,000.......................... 337,500 450,000 562,500 675,000 787,500 881,250 975,000
1,600,000.......................... 360,000 480,000 600,000 720,000 840,000 940,000 1,040,000
1,700,000.......................... 382,500 510,000 637,500 765,000 892,500 998,750 1,105,000
</TABLE>
The calculation of "final average annual compensation," is the highest
average compensation for 60 consecutive months of the 120 consecutive-month
period preceding retirement and includes compensation that would appear under
the "Salary" and "Bonus" columns of the Summary Compensation Table.
Benefits set forth in the preceding table are computed as a straight-life
annuity and are subject to deduction for Social Security.
82
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
NEW U S WEST SELECTED HISTORICAL FINANCIAL INFORMATION
The following table sets forth selected historical financial information for
New U S WEST. This information presents New U S WEST's results of operations and
financial condition as if it were a separate entity for all periods presented
but does not give effect to certain transactions being undertaken in connection
with the Separation, including the refinancing by New U S WEST of the Dex
Indebtedness and the issuance of $850 of New U S WEST Common Stock to holders of
Media Stock in connection with the Dex Alignment. For financial information for
New U S WEST which gives effect to all such transactions, see "--New U S WEST
Unaudited Pro Forma Condensed Combined Financial Statements." This information
should be read in conjunction with New U S WEST's Combined Financial Statements,
including the notes thereto, included elsewhere in this Proxy Statement. See
"Annex F--New U S WEST Combined Financial Statements."
<TABLE>
<CAPTION>
NINE MONTHS ENDED OR
AS OF SEPTEMBER 30, YEAR ENDED OR AS OF DECEMBER
(UNAUDITED) 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
Dollars in millions (except per share amounts)
<S> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 8,657 $ 8,283 $ 11,168 $ 10,508 $ 10,132
Net income (loss)(1)................................................ 1,256 1,141 1,535 1,423 1,403
Dividends per common share.......................................... 1.605 1.605 2.14 2.14 2.14
BALANCE SHEET INFORMATION
Total assets........................................................ 17,264 17,191 17,279 16,960 16,317
Total debt.......................................................... 5,795 6,832 6,545 6,782 6,147
Total equity........................................................ 4,409 3,985 4,085 3,657 3,357
OTHER INFORMATION
Return on equity(2, 3).............................................. 38.5% 38.5% 38.6% 41.8% 45.3%
Percentage of debt to total capital(2).............................. 56.8% 63.2% 61.6% 65.0% 64.7%
Capital expenditures................................................ $ 1,644 $ 2,023 $ 2,831 $ 2,770 $ 2,513
Telephone network access lines in service (thousands)............... 15,829 15,253 15,424 14,795 14,299
Billed access minutes of use (millions)--
interstate........................................................ 41,085 38,674 52,039 47,801 43,768
intrastate........................................................ 8,702 7,808 10,451 9,504 8,507
Total employees..................................................... 50,661 54,056 51,477 54,552 55,246
Telephone company employees......................................... 43,388 47,568 45,427 47,934 47,493
Telephone company employees per ten thousand access lines........... 27.4 31.2 29.5 32.4 33.2
<CAPTION>
1993 1992
--------- ---------
<S> <C> <C>
RESULTS OF OPERATIONS INFORMATION
Operating revenues.................................................. $ 9,779 $ 9,447
Net income (loss)(1)................................................ (2,585) (627)
Dividends per common share.......................................... -- --
BALANCE SHEET INFORMATION
Total assets........................................................ 15,727 20,984
Total debt.......................................................... 5,728 5,233
Total equity........................................................ 2,837 6,156
OTHER INFORMATION
Return on equity(2, 3).............................................. 27.5% 16.9%
Percentage of debt to total capital(2).............................. 66.9% 46.0%
Capital expenditures................................................ $ 2,251 $ 2,423
Telephone network access lines in service (thousands)............... 13,803 13,301
Billed access minutes of use (millions)--
interstate........................................................ 40,594 37,413
intrastate........................................................ 7,529 6,956
Total employees..................................................... 56,147 59,549
Telephone company employees......................................... 49,668 52,423
Telephone company employees per ten thousand access lines........... 36.0 39.4
</TABLE>
- ------------------------------
(1) Income for the first nine months of 1997 includes a gain of $48 on the sales
of certain rural telephone exchanges and an extraordinary charge of $3 for
the early extinguishment of debt. Income for the first nine months of 1996
includes a gain of $31 on the sales of certain rural telephone exchanges and
the cumulative and current effects of $34 and $13, respectively, from
adopting SFAS No. 121. 1996 net income includes a gain of $36 on the sales
of certain rural telephone exchanges and the cumulative and current effects
of $34 and $15, respectively, from adopting SFAS No. 121. 1995 net income
includes a gain of $85 on the sales of certain rural telephone exchanges and
other charges of $16, including an extraordinary charge of $8 for the early
extinguishment of debt and $8 for costs associated with the 1995
Recapitalization. 1994 net income includes a gain of $51 on the sales of
certain rural telephone exchanges. 1993 net income was reduced by $566 for a
restructuring charge and $54 for the cumulative effect on deferred taxes of
the 1993 federally mandated increase in income tax rates. 1993 net income
was also reduced by extraordinary charges of $3,123 for the discontinuance
of SFAS No. 71 and $77 for the early extinguishment of debt. 1992 net income
was reduced by $1,782 for the cumulative effect of a change in accounting
principles.
(2) The increases in the percentage of debt to total capital and return on
equity, and the decrease in total equity since 1992, are primarily due to
the effects of discontinuing SFAS No. 71 in 1993 and the cumulative effect
of change in accounting principles in 1992.
(3) The return on equity for the first nine months of 1997 is based on income
before extraordinary item. The return on equity for the first nine months of
1996 and full year 1996 is based on income before the cumulative effect of a
change in accounting principle. 1995 return on equity is based on income
before extraordinary item. 1993 return on equity is based on income
excluding extraordinary items, a restructuring charge and the cumulative
effect on deferred taxes of the 1993 federally mandated increase in income
tax rates. 1992 return on equity is based on income before the cumulative
effect of a change in accounting principles.
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CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
NEW U S WEST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The New U S WEST Combined Financial Statements included in this Proxy
Statement include the combined historical balance sheets, results of operations
and cash flows of the businesses that comprise the Communications Group (the
"communications businesses") and Dex. The following discussion is based on the
New U S WEST Combined Financial Statements prepared in accordance with GAAP. The
discussion should be read in conjunction with the New U S WEST Unaudited Pro
Forma Condensed Combined Financial Statements included in this Proxy Statement
and the U S WEST Consolidated Financial Statements and the Communications Group
Combined Financial Statements incorporated by reference in this Proxy Statement.
See "Annex F--New U S WEST Combined Financial Statements" and "Chapter 8: The
Annual Meeting and Certain Other Matters--Where You Can Find More Information."
As used in this discussion, all references to dollars are in millions.
Certain terms of the Separation Agreement, including the refinancing of $3.9
billion of Dex Indebtedness by New U S WEST, the issuance of $850 of New U S
WEST Common Stock in connection with the Dex Alignment, the transfer of certain
assets and liabilities of U S WEST to New U S WEST and the allocation of certain
costs and expenses in connection with the Separation, are not reflected in the
discussion below. As a result, historical earnings per share of New U S WEST are
not presented as such earnings per share are not meaningful until the financial
effects of the Separation, which are significant, are reflected in the
historical statements of New U S WEST. These financial effects will be included
in historical results upon execution of the Separation Agreement. See "--New U S
WEST Unaudited Pro Forma Condensed Combined Financial Statements" and "Chapter
3: The Separation--Accounting Treatment."
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE
MONTHS ENDED SEPTEMBER 30, 1996
NET INCOME
Following are details of New U S WEST's net income, normalized to exclude
the effects of certain nonoperating items.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
INCREASE
SEPTEMBER 30, (DECREASE)
---------------------- -------------
1997 1996 $ %
-------- ------------ ------ -----
<S> <C> <C> <C> <C>
Reported net income............................... $ 1,256 $ 1,141 $ 115 10.1
Adjustments to reported net income:
Gains on sales of rural telephone exchanges..... (48) )(31 (17) 54.8
Early extinguishment of debt.................... 3 -- 3 --
Cumulative effect of change in accounting
principle(1).................................. -- )(34 34 --
Current year effect of change in accounting
principle(1).................................. -- )(13 13 --
-------- ------ ------ -----
Normalized income................................. $ 1,211 $ 1,063 $ 148 13.9
-------- ------ ------ -----
-------- ------ ------ -----
</TABLE>
- ------------------------------
(1) Effective January 1, 1996, New U S WEST adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
During the nine-month period, normalized income increased $148, or 13.9
percent, to $1,211. The increase is primarily due to higher demand for services
and continued cost control efforts in U S WEST Communications' core business,
which accelerated in the latter half of 1996. Growth in the Yellow Pages
directory operations and a 1995 after-tax charge of $15 to reorganize and reduce
headcount in the directory business also contributed to the increase. Partially
offsetting the increase
84
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
were additional expenses related to interconnection and accruals to recognize U
S WEST Communications' estimated state regulatory liabilities. New U S WEST
anticipates that expense increases related to interconnection requirements and
new service offerings, including wireless PCS, combined with rate reductions
resulting from price cap regulation by the FCC, will partially offset future net
income growth.
During August 1997, New U S WEST incurred an extraordinary loss of $3 (net
of income tax benefits of $2), related to the early extinguishment of debt.
Effective January 1, 1996, New U S WEST adopted SFAS No. 121, which, among
other things, requires that companies no longer record depreciation expense on
assets held for sale. Adoption of SFAS No. 121 resulted in a 1996 one-time gain
of $34 (net of tax of $22) related to the cumulative effect of change in
accounting principle.
OPERATING REVENUES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
INCREASE
SEPTEMBER 30, (DECREASE)
---------------------- --------------
1997 1996 $ %
-------- ------------ ------ ------
<S> <C> <C> <C> <C>
Communications and related services:
Local service................................... $ 3,739 $ 3,532 $ 207 5.9
Interstate access service....................... 2,028 1,854 174 9.4
Intrastate access service....................... 608 571 37 6.5
Long-distance network services.................. 721 840 (119) (14.2)
Other services.................................. 707 683 24 3.5
-------- ------ ------ ------
7,803 7,480 323 4.3
Directory services................................ 879 826 53 6.4
Intersegment eliminations......................... (25) )(23 (2) (8.7)
-------- ------ ------ ------
Total operating revenues.......................... $ 8,657 $ 8,283 $ 374 4.5
-------- ------ ------ ------
-------- ------ ------ ------
</TABLE>
Approximately 88 percent of New U S WEST's operating revenues and 97 percent
of the communications and related services revenues are attributable to the
operations of U S WEST Communications. Approximately 60 percent of U S WEST
Communications' revenues are derived from the states of Arizona, Colorado,
Minnesota and Washington.
New U S WEST's operating revenues increased 4.5 percent, to $8,657 during
the nine-month period ended September 30, 1997, primarily due to growth in the
communications and related services segment.
COMMUNICATIONS AND RELATED SERVICES
The primary factors that influence changes in communications and related
services revenues are customer demand for products and services, price changes
(including those related to regulatory proceedings) and refunds. Approximately
30 percent of the access lines in service are devoted to providing services to
business customers. The access line growth rate for business customers, who tend
to be heavier users of the network, has consistently exceeded the growth rate of
residential customers. During the past twelve months, business access lines grew
5.7 percent while residential access lines increased 3.8 percent, when adjusted
for the sales of rural telephone access lines.
LOCAL SERVICE REVENUES. Local service revenues include local telephone
exchange, local private line and public telephone services. Local service
revenues increased predominately as a result of access line
85
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
growth, and increased demand for new product and service offerings and existing
central office features. Total reported access lines increased 576,000, or 3.8
percent, during the past 12 months, of which 274,000 was attributable to second
lines. Second-line installations increased 28 percent during the past 12 months.
Access lines grew 663,000, or 4.3 percent, when adjusted for sales of
approximately 87,000 rural telephone access lines during the past 12 months.
Also contributing to the revenue increase were rate increases in various states
and interim compensation revenue from IXCs as a result of the FCC's payphone
orders which took effect in April 1997.
Partially offsetting the increases were lower wireless interconnection
access prices mandated by the Telecommunications Act and accruals of
approximately $100 to recognize U S WEST Communications' estimated state
regulatory liabilities.
INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES. Access charges are
collected primarily from IXCs for their use of the local exchange network. For
interstate access services there is also a fee collected directly from telephone
customers. Approximately 30 percent of access revenues and 10 percent of
communications and related services revenues are derived from providing access
services to AT&T.
Higher interstate access service revenues resulted from increased demand for
private line services, access line growth and a 6.2 percent increase in billed
interstate access minutes of use. Also contributing to the increase were the
effects of sharing-related accruals for refunds to IXCs recorded in 1996.
Beginning July 1, 1997, New U S WEST reduced prices for interstate services as a
result of the FCC's current price cap plan, which partially offset the revenue
increases. The access rate reductions have an on-going annual revenue impact of
approximately $160, which is reflected in lower interstate rates over twelve
months beginning July 1, 1997. Intrastate access service revenues increased
largely as a result of an 11.4 percent increase in billed intrastate minutes of
use and increased demand for private line services.
LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services
revenues are derived from calls made within the LATA boundaries of the
Communications Group Region. Long-distance network services revenues decreased
14.2 percent primarily due to the effects of competition and the implementation
of multiple toll carrier plans ("MTCPs") in Iowa and Nebraska in 1996, and in
several states in 1997. The MTCPs essentially allow independent telephone
companies to act as toll carriers and are net income neutral with the reduction
in toll revenues largely offset by increased intrastate access revenues and
lower access expense.
Excluding the effects of the MTCPs, long-distance network services revenues
decreased 9.4 percent. Long-distance network services revenues have declined
over the last several years as customers have migrated to IXCs that have the
ability to offer long-distance services on both an intraLATA and interLATA
basis. A portion of revenues lost to competition, however, is recovered through
access charges paid by the IXCs. New U S WEST believes that erosion of
long-distance network services revenues will continue due to the loss of
exclusivity of 1+ dialing in Minnesota and Arizona, effective in February and
April 1996, respectively, and continued competitive dial-around activity in
other states within the Communications Group Region. New U S WEST is responding
to competition through competitive pricing of intraLATA long-distance services
and increased promotional efforts to retain customers.
OTHER SERVICES REVENUES. Revenues from other services primarily consist of
voice messaging services, inside wire installation and maintenance services,
billing and collection services provided to IXCs, high-speed data transmission
services, and the provision of CPE. Also included are sales of customer lists,
billing and collection services and other services provided by U S WEST
Communications to Dex. Other services revenues increased primarily as a result
of continued market penetration of voice messaging services and greater sales of
inside wire maintenance and other
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CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
unregulated products and services. Partially offsetting these increases was a
reduction in contract revenues due to the completion of a large federal
government telephony project in 1996.
DIRECTORY SERVICES
Revenues related to Yellow Pages directory advertising represent 99 percent
of directory services revenues. Yellow Pages directory advertising revenues
increased 6.9 percent, to $868, during the nine-month period. The increase is
largely a result of a 7.2 percent increase in revenue per local advertiser, on a
comparable basis, primarily resulting from price increases of 4.6 percent and an
increase in volume and complexity of advertisements sold. These increases are
offset slightly by decreased revenue associated with exited product lines which
were nonstrategic to the directory business.
INTERSEGMENT ELIMINATIONS
Intersegment eliminations consist primarily of sales of customer lists,
billing and collection services and other services by U S WEST Communications to
Dex at market price. Also included are commercial property management services
provided by U S WEST Business Resources, Inc. to Dex.
COSTS AND EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
INCREASE
SEPTEMBER 30, (DECREASE)
---------------------- -------------
1997 1996 $ %
-------- ------------ ------ -----
<S> <C> <C> <C> <C>
Employee-related expenses......................... $ 2,915 $ 2,923 $ (8) (0.3)
Other operating expenses.......................... 1,517 1,374 143 10.4
Taxes other than income taxes..................... 320 302 18 6.0
Depreciation and amortization..................... 1,616 1,602 14 0.9
Interest expense.................................. 304 334 (30) (9.0)
Gains on sales of rural telephone exchanges....... 77 51 26 51.0
Other expense--net................................ 51 24 27 --
</TABLE>
EMPLOYEE-RELATED EXPENSES. Employee-related expenses include salaries and
wages (including both basic and performance-based pay), overtime, benefits
(including pension and health care), payroll taxes and contract labor.
Employee-related expenses decreased primarily as a result of lower salaries and
wages related to employee reductions of 3,395 during the last 12 months. Also
contributing to the decrease was a 1996 charge of $25 to reorganize and reduce
headcount in the directory business, and lower conference and travel expenses
and overtime costs. Largely offsetting the decreases were higher contract labor
costs and increases in certain employee-related benefit costs. The contract
labor increase reflects increased marketing and sales efforts, systems
development work (which includes expenses related to interconnection), and the
launch of new products and services.
OTHER OPERATING EXPENSES. Other operating expenses include access charges
paid to independent LECs (incurred for the routing of long-distance traffic
through their facilities), network software expenses, paper, printing, delivery
and distribution costs associated with publishing activities, and other general
and administrative costs.
Other operating expenses increased predominantly as a result of increased
network software purchases (which include expenses related to interconnection),
advertising costs and professional fees. Additionally, operating expenses
increased as a result of a reserve adjustment associated with billing and
collection activities performed for IXCs and repair costs associated with
flooding in North Dakota. Increased printing, paper and sales support costs in
the directory business also contributed to the
87
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
increase in other operating expenses. These directory cost increases were
associated with an increase in the volume and complexity of advertisements sold.
Partially offsetting the increases were reduced access expenses (primarily
related to the implementation of the MTCPs in 1996 and 1997), lower materials
and supplies, completion of a large federal government telephony project in 1996
and a 1996 charge to discontinue the Omaha broadband video service trial. The
increase in other operating expenses was also partially offset by the effects of
the directory business discontinuing various product development activities in
1996.
TAXES OTHER THAN INCOME TAXES. Taxes other than income taxes, which
consists primarily of property taxes, increased $18, or 6.0 percent, as a result
of increased 1997 use taxes and property tax true-ups in 1996.
DEPRECIATION AND AMORTIZATION. Depreciation expense increased as the
effects of a higher depreciable asset base were partially offset by a
third-quarter 1996 depreciation adjustment.
INTEREST EXPENSE. Interest expense decreased $30, or 9.0 percent, due to
lower average debt levels as compared to 1996. Partially offsetting the decrease
was a reduction in the amount of interest capitalized resulting from a lower
average balance of telecommunications plant under construction. Interest expense
will increase significantly upon the execution of the Separation Agreement and
the refinancing of $3.9 billion of Dex Indebtedness by New U S WEST in
connection with the Dex Alignment. See "--New U S WEST Unaudited Pro Forma
Condensed Combined Financial Statements."
GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During the nine-month period
ended September 30, 1997, New U S WEST sold selected rural telephone exchanges
in Iowa, South Dakota, Nebraska, Idaho, and Minnesota for pretax gains of $77.
The 1996 gains were a result of sales in Utah, North Dakota and South Dakota.
OTHER EXPENSE--NET. Other expense increased primarily due to additional
interest expense associated with New U S WEST's interstate sharing and state
regulatory liabilities.
RESTRUCTURING CHARGE
During the nine-month period ended September 30, 1997, the restructuring
reserve decreased $59 to a balance of $67. Reserve usage primarily related to
492 employee separations during the first nine months of 1997 and systems
development costs. The restructuring plan is substantially complete as of
December 31, 1997.
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<PAGE>
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1996 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1995
NET INCOME
Following are details of New U S WEST's net income for 1996 and 1995,
normalized to exclude the effects of certain nonoperating items.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Reported net income............................................ $ 1,535 $ 1,423 $ 112 7.9
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.................. (36) (85) 49 57.6
Cumulative effect of change in accounting principle(1)....... (34) -- (34) --
Current year effect of change in accounting principle(1)..... (15) -- (15) --
Recapitalization costs....................................... -- 8 (8) --
Early extinguishment of debt................................. -- 8 (8) --
--------- --------- --------- ---
Normalized income.............................................. $ 1,450 $ 1,354 $ 96 7.1
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
- ------------------------------
(1) Effective January 1, 1996, New U S WEST adopted SFAS No. 121.
New U S WEST's 1996 normalized income was $1,450, an increase of $96, or 7.1
percent, compared with $1,354 in 1995. The increase is primarily attributable to
demand for communications services and the effects of Dex discontinuing various
product development activities in 1995. Growth in the Yellow Pages directory
operations also contributed to the increase. Partially offsetting the increased
demand for services were higher costs incurred to address business growth,
service-improvement initiatives and costs related to new business opportunities.
An after-tax charge of $15 related to the Yellow Pages directory operations to
reorganize and reduce headcount in 1996 also partially offset the increase.
Effective January 1, 1996, New U S WEST adopted SFAS No. 121 which, among
other things, requires that companies no longer record depreciation expense on
assets held for sale. Adoption of SFAS No. 121 resulted in a one-time gain of
$34 (net of tax of $22), related to the cumulative effect of change in
accounting principle.
During 1995, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in an extraordinary charge of
$8, net of tax benefits of $5.
89
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
OPERATING REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications and related services:
Local service.......................................... $ 4,770 $ 4,344 $ 426 9.8
Interstate access service.............................. 2,507 2,378 129 5.4
Intrastate access service.............................. 770 747 23 3.1
Long-distance network services......................... 1,100 1,189 (89) (7.5)
Other services......................................... 932 826 106 12.8
--------- --------- --------- ---
10,079 9,484 595 6.3
Directory services....................................... 1,120 1,058 62 5.9
Intersegment eliminations................................ (31) (34) 3 8.8
--------- --------- --------- ---
Total operating revenues................................. $ 11,168 $ 10,508 $ 660 6.3
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
COMMUNICATIONS AND RELATED SERVICES
LOCAL SERVICE REVENUES. The 9.8 percent increase in local service revenues
is primarily attributable to access line growth and increased demand for new
product and service offerings, and existing central office features. Total
reported access lines increased 629,000 during 1996, or 4.3 percent, of which
244,000 is attributed to second lines. Second line installations increased 30.5
percent compared with 1995. Access lines grew by 742,000, or 5.0 percent, when
adjusted for sales of approximately 113,000 rural telephone access lines during
1996.
INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES. Higher revenues from
interstate access services were driven by access line growth and an increase of
8.9 percent in interstate billed access minutes of use. The increased business
volume was partially offset by the effects of price reductions and sharing
related accrued refunds to IXCs. New U S WEST reduced prices for interstate
access services in both 1996 and 1995 as a result of FCC orders and competitive
pressures. Intrastate access revenues increased primarily due to higher demand
partially offset by the effects of price reductions.
LONG-DISTANCE NETWORK SERVICES REVENUES. During 1996, long-distance network
services revenues decreased 7.5 percent, primarily due to the effects of
competition and the implementation of MTCPs in Iowa and Nebraska in May and
October 1996, respectively. The 1996 impact of the MTCPs was a $27 reduction in
long-distance revenues, offset by an increase in intrastate access revenues of
$5 and a decrease in other operating expenses (i.e., access expense) of $21.
Excluding the effects of the MTCPs, long-distance network services revenues
decreased 5.2 percent.
OTHER SERVICES REVENUES. During 1996, revenues from other services
increased primarily as a result of continued market penetration in voice
messaging services and increased inside wire maintenance services. Also
contributing to other services revenue growth were increased contract revenues
related to a large wire installation project and CPE sales.
DIRECTORY SERVICES
Revenues related to Yellow Pages directory advertising represented 98 and 97
percent of directory services revenues in 1996 and 1995, respectively. Yellow
Pages directory advertising revenues increased 7.4 percent in 1996 to $1,102.
The increase is largely a result of a 5.7 percent increase in revenue per local
advertiser (primarily a result of price increases of approximately 4.0 percent)
combined with an increase of 3,000 local advertisers during the year.
90
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1996 1995 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses................................. $ 3,894 $ 3,624 $ 270 7.5
Other operating expenses.................................. 1,901 1,848 53 2.9
Taxes other than income taxes............................. 404 394 10 2.5
Depreciation and amortization............................. 2,158 2,066 92 4.5
Interest expense.......................................... 448 429 19 4.4
Gains on sales of rural telephone exchanges............... 59 136 (77) (56.6)
Other expense--net........................................ 45 35 10 28.6
</TABLE>
EMPLOYEE-RELATED EXPENSES. During 1996, total employee-related expenses
increased primarily due to continued efforts at U S WEST Communications to
address increased business growth, service-improvement initiatives and new
business opportunities. Salaries and wages and contract labor are the two
primary factors that impact employee-related expenses. Salaries and wages
increased in the communications businesses primarily due to inflation-driven and
contractual wage increases. The contract labor increase supported the increased
business growth and the additional marketing organization costs related to the
launch of new products and services. Employee-related expenses also include
approximately $15 for contract labor and overtime as a result of flooding in
Washington and Oregon in first-quarter 1996.
Also contributing to the employee-related expense increase was a charge of
$25 in the directory business to reorganize and reduce headcount in 1996. The
Yellow Pages operation announced a plan to reorganize the central operating
management into three regions to establish greater accountability and to move
decision making closer to the customers. In conjunction with this
reorganization, the Yellow Pages operation reduced headcount by approximately
200 people in 1996.
Partially offsetting these increases was a reduction in postretirement
benefits costs due to changes in actuarial assumptions and favorable costs
trends, lower conference and travel expenses and decreased overtime as a result
of accelerated cost reduction efforts in the latter half of 1996.
OTHER OPERATING EXPENSES. During 1996, other operating expenses increased
primarily due to higher advertising and bad debt expenses, and costs associated
with greater sales of CPE. Also contributing to the increase was a reserve
adjustment associated with billing and collection activities performed for IXCs
and a charge related to the discontinuance of the Omaha broadband video service
trial. An approximate 10 percent increase in paper, printing, delivery and
distribution costs at the directory business also contributed to the increase.
Reduced access expense (a portion of which relates to the 1996
implementation of the MTCPs in Iowa and Nebraska) and the effect of the
directory business exiting various product development activities in 1995
partially offset these increases. A reduction in general and administrative
costs from U S WEST also partially offset these increases.
TAXES OTHER THAN INCOME TAXES. Taxes other than income taxes were
relatively flat as compared with 1995. In fourth-quarter 1996, taxes other than
income taxes increased by $23, or 29.1 percent, due to favorable property tax
valuations and mill levies recognized during fourth-quarter 1995.
DEPRECIATION AND AMORTIZATION. The increase in depreciation and
amortization expense is attributed to the effects of a higher depreciable asset
base, partially offset by the effects of 1995 sales of certain rural telephone
exchanges and the adoption of SFAS No. 121.
91
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
INTEREST EXPENSE. Interest expense increased primarily due to higher
average debt levels and a decrease in the amount of interest capitalized
resulting from a lower average balance of telecommunications plant under
construction. The average borrowing cost was 7.0 percent in 1996, compared with
6.9 percent in 1995.
GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1996, New U S WEST sold
selected rural telephone exchanges in Utah, North Dakota, South Dakota and Idaho
for pretax gains of $59. The 1995 gains were a result of sales in Colorado,
Washington, Oregon and Arizona.
OTHER EXPENSE. The increase in other expense in 1996 is a result of gains
on non-strategic asset sales recognized by Dex in 1995. In the communications
businesses, other expense was flat in 1996 as compared with 1995. However, other
expense increased $8 in fourth-quarter 1996, primarily as a result of a $13
adjustment related to New U S WEST's equity investment in Bell Communications
Research, Inc. ("Bellcore"). U S WEST Communications' one-seventh ownership
interest was sold in fourth-quarter 1997 for a pretax gain of $53. Partially
offsetting the increase were costs associated with the 1995 Recapitalization.
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
--------------------
1996 1995 $ %
--------- --------- --- ---
<S> <C> <C> <C> <C>
Provision for income taxes..................................... $ 876 $ 817 $ 59 7.2
Effective tax rate............................................. 36.9% 36.3% -- --
</TABLE>
The increase in the effective tax rate resulted primarily from the effects
of lower investment tax credit amortization.
RESTRUCTURING CHARGE
In 1993, New U S WEST incurred a $930 restructuring charge (pretax). The
related restructuring plan (the "Restructuring Plan"), which is substantially
complete as of December 31, 1997, was designed to provide faster, more
responsive customer services, while reducing the costs of providing these
services. Following is a schedule of the incurred costs that were included in
the 1993 restructuring charge:
<TABLE>
<CAPTION>
ACTUAL
-------------------------------
1994 1995 1996 REMAINING* TOTAL
--------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation.................................. $ 19 $ 76 $ 102 $ 91 $ 288
Systems development.................................. 127 145 106 22 400
Real estate.......................................... 50 66 8 6 130
Relocation........................................... 21 24 5 2 52
Retraining and other................................. 11 23 21 5 60
--------- --------- --------- ----- ---------
Total................................................ $ 228 $ 334 $ 242 $ 126 $ 930
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
- ------------------------------
* As of December 31, 1996.
Employee separation costs include severance payments, health-care coverage
and postemployment education benefits. Under the Restructuring Plan, New U S
WEST anticipated the separation of 10,000
92
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
employees. Annual employee separations and employee-separation amounts under the
Restructuring Plan follow:
<TABLE>
<CAPTION>
ACTUAL
-------------------------------
1994 1995 1996
ACTUAL ACTUAL ACTUAL REMAINING* TOTAL
--------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Employee separations............................. 2,180 2,325 2,667 2,828 10,000
Employee-separation amounts(1)................... $ 75 $ 76 $ 102 $ 91 $ 344
</TABLE>
- ------------------------------
* As of December 31, 1996.
(1) The 1994 employee-separation amount includes $56 associated with work-force
reductions under a 1991 restructuring plan.
RESULTS OF OPERATIONS--YEAR ENDED DECEMBER 31, 1995 COMPARED WITH THE YEAR ENDED
DECEMBER 31, 1994
NET INCOME
Following are details of New U S WEST's net income for 1995 and 1994,
normalized to exclude the effects of certain nonoperating items.
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Reported net income........................................ $ 1,423 $ 1,403 $ 20 1.4
Adjustments to reported net income:
Gains on sales of rural telephone exchanges.............. (85) (51) (34) (66.7)
Recapitalization costs................................... 8 -- 8 --
Early extinguishment of debt............................. 8 -- 8 --
--------- --------- --- ---------
Normalized income.......................................... $ 1,354 $ 1,352 $ 2 0.1
--------- --------- --- ---------
--------- --------- --- ---------
</TABLE>
New U S WEST's 1995 normalized income was $1,354 compared with $1,352 in
1994. The increase in normalized income was attributable to revenue growth of
3.7 percent largely offset by significantly higher costs incurred at U S WEST
Communications to improve customer service and meet greater than expected
business growth, and by product development activities including a charge of $7
to exit non-strategic product lines by Dex.
During 1995, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing resulted in an extraordinary charge of
$8, net of tax benefits of $5.
93
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
OPERATING REVENUES
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Communications and related services:
Local service........................................ $ 4,344 $ 4,067 $ 277 6.8
Interstate access service............................ 2,378 2,269 109 4.8
Intrastate access service............................ 747 729 18 2.5
Long-distance network services....................... 1,189 1,329 (140) (10.5)
Other services....................................... 826 782 44 5.6
--------- --------- --------- ---------
9,484 9,176 308 3.4
Directory services..................................... 1,058 997 61 6.1
Intersegment eliminations.............................. (34) (41) 7 17.1
--------- --------- --------- ---------
Total operating revenues............................... $ 10,508 $ 10,132 $ 376 3.7
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
COMMUNICATIONS AND RELATED SERVICES
LOCAL SERVICE REVENUES. Local service revenues increased principally as a
result of higher demand for new and existing services, and demand for second
lines. Reported total access lines increased 496,000, or 3.5 percent, of which
161,000 were second lines. Second line installations increased 25.5 percent
compared with 1994. Access line growth was 4.1 percent when adjusted for sales
of rural telephone access lines during 1995.
INTERSTATE AND INTRASTATE ACCESS SERVICE REVENUES. Higher revenues from
interstate access services were driven by an increase of 9.2 percent in
interstate billed access minutes of use, which more than offset the effects of
price reductions and refunds. Intrastate access revenues increased primarily due
to the impact of increased business volumes and MTCPs, partially offset by the
impact of rate changes.
LONG-DISTANCE NETWORK SERVICES REVENUES. Long-distance network services
revenues were impacted by the implementation of MTCPs in Oregon and Washington
in 1994. The 1995 impact of the MTCPs was a $62 reduction in long-distance
revenues, partially offset by an increase in intrastate access revenues of $12
and a decrease in other operating expenses (i.e., access expense) of $42.
Excluding the effects of the MTCPs, long-distance network services revenues
decreased 5.9 percent during 1995, primarily due to the effects of competition
and rate reductions.
OTHER SERVICES REVENUES. During 1995, revenues from other services
increased primarily as a result of continued market penetration in voice
messaging services and sales of high-speed data transmission services. Revenue
growth from other services was also attributed to inside wire maintenance
services and a large contract related to a wire installation project. These
increases were partially offset by a decrease in revenues from billing and
collection services.
DIRECTORY SERVICES
Revenues related to Yellow Pages directory advertising increased 6.4
percent, to $1,026 in 1995. The increase was a result of price increases of 4.5
percent, higher revenue per advertiser and an increase in Yellow Pages
advertising volume.
94
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
COSTS AND EXPENSES
<TABLE>
<CAPTION>
INCREASE (DECREASE)
--------------------
1995 1994 $ %
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Employee-related expenses.................................. $ 3,624 $ 3,461 $ 163 4.7
Other operating expenses................................... 1,848 1,826 22 1.2
Taxes other than income taxes.............................. 394 401 (7) (1.7)
Depreciation and amortization.............................. 2,066 1,928 138 7.2
Interest expense........................................... 429 381 48 12.6
Gains on sales of rural telephone exchanges................ 136 82 54 65.9
Other expense--net......................................... 35 3 32 --
</TABLE>
EMPLOYEE-RELATED EXPENSES. During 1995, improving customer service was New
U S WEST's first priority. Overtime payments and contract labor expense
associated with customer service initiatives increased employee-related costs in
the communications businesses by approximately $168 in 1995. The increase in
employee-related expenses was also attributable to growth initiatives at Dex,
and the hiring of additional employees by U S WEST Communications in 1995 and
1994 to handle the higher than anticipated volume of business and to address new
business opportunities. Partially offsetting these cost increases was a
reduction in the accrual for postretirement benefits, a decrease in travel
expense and reduced expenses related to employee separations under reengineering
and streamlining initiatives.
OTHER OPERATING EXPENSES. Other operating expenses increased primarily due
to higher costs associated with product development activities in the directory
business and an 11 percent increase in paper, printing, delivery and
distribution costs. Higher costs associated with increased sales, including bad
debt expenses, in the communications businesses, also contributed to the
increase. Partially offsetting these increases were the effects of the MTCPs and
a reduction in expenses related to project funding at Bellcore.
TAXES OTHER THAN INCOME TAXES. Taxes other than income taxes decreased 1.7
percent in 1995, primarily due to favorable property tax valuations and mill
levies as compared with 1994. As a result of these valuations and mill levies,
1995 fourth-quarter accruals decreased by $20 compared with fourth-quarter 1994.
DEPRECIATION AND AMORTIZATION EXPENSE. The increase in depreciation and
amortization expense was attributable to the effects of a higher depreciable
asset base, partially offset by the effects of the sales of certain rural
telephone exchanges.
INTEREST EXPENSE. Interest expense increased primarily as a result of an
increased use of debt financing. The average borrowing cost for the
communications businesses was 6.9 percent in 1995 and 1994.
GAINS ON SALES OF RURAL TELEPHONE EXCHANGES. During 1995, New U S WEST sold
selected rural telephone exchanges in Colorado, Washington, Oregon and Arizona
for pretax gains of $136. The 1994 gains were a result of sales in Montana and
Wyoming.
OTHER EXPENSE. The increase in other expense was largely attributable to a
1994 gain on the sale of nonstrategic directory operations and $8 of costs
associated with the 1995 Recapitalization.
95
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
PROVISION FOR INCOME TAXES
<TABLE>
<CAPTION>
INCREASE
-----------
$
1995 1994 -- %
--------- --------- ---
<S> <C> <C> <C> <C>
Provision for income taxes....................................... $ 817 $ 811 $ 6 0.7
Effective tax rate............................................... 36.3% 36.6% -- --
</TABLE>
The decrease in the effective tax rate resulted primarily from the effects
of a research and experimentation credit and adjustments for prior periods.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion excludes certain financing and other effects of the
Separation, the principal results of which are the refinancing of $3.9 billion
of Dex Indebtedness by New U S WEST and the issuance of $850 of New U S WEST
Common Stock in connection with the Dex Alignment. See "--New U S WEST Unaudited
Pro Forma Condensed Combined Financial Statements" and "Chapter 3: The
Separation--Accounting Treatment."
OPERATING ACTIVITIES
Cash provided by operating activities was $3,153 and $2,566 during the
nine-month periods ended September 30, 1997 and 1996, respectively, and $3,614,
$2,970, and $2,756 in 1996, 1995 and 1994, respectively.
Cash from operations increased $587 for the nine-month period ended
September 30, 1997, compared with the same period in 1996. The increase is
primarily due to business growth and continued cost control efforts in the core
telecommunications business, including efforts to manage working capital. Lower
restructuring expenditures, a decrease in the cash funding of postretirement
benefits and growth in operations in the directory business also contributed to
the increase. Higher tax payments partially offset these increases.
During 1996, cash provided by operating activities increased $644. The
increase was primarily attributable to growth in operations in both the
communications and the directory businesses, a $161 decrease in the cash funding
of postretirement benefits, and lower restructuring expenditures. These
increases were partially offset by higher 1996 income tax payments. Cash from
operations increased $214 in 1995, compared with 1994, primarily due to growth
in the communications businesses and a decrease in the cash funding for
postretirement benefits, partially offset by higher payments for restructuring
activities.
Future cash needs could increase with the pursuit of new business
opportunities, including wireless PCS. Future cash needs could also increase as
New U S WEST implements the interconnection requirements and other provisions of
the Telecommunications Act. However, the impact will depend on the nature and
timing of the requirements and the type of recovery mechanisms provided for by
the FCC and state commissions. See "--Business of New U S WEST--Regulation."
INVESTING ACTIVITIES
Total capital expenditures were $1,322 and $1,906, on a cash basis, during
the first nine months of 1997 and 1996, and $2,444, $2,494 and $2,290 in 1996,
1995 and 1994, respectively. The majority of the 1997 expenditures related to
access line growth and continued modernization of the telecommunications
network. Also included were interconnection costs and expenditures associated
with entering wireless communications markets with the launch of PCS.
96
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
In 1997, New U S WEST purchased PCS licenses in the FCC block auction of D
and E spectrum for approximately $57. The licenses were granted to New U S WEST
in June 1997.
New U S WEST received cash proceeds of $51 and $130 during the nine-month
periods ended September 30, 1997 and 1996, respectively, and $174, $214 and $93
during 1996, 1995 and 1994, respectively, for the sales of certain rural
telephone exchanges. Since implementing its rural telephone exchange sales
program, New U S WEST has sold approximately 342,000 access lines.
FINANCING ACTIVITIES
During the first nine months of 1997, debt decreased $750 and the percentage
of debt to total capital decreased from 61.6 percent at December 31, 1996, to
56.8 percent, at September 30, 1997. The decrease is primarily a result of
increased equity and lower debt levels. The lower debt levels have been
partially driven by increased operating cash flows and lower capital
expenditures. Debt decreased $237 in 1996 and the percentage of debt to total
capital declined to 61.6 percent at year-end 1996 from 65.0 percent at year-end
1995. The decline in the percentage of debt to total capital in 1996 was
primarily a result of increased net income and equity issuances for the dividend
reinvestment plan, the employee savings plan and the exercise of stock options.
During 1995, debt increased $635, primarily due to the increase in capital
expenditures.
New U S WEST's total debt and percentage of debt to total capital will
increase significantly due to the Dex Alignment, which will result in the
refinancing of $3.9 billion of Dex Indebtedness by New U S WEST and a
corresponding reduction in equity. New U S WEST is expected to incur additional
debt in 1998 to fund certain one-time expenses associated with the Separation
and costs associated with the Refinancing.
During August 1997, U S WEST redeemed its zero coupon subordinated notes
which had a recorded value of $303 attributed to New U S WEST. Floating-rate U S
WEST debt, due on demand, was used to finance the redemption.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
Historically, U S WEST has funded the nonregulated activities of New U S
WEST, including Dex, with short-term advances. Short-term advances of $33, $42,
$53 and $29 were repaid during the nine-month period ended September 30, 1996
and during 1996, 1995 and 1994, respectively. Upon execution of the Separation
Agreement, it is anticipated New U S WEST will fund the nonregulated businesses,
including Dex, with short-term advances.
Prior to the Separation, Dex paid dividends to U S WEST equal to its net
income adjusted for the amortization of intangibles. These dividends totaled
$243 and $222 during the nine-month periods ended September 30, 1997 and 1996,
respectively, and $303, $241 and $196 during 1996, 1995 and 1994, respectively.
During the first-quarter of 1997, Standard & Poor's lowered U S WEST
Communications' senior unsecured debt rating from A plus to A as a result of a
modified rating criteria implemented by Standard & Poor's to reflect the
increased competitive telecommunications environment. In connection with U S
WEST's announcement of the Separation, Standard & Poor's placed U S WEST
Communications' senior unsecured debt rating on credit watch with positive
implications and reaffirmed U S WEST Communications' commercial paper ratings.
In connection with U S WEST's announcement of the Separation, Duffs & Phelps
reaffirmed U S WEST Communications' senior unsecured debt and commercial paper
ratings.
During the second quarter of 1997, Moody's placed U S WEST Communications'
senior unsecured debt rating under review in connection with U S WEST
Communications' regulatory rulings, which may
97
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
result in a downgrading. See "Contingencies." The status of this review remains
unchanged as a result of U S WEST's announcement of the Separation.
U S WEST Communications' senior unsecured debt and commercial paper ratings
by Moody's, Standard & Poor's and Duff & Phelps were Aa3, A and AAminus, and P1,
A1 and D1plus, respectively, at December 31, 1997.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications is permitted to
borrow up to $500 under short-term lines of credit, all of which was available
at December 31, 1997. Additional lines of credit are available to the
nonregulated subsidiaries of U S WEST in accordance with their borrowing needs.
Under registration statements filed with the SEC, as of December 31, 1997, U S
WEST Communications is permitted to issue up to $320 of new debt securities.
Additional securities are permitted to be issued under registration statements
filed with the SEC to support the requirements of the nonregulated subsidiaries
of U S WEST.
New U S WEST is currently engaged in discussions with major lending
institutions to secure stand-alone lines of credit to meet the combined business
needs of its non-regulated subsidiaries. New U S WEST does not expect the
Separation to adversely affect its ability to access the capital markets or the
financing terms available to it.
Under the terms of the Dex Alignment U S WEST will distribute, as a dividend
to Media Group shareholders, a fractional share of New U S WEST Common Stock
based on each share of Media Stock held, up to an aggregate of $850. Management
anticipates that the New U S WEST Board will declare dividends on New U S WEST
Common Stock initially at the quarterly rate of $0.535 per share, which is the
same dividend currently paid on the Communications Stock. While the New U S WEST
Board is not expected to change this dividend policy, it has the right to do so
at any time. Upon the execution of the Separation Agreement, total cash
dividends paid will increase as a result of the issuance of $850 of New U S WEST
Common Stock. New U S WEST expects to fund the additional dividend requirement
through operations.
New U S WEST from time to time engages in preliminary discussions regarding
restructurings, dispositions and other similar transactions. Any such
transaction may include, among other things, the transfer of certain assets,
businesses or interest, or the incurrence or assumption of indebtedness, and
could be material to the financial condition and results of operations of New U
S WEST. There is no assurance that any such discussion will result in the
consummation of any transaction.
New U S WEST is exposed to market risk arising from changes in interest
rates. Derivative financial instruments are used to manage this risk. New U S
WEST does not use derivative financial instruments for trading purposes.
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Notional amounts of interest rate swaps outstanding were $384 and $784 at
December 31, 1996 and 1995, respectively, with various maturities extending to
2001. A 50 basis point increase in interest rates would create a gain of $1 in
the market value of interest rate swaps. Likewise, a 50 basis point decrease in
interest rates would create a loss of $1 in the market value of interest rate
swaps.
FEDERAL REGULATORY ENVIRONMENT
For a complete discussion of the Federal regulatory environment of New U S
WEST, see
"--Business of New U S WEST--Regulation."
98
CHAPTER 5: INFORMATION ABOUT NEW U S WEST
<PAGE>
CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
In 1996, the Washington State Utilities and Transportation Commission
("WUTC") acted on U S WEST Communications' 1995 rate request. U S WEST
Communications had sought to increase revenues by raising rates primarily for
basic residential services over a four-year period. Instead of granting U S WEST
Communications' request, the WUTC ordered $91.5 in annual net revenue
reductions, effective May 1, 1996. Based on the WUTC ruling, U S WEST
Communications filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase. The Court declined to change
the WUTC order. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which granted a stay
of the order, pending its full review of the appeal.
On December 24, 1997, the State Supreme Court upheld the WUTC ruling. The
State Supreme Court's ruling results in an estimated maximum liability for the
revenues collected by U S WEST Communications from May 1, 1996 through January
31, 1998, including interest, in the amount of $225. The prospective revenue
reduction as a result of this ruling approximates $115 annually, which includes
the effects of business growth. In a separate action, the WUTC authorized a rate
increase of approximately $60 annually that partially mitigates the effect of
the State Supreme Court's ruling. Tariffs implementing both orders became
effective February 1, 1998.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form of
regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court
granted U S WEST Communications' request for a stay, pending a full review of
the OPUC's order. On January 8, 1998, the Oregon Circuit Court ruled in U S WEST
Communications' favor on most of the appealed issues. The OPUC has announced its
intent to appeal. The potential exposure, including interest, at December 31,
1997, would not exceed $181.
In another proceeding, the Utah Supreme Court remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from IXCs and other parties related to the Tax Reform Act of 1986. The
potential exposure, including interest, at December 31, 1997, would not exceed
$160.
New U S WEST has accrued $348 at December 31, 1997, which represents its
estimated liability for all state regulatory proceedings. Approximately $225 of
the total estimated liability was recognized during fourth-quarter 1997. It is
possible that the ultimate liability could exceed the recorded liability by an
amount up to approximately $230. New U S WEST will continue to monitor and
evaluate the risks associated with its local regulatory jurisdictions, and will
adjust estimates as new information becomes available.
YEAR 2000 COSTS
During 1997 New U S WEST conducted a comprehensive review of its computer
systems and related software for year 2000 compatibility. Year 2000
compatibility permits computer systems that
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have date-sensitive software written in two digits to recognize, for example,
calendar years ending in "00" as relating to the year 2000 rather than the year
1900. The inability of computer systems to make such distinction could result in
a disruption of New U S WEST operations.
The systems evaluated to date include all internal systems and those that
manage the public switched network and customer networks. This evaluation
extends to New U S WEST's significant vendors and large customers in determining
the impact on New U S WEST if those third parties fail to remediate their own
year 2000 issues.
Management is developing an estimate of the incremental cost of achieving
year 2000 compliance. However, management cannot provide assurance that actual
results would not differ from any estimate. Factors that might cause actual
results to differ from any estimate include availability of skilled resources,
the ability to locate and modify all relevant software code and vendor
compliance. New U S WEST believes that with its planned modifications to
existing software and conversions to new software, the year 2000 issue can be
mitigated.
NEW ACCOUNTING STANDARDS
Effective January 1, 1996, New U S WEST adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." See Note 4-- Property, Plant and Equipment--to the New U S WEST Combined
Financial Statements.
In 1996, New U S WEST adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." See Note 10--Stock Incentive Plans--to the New U S WEST Combined
Financial Statements.
New U S WEST will adopt SFAS No. 128, "Earnings Per Share" effective
December 31, 1997. This accounting standard specifies new computation,
presentation and disclosure requirements for earnings per share. Among other
things, SFAS No. 128 requires presentation and diluted earnings per share on the
face of the income statement. Adoption of the new standard is not expected to
have a material impact on earnings per share for comparative periods.
In 1998, New U S WEST will adopt SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that the components of and the total
amount for comprehensive income be displayed in the financial statements.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities. Among
other things SFAS No. 131 requires detailed operating segment information of an
enterprise on an annual and interim period basis.
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NEW U S WEST UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statements of
operations of New U S WEST for the nine months ended September 30, 1997 and the
year ended December 31, 1996 give effect to the Refinancing (including the
refinancing of the Dex Indebtedness by New U S WEST), the issuance of the Dex
Dividend to holders of Media Stock in connection with the Dex Alignment and
transfers of certain assets and liabilities of U S WEST to New U S WEST, and
allocations of certain costs and expenses in connection with the Separation (the
"New U S WEST Separation Adjustments"), as if such transactions had been
consummated as of January 1, 1997 and 1996, respectively. The unaudited pro
forma condensed combined balance sheet gives effect to the New U S WEST
Separation Adjustments as if such transactions had been consummated as of
September 30, 1997.
The combined historical financial statements of New U S WEST included in
this Proxy Statement combine the historical results of operations and financial
position of the Communications Group and Dex as if such businesses operated as a
separate entity for all periods presented and do not give effect to any of the
New U S WEST Separation Adjustments. The following unaudited pro forma condensed
combined financial statements present the historical results of operations and
financial position of the Communications Group and Dex in separate columns to
the left of New U S WEST's combined historical results of operations and
financial position. This presentation is intended to assist the reader in
gaining a better understanding of the impact of the Dex Alignment on the
combined historical results of operations and financial position of New U S
WEST.
The assets of New U S WEST will be accounted for at the historical book
values at which they were carried by U S WEST prior to the Separation. MediaOne
will account for the distribution of New U S WEST to U S WEST's stockholders at
fair value, and will recognize a gain on the distribution. The historical
results of New U S WEST will be reflected as a discontinued operations by
MediaOne. See "Chapter 3: The Separation--Accounting Treatment."
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma financial
statements do not necessarily represent what New U S WEST's financial position
or results of operations would have been had the transaction occurred at such
dates or to project New U S WEST's financial position or results of operations
at or for any future date or period. In the opinion of management, all
adjustments necessary to present fairly the unaudited pro forma financial
information have been made. The unaudited pro forma financial statements should
be read in conjunction with the historical financial statements of New U S WEST,
including the notes thereto, included in Annex F to this Proxy Statement.
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NEW U S WEST
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMUNICATIONS NEW U S WEST
GROUP DEX NEW U S WEST SEPARATION NEW U S WEST
HISTORICAL HISTORICAL(A) HISTORICAL ADJUSTMENTS PRO FORMA
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Operating revenues..................... $ 7,803 $ 854 $ 8,657 $ 8,657
Operating expenses..................... 5,923 445 6,368 6,368
------ ----- ------ ----- ------
Operating income....................... 1,880 409 2,289 2,289
Interest expense....................... 303 1 304 $ 182(B) 486
Gains on sales of rural telephone
exchanges............................ 77 -- 77 77
Other (expense) income--net............ (52) 1 (51) (51)
------ ----- ------ ----- ------
Income (loss) before income taxes and
extraordinary item................... 1,602 409 2,011 (182) 1,829
Provision (benefit) for income taxes... 592 160 752 (65)(C) 687
------ ----- ------ ----- ------
Income (loss) before extraordinary
item................................. $ 1,010 $ 249 $ 1,259 $ (117) $ 1,142
------ ----- ------ ----- ------
------ ----- ------ ----- ------
Earnings per common share before
extraordinary item................... $ 2.09 $ 2.28
Average common shares outstanding
(millions)........................... 482.4 18.3(D) 500.7(E)
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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<PAGE>
NEW U S WEST
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMUNICATIONS NEW U S WEST
GROUP DEX NEW U S WEST SEPARATION NEW U S WEST
HISTORICAL HISTORICAL(A) HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Operating revenues...................... $ 10,079 $ 1,089 $ 11,168 $ 11,168
Operating expenses...................... 7,739 618 8,357 8,357
------- ------ ------- ------- -------
Operating income........................ 2,340 471 2,811 2,811
Interest expense........................ 445 3 448 $ 242(B) 690
Gains on sales of rural telephone 59 -- 59 59
exchanges.............................
Other expense--net...................... 41 4 45 45
------- ------ ------- ------- -------
Income (loss) before income taxes and 1,913 464 2,377 (242) 2,135
cumulative effect of change in
accounting principle..................
Provision (benefit) for income taxes.... 698 178 876 (87)(C) 789
------- ------ ------- ------- -------
Income (loss) before cumulative effect $ 1,215 $ 286 $ 1,501 $ (155) $ 1,346
of change in accounting principle.....
------- ------ ------- ------- -------
------- ------ ------- ------- -------
Earnings per common share before $ 2.55 $ 2.71
cumulative effect of change in
accounting principle..................
Average common shares outstanding 477.5 18.3(D) 495.8(E)
(millions)............................
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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<PAGE>
NEW U S WEST
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
COMMUNICATIONS NEW U S WEST
GROUP DEX NEW U S WEST SEPARATION NEW U S WEST
HISTORICAL HISTORICAL(A) HISTORICAL ADJUSTMENTS PRO FORMA
--------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets.......................... $ 2,213 $ 269 $ 2,482 $ 9(F) $ 2,491
Property, plant and equipment--net...... 13,787 73 13,860 26(F) 13,886
Other assets............................ 921 1 922 27(F) 949
------- ------ ------- ------- -------
Total assets............................ $ 16,921 $ 343 $ 17,264 $ 62 $ 17,326
------- ------ ------- ------- -------
------- ------ ------- ------- -------
LIABILITIES AND EQUITY
Short term debt......................... $ 726 $ 45 $ 771 $ 840(B) $ 1,783
60(G)
21(F)
109(H)
(18) (I)
Other current liabilities............... 3,019 88 3,107 (14) (G) 3,112
19(F)
Long-term debt.......................... 5,024 -- 5,024 3,015(B) 8,039
Other noncurrent liabilities............ 3,911 42 3,953 22(F) 3,975
Equity.................................. 4,241 168 4,409 (4,705)(J) 417
(46)(G)
(109)(H)
18(I)
850(D)
------- ------ ------- ------- -------
Total liabilities and equity............ $ 16,921 $ 343 $ 17,264 $ 62 $ 17,326
------- ------ ------- ------- -------
------- ------ ------- ------- -------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements
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<PAGE>
NEW U S WEST
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) Reflects the historical results of operations and financial position of Dex,
net of affiliated transactions.
(B) Reflects $3.855 billion of the Dex Indebtedness (net of $45 million of Dex
debt) and debt incurred related to costs and expenses associated with the
Separation. Interest expense is based on a rate of 5.50 percent for short
term debt and 6.20 percent for long term debt (the current average of the 5
and 10-year borrowing rates available to U S WEST Communications). A 1/8
percentage point change in the assumed financing rate would change annual
interest expense by $5.0 million.
(C) Reflects the estimated income tax effects of the pro forma adjustments.
(D) Issuance of $850 million of New U S WEST Common Stock at $46.36 per share
(the average price of Communications stock for the 20 trading days ending 5
days prior to the Separation, as if the Separation had occurred on January
30, 1998) pursuant to the Dex Alignment.
(E) Reflects the redemption of each share of Communications Stock for one share
of New U S WEST Common Stock and the issuance of $850 million of New U S
WEST Common Stock at $46.36 per share pursuant to the Dex Alignment.
(F) Reflects the transfer of assets and liabilities of U S WEST previously
shared by New U S WEST and MediaOne, for which debt financing is assumed.
(G) Reflects New U S WEST's allocated share of Separation costs, for which debt
financing is assumed. Separation costs include severance, financial
advisory, legal, registration fee, printing and mailing costs related to the
separation. The income statement effects of New U S WEST's allocated share
of Separation costs are not presented since such costs are nonrecurring in
nature.
(H) Reflects a dividend to MediaOne of $109 million for New U S WEST's allocated
share of refinancing costs associated with the Separation, for which debt
financing is assumed.
(I) Reflects an $18 million contribution to New U S WEST as repayment for the
excess of insurance premiums paid by New U S WEST to MediaOne in excess of
liabilities incurred.
(J) Reflects adjustment to record Dex at book value.
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<PAGE>
CHAPTER 6: INFORMATION ABOUT MEDIAONE
BUSINESS OF MEDIAONE
GENERAL
MediaOne is a diversified global media and broadband communications company
and the third largest cable television system operator in the United States.
MediaOne has operations and investments in three principal areas: (i) domestic
broadband communications; (ii) international broadband and wireless
communications; and (iii) cable television programming. Among its investments,
MediaOne holds a 25.51% interest in TWE, a provider of cable programming, filmed
entertainment and broadband communications services which is the second largest
cable television system operator in the United States.
STRATEGY
Cable and broadband services are at the core of MediaOne's strategy. While
other companies develop software, hardware and global applications for the
networked world, MediaOne will focus on the supply of easy-to-use local
connections to it. It will do so by providing highly clustered customer access
to hybrid fiber-coax ("HFC") broadband networks. MediaOne believes that this
type of access provides the best and most economical platforms for delivery of
video, data, telephony and other broadband services. Management believes that,
relative to other network alternatives, HFC provides a more desirable
combination of speed, interactivity, signal quality and integration of services.
It is also a better platform for providing a combination of services on a
largely variable cost basis. MediaOne is currently upgrading its cable systems.
Once completed, this upgrade will enhance network quality and reliability as
well as provide capacity for added channels, pay-per-view offerings and targeted
advertising. The upgrade will also permit the offering of new services to
subscribers such as high-speed Internet access, telephone and digital video
offerings. These new services could be offered to subscribers on a highly
variable cost basis. By the end of 1998, MediaOne expects that it will have more
than 75 percent of its owned or managed cable properties upgraded to offer
multiple services to customers.
BUSINESS
DOMESTIC BROADBAND COMMUNICATIONS
MEDIAONE NETWORKS. MediaOne is the third-largest cable television system
operator in the United States. As of September 30, 1997, MediaOne's cable
television systems passed approximately 8.4 million homes and provided service
to approximately 4.9 million basic cable subscribers. MediaOne's systems are
organized into six operating regions, including large clusters in Atlanta,
Georgia, Eastern Massachusetts, Southern California, Southern Florida, Detroit,
Michigan and Minneapolis/St. Paul, Minnesota. As of September 30, 1997,
approximately 80% of MediaOne's total basic subscribers were located in clusters
with a population greater than 100,000. MediaOne believes that its operating
scale in key markets generates significant benefits, including operating
efficiencies, and enhances its ability to develop and deploy new broadband
technologies and services.
MediaOne's cable services are marketed under the "MediaOne" brand.
MediaOne's cable systems offer customers various levels (or "tiers") of cable
programming services consisting of broadcast television signals available
off-the-air in any locality, television signals from so-called "super stations"
originating in distant cities (such as WGN), various satellite-delivered
non-broadcast channels (such as CNN, MTV, USA Network, ESPN, the Discovery
Channel and Nickelodeon), displays of information featuring news, weather, stock
and financial market reports and programming originated locally by the systems
(such as public, governmental and educational access channels). MediaOne's
systems also provide premium programming services to their customers for an
extra monthly charge. These premium programming services include HBO, Cinemax,
Showtime, The Movie Channel, Encore and regional
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sports networks. Customers generally pay initial connection charges and fixed
monthly fees for a tier of programming services and additional fixed monthly
fees for premium programming services. MediaOne also offers pay-per-view
programming of movies and special events for an additional per-program charge.
MediaOne's systems have channel capacity and addressability that are among
the highest in the cable industry. MediaOne's systems are located primarily in
suburban communities adjacent to major metropolitan markets and in mid-sized
cities that generally are densely populated and geographically diverse. MediaOne
believes that its technologically advanced broadband networks and the
demographic profile of its subscriber base, coupled with its effective
marketing, have been essential to its ability to sustain total monthly revenue
per basic subscriber that is among the highest in the cable industry. MediaOne
believes that the geographic diversity of its system clusters reduces its
exposure to economic, competitive or regulatory factors in any particular
region.
MediaOne is upgrading its cable systems to create broadband HFC networks.
These HFC networks will provide increased channel capacity for the delivery of
additional cable programming and facilitate the delivery of additional services,
such as telephony services, enhanced video services, Internet access services
and high-speed data services. MediaOne is selectively upgrading its systems and
expects that it will have more than 75% of its systems upgraded by the end of
1998. MediaOne has already begun to offer additional services over upgraded HFC
networks in certain markets. For example, MediaOne currently offers MediaOne
Express, an Internet access service, over its HFC networks in Los Angeles,
Boston, Detroit, Atlanta, Jacksonville, Richmond and Southern Florida. In late
1997, MediaOne and Time Warner Inc. ("TWX") announced plans to merge the
operations of MediaOne Express and Road Runner, the Internet access service
offered by Time Warner Cable, to create the largest cable-based high-speed
Internet access business in the United States. In addition, MediaOne began
offering telephony services over its HFC networks in the Atlanta, Georgia
metropolitan area in January 1998 and expects to begin offering telephony
services in two additional markets in 1998.
To further enhance the clustering of its cable systems, MediaOne has
recently agreed to exchange (the "TCI Exchange") certain cable television
systems with TCI. Pursuant to the TCI Exchange, MediaOne will exchange cable
systems serving approximately 542,000 subscribers, including systems in Chicago,
Southern Illinois and Central Michigan, for cable systems of TCI serving
approximately 508,000 subscribers, including systems in California, Florida and
Georgia. Consummation of the TCI Exchange is expected to occur in mid-1998,
subject to the receipt of certain franchise and other approvals.
In May 1997, MediaOne entered into an agreement (the "Minnesota Sale
Agreement") to sell its cable system (the "Minnesota System") serving the
Minneapolis/St. Paul, Minnesota metropolitan area to Charter Communications,
Inc. ("Charter") for approximately $600 million. As of September 30, 1997, the
Minnesota System served approximately 300,000 subscribers. The Minnesota System
was acquired by MediaOne as part of its acquisition of Continental. Under
current FCC cross-ownership rules, MediaOne is prohibited from owning a cable
network and a telephone network in the same geographic area. Because the
Minnesota System is located in an area where U S WEST Communications owns the
telephone network, MediaOne was mandated by the FCC to sell the Minnesota System
in connection with the Continental acquisition in order to comply with the
cross-ownership rules. As a result of the Separation, U S WEST Communications
and MediaOne will be independent companies and MediaOne will no longer be
prohibited by the FCC rules from owning the Minnesota System. U S WEST has
petitioned the FCC for a waiver from the FCC cross-ownership rules, which would
permit MediaOne to own the Minnesota System until the consummation of the
Separation. If such waiver is obtained, MediaOne intends to terminate the
Minnesota Sale Agreement and retain the Minnesota System. MediaOne has the right
to terminate the Minnesota Sale Agreement at any time upon the payment to
Charter of a $30 million termination fee.
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TIME WARNER CABLE. MediaOne owns a 25.51% priority capital and residual
equity interest in TWE. The remaining interests in TWE are owned by TWX. See
"--Time Warner Entertainment." TWE, through Time Warner Cable, its cable
division ("Time Warner Cable"), is the second-largest cable television system
operator in the United States. Time Warner Cable owns or manages cable systems
in 34 states. These systems include 34 clusters of more than 100,000
subscribers, including Time Warner Cable of New York City, the largest cluster
in the United States. More than 55% of Time Warner Cable's subscribers are
located in Florida, New York, North Carolina, Ohio and Texas. As of September
30, 1997, Time Warner Cable owned cable television systems that passed
approximately 15.4 million homes and provided service to approximately 9.6
million basic cable subscribers. Of these systems, systems passing approximately
7.0 million homes and providing service to approximately 4.6 million subscribers
are owned by Time Warner Entertainment-Advance/Newhouse Partnership ("TWE-A/N"),
a partnership in which TWE owns a 66.7% interest, and the Advance/Newhouse
Partnership ("A/N") owns a 33.3% interest. In addition, Time Warner Cable
manages cable television systems owned by TWX which, as of September 30, 1997,
passed approximately 3.8 million homes and provided service to approximately 2.3
million cable television subscribers. Time Warner Cable's cable services are
marketed under the "Time Warner Cable" brand. Time Warner Cable offers cable
programming services over its networks similar to those offered by MediaOne.
Like MediaOne, Time Warner Cable is upgrading its cable systems to provide
increased channel capacity and to facilitate the delivery of additional
services.
In October 1997, TWE, TWE-A/N and TWX entered into an agreement pursuant to
which TWX will contribute cable systems owned by TWX serving approximately
650,000 subscribers to TWE-A/N, subject to approximately $1 billion in debt, in
exchange for $300 million of common and preferred interests. In connection with
the transaction, A/N will make an equity contribution to TWE-A/N to maintain its
33.3% interest therein. Upon consummation of this transaction, TWE-A/N will be
owned approximately 65.3% by TWE, 33.3% by A/N and 1.4% by TWX. The transaction
is expected to close in the first quarter of 1998, subject to customary closing
conditions, including any necessary franchise approvals.
Through the TWE Management Committee, MediaOne and TWX jointly direct the
businesses and affairs of substantially all of the cable systems of Time Warner
Cable. Through its representation on the TWE Management Committee, MediaOne
believes that it has substantial influence with respect to the operation of Time
Warner Cable's cable systems. U S WEST and TWE have the right to appoint the
chairman of the TWE Management Committee in alternating years. TWE is also a
leading provider of filmed entertainment and cable programming. For additional
information with respect to MediaOne's interest in TWE, see "--Cable
Programming" and "--Time Warner Entertainment."
OTHER BROADBAND INTERESTS. MediaOne owns or holds interests in CLECs which
provide business telephony services. Such interests include an 80% interest in
Continental Fiber Technologies, Inc., which provides business telephony services
in Jacksonville, Florida; a 63% interest in Alternet of Virginia, Inc., which
provides business telephony services in Richmond, Virginia; and a 100% interest
in MediaOne Business Services, Inc., which provides business telephony services
in Atlanta, Georgia. MediaOne leases fiber to these companies for use in their
fiber-optic networks. In addition, MediaOne, through TWE, owns an interest in
Time Warner Communications, a provider of business telephony services in many of
the principal cities where Time Warner Cable's systems are located. Time Warner
Communications is owned by TWE, TWE-A/N and TWX, each of whom leases fiber to
Time Warner Communications for use in its fiber-optic networks.
MediaOne owns a 10% interest in Primestar Partners, L.P. ("Primestar"), a
nationwide provider of DBS services. TWE and TWE-A/N also collectively hold a
31% interest in Primestar. MediaOne, TWE and TWE-A/N generally have the
non-exclusive right to distribute Primestar's services to customers in their
respective service areas. MediaOne, TWE, TWE-A/N and the other partners in
Primestar have
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entered into an agreement whereby each partner's interest in Primestar, as well
as its Primestar subscribers and certain related assets, will be contributed to
a newly formed company that will be known as Primestar, Inc. ("New Primestar").
MediaOne will receive shares of New Primestar and cash and TWE will receive
shares of New Primestar and realize a reduction in indebtedness in connection
with such contribution. In addition, in a related, independent transaction,
following such contribution, New Primestar has agreed to purchase the satellite
assets owned by American Sky Broadcasting LLC, which is owned by News
Corporation and MCI Communications Corporation, in exchange for a nonvoting
interest in New Primestar. These transactions, which are subject to various
regulatory and other approvals, are expected to close in 1998.
INTERNATIONAL BROADBAND AND WIRELESS COMMUNICATIONS
BROADBAND COMMUNICATIONS. MediaOne owns interests in various providers of
broadband communications services in international markets in continental
Europe, the United Kingdom and Asia. As of September 30, 1997, these interests
represented approximately 2 million proportionate homes passed and 900,000
proportionate subscribers (after giving effect to the sale by MediaOne of
Fintelco, its broadband business in Argentina).
Among its international broadband interests, MediaOne holds a 26.8% interest
in Telewest, the second-largest provider of combined cable and
telecommunications services in the United Kingdom. Telewest is constructing
broadband networks capable of providing a broad range of video, telephony and
data services. As of September 30, 1997, Telewest had approximately 654,000
cable subscribers and 980,000 telephony customers. TCI also owns a 26.8%
interest in Telewest. MediaOne also holds interests in other providers of cable
and broadband communications services in international markets, including a 94%
interest in Kabel Plus, a provider of cable and telephony services in the Czech
Republic; a 50% interest in A2000, a provider of cable television services in
the Netherlands; a 28% interest in Telenet Flanders, a provider of cable and
telephony services over an HFC network in portions of Belgium; a 35% interest in
ARIAWEST, a provider of telecommunications services in portions of Indonesia; a
25% interest in Singapore Cablevision Pty Ltd, a joint venture that is
constructing a broadband network in Singapore; and a 25% interest in Titus
Communications Corp. ("Titus") and a 19% interest in Chofu Cable Television
("Chofu"), each of which is constructing cable television systems in Japan. TWE
and TWE-A/N also collectively hold a 25% beneficial interest in Titus and a 19%
beneficial interest in Chofu.
WIRELESS COMMUNICATIONS. MediaOne owns interests in various providers of
wireless communications services in international markets in continental Europe,
the United Kingdom and Asia. As of September 30, 1997, these interests
represented 77.3 million proportionate POPs and approximately 871,000
proportionate subscribers.
Among its international wireless interests, MediaOne owns a 50% interest in
Mercury Personal Communications ("One2One"), which provides PCS services in the
United Kingdom under the brand "One2One." The remaining 50% of One2One is owned
by Cable & Wireless plc. One2One was the first PCS service in the world to
commence operations in 1993. As of September 30, 1997, One2One's networks served
approximately 808,000 subscribers and provided coverage to approximately 90% of
the United Kingdom's population. MediaOne also holds interests in various other
providers of wireless communications services in international markets,
including a 46.6% interest in Westel 900 and a 49% interest in Westel 450,
providers of cellular services in Hungary; 24.5% interests in Eurotel Praha and
Eurotel Bratislava, providers of wireless services in portions of the Czech and
Slovak Republics; a 22.5% interest in Poland GSM, a provider of Global Systems
for Mobile Communications ("GSM") cellular services in Poland; a 49% interest in
U S WEST BPL Cellular, a provider of GSM cellular services in certain regions of
India; a 20% interest in Binariang, a provider of wireless, wireline,
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<PAGE>
satellite and international gateway services in Malaysia; and a 66.5% interest
in the Russian Telecommunications Development Corp., a provider of cellular
services in certain cities in Russia.
CABLE PROGRAMMING
MediaOne has made investments in cable programming networks as a means of
generating additional interest among cable television consumers. Among its
investments in providers of cable programming, MediaOne holds a 10.4% interest
in E! Entertainment Television, Inc., a 50% interest in New England Cable News,
a 10.0% interest in PPVN Holding Co., which operates under the brand name
"Viewer's Choice," a 7.5% interest in the Sunshine Network, a provider of sports
programming in Florida, a 14.4% interest in The Golf Channel, a 10.1% interest
in Music Choice, a distributor of audio programming over cable networks, a 21.9%
interest in the Outdoor Life Network and a 21.7% interest in Speedvision.
Internationally, MediaOne holds a 7.1% interest in Flextech plc, a provider of
cable programming in the United Kingdom.
TWE holds extensive interests in cable programming networks. TWE, through
its Home Box Office division ("Home Box Office"), owns and operates HBO and
Cinemax. HBO's programming includes commercial-free, uncut feature motion
pictures, sporting events, special entertainment events and motion pictures
produced by or for HBO. Cinemax offers a broad range of motion pictures,
including classic, family, action-adventure, foreign and recently-released
films. Home Box Office has also entered into a number of international joint
ventures, including HBO Ole in Latin America and a movie-based HBO service in
Asia. Home Box Office also produces television programming and operates TVKO, an
entity that produces boxing matches and other pay-per-view programming. TWE also
holds interests in various other cable programming networks, including a 50%
interest in Comedy Central and a 33.33% interest in Court TV. MediaOne does not
have any rights with respect to the management and operation of TWE's cable
programming businesses. See "--Time Warner Entertainment."
TIME WARNER ENTERTAINMENT
MediaOne owns a 25.51% pro rata priority capital and residual equity
interest in TWE. Subsidiaries of TWX own a 74.49% pro rata priority capital and
residual equity interest in TWE as well as certain senior capital interests in
TWE. TWE is engaged in the cable programming, filmed entertainment and broadband
communications businesses. Subject to the powers of the TWE Management Committee
with respect to Time Warner Cable, and except for approvals required for certain
significant actions, the businesses and affairs of TWE are controlled by TWX.
For a description of the broadband communications and cable programming
operations of TWE, see "--Business--Domestic Broadband Communications--Time
Warner Cable" and "--Cable Programming."
TWE's filmed entertainment business consists of the production, financing
and distribution of feature motion pictures (including through Warner Bros.),
television series, made-for-television movies, miniseries for television,
first-run syndication programming and animated programming for theatrical and
television exhibition, and the distribution of prerecorded videocassettes and
videodiscs. TWE's filmed entertainment business is also engaged in product
licensing and the ownership and operation of retail stores, movie theaters and
theme parks, including Warner Bros. Studio Stores and a 49% interest in Six
Flags theme parks. TWE also owns and operates The WB, a national broadcast
television network launched in 1995.
MediaOne has an option to increase its equity interest in TWE from 25.51% to
31.84% depending upon cable operating performance. The option is exercisable, in
whole or in part, on any two occasions between January 1, 1999 and May 31, 2005
for an aggregate cash exercise price of $1.25 billion to $1.8 billion, depending
upon the year of exercise. Either MediaOne or TWE may elect that the exercise
price for the option be paid with partnership interests rather than cash.
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<PAGE>
TWE's limited partnership agreement contains certain non-competition
restrictions (the "TWE Non-Competition Restrictions"), which prohibit each of
the TWE partners, including MediaOne, from competing with TWE in the three
principal lines of business of TWE--cable, filmed entertainment and
programming--as such businesses may evolve, subject to certain agreed upon
exceptions and limited passive investments. The TWE Non-Competition Restrictions
do not prohibit MediaOne from engaging in the cable business in an area where
TWE is not then engaging in the cable business, subject to TWE's right of first
refusal with respect to such cable business, or from engaging in the cable
business outside of the United States. In addition, the TWE Non-Competition
Restrictions do not prevent MediaOne from acquiring a foreign cable business
that is also engaged in a programming business if such programming business does
not account for more than 40% of the cable business' revenues. Under the TWE
Non-Competition Restrictions, the acquisition by U S WEST of Continental and its
cable systems in the Atlanta, Georgia metropolitan area required the consent of
TWX. The ability of MediaOne to make acquisitions of additional cable systems
may be limited by the TWE Non-Competition Restrictions.
MediaOne also owns a 12.75% interest in Time Warner Entertainment Japan Inc.
("TWE Japan"). The remaining interests in TWE Japan are owned by TWX, Itochu
Corporation and Toshiba Corporation. TWE Japan was organized to conduct TWE's
businesses in Japan, including video distribution, theatrical film and
television distribution and merchandising businesses, and to expand and develop
new business opportunities.
AIRTOUCH TRANSACTION
On January 29, 1998, U S WEST, U S WEST Media Group, Inc., U S WEST
NewVector Group, Inc. ("NewVector"), U S WEST PCS Holdings, Inc. ("PCS
Holdings") and AirTouch entered into an Agreement and Plan of Merger (the
"AirTouch Merger Agreement") pursuant to which U S WEST agreed to sell the Media
Group's domestic wireless business to AirTouch in a tax-free transaction. The
Media Group's domestic wireless business is currently conducted by NewVector,
which conducts the Media Group's domestic cellular business, and by PCS
Holdings, which holds the Media Group's interest in PrimeCo Personal
Communications, L.P., a provider of PCS services. Pursuant to the AirTouch
Merger Agreement, NewVector and PCS Holdings will merge with and into AirTouch
and, as a result, AirTouch will acquire the businesses of NewVector and PCS
Holdings.
Pursuant to the AirTouch Transaction, AirTouch will pay MediaOne
approximately $5.7 billion in consideration (subject to certain closing
adjustments), which will consist of (i) the assumption by AirTouch of
approximately $1.4 billion of indebtedness of NewVector and PCS Holdings and
(ii) the issuance to MediaOne of $1.6 billion in liquidation preference of
AirTouch Preferred Stock and approximately $2.7 billion in value of AirTouch
Common Stock. The number of shares of AirTouch Common Stock to be received by
MediaOne in the AirTouch Transaction will depend upon the average volume-
weighted trading price of the AirTouch Common Stock during a 30-day period
ending on the fifth trading day prior to the closing of the AirTouch Transaction
(the "AirTouch Determination Price"). If the AirTouch Determination Price is
less than or equal to $40, MediaOne will receive 67.1 million shares of AirTouch
Common Stock. If the AirTouch Determination Price is greater than or equal to
$45, MediaOne will receive 60.8 million shares of AirTouch Common Stock. If the
AirTouch Determination Price is between $40 and $45, the number of shares of
AirTouch Common Stock to be received by MediaOne will decrease from 67.1 million
to 60.8 million on a proportionate basis.
MediaOne and AirTouch are currently parties to a multi-phased joint venture
pursuant to which they have agreed to combine their domestic cellular
businesses. The AirTouch Transaction has been entered into in lieu of such joint
venture.
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<PAGE>
MediaOne expects to consummate the AirTouch Transaction in the second
quarter of 1998, subject to the receipt of certain regulatory and other third
party approvals. The approval of U S WEST's stockholders is not required to
consummate the AirTouch Transaction.
Following consummation of the AirTouch Transaction, MediaOne intends to take
appropriate actions to monetize the shares of AirTouch Preferred Stock and
AirTouch Common Stock which it receives in the AirTouch Transaction. In
connection with the AirTouch Transaction, MediaOne and AirTouch will enter into
an Investment Agreement, pursuant to which AirTouch will agree to provide to
MediaOne registration rights with respect to the shares of AirTouch Preferred
Stock and AirTouch Common Stock which it receives in the AirTouch Transaction
and to assist MediaOne in the monetization of such shares.
COMPETITION
MediaOne's cable television systems generally compete for viewer attention
with other providers of video programming, including DBS systems, MMDS systems,
LMDS systems, SMATV systems and other cable companies providing services in
areas where MediaOne operates. In addition, certain LECs, including RBOCs, are
beginning to offer video programming in competition with MediaOne's cable
services. In the past, federal cross-ownership restrictions have limited entry
by LECs into the cable television business. The Telecommunications Act has
eliminated many of these barriers, thereby enhancing the ability of LECs to
provide video programming in competition with MediaOne. The extent of such
competition in any franchise area is dependent, in part, upon the quality,
variety and price of the programming provided by these services. Many of these
competitive services are generally not subject to the same local government
regulation that affects cable television. The cable television services offered
by MediaOne also face competition for viewers and advertising from other
communications and entertainment media, including off-air television
broadcasting services, movie theaters, video tape rentals and live sporting
events. The competition faced by MediaOne's cable systems may increase in the
future with the development and growth of new technologies.
As MediaOne begins to offer additional services over its HFC networks,
MediaOne will face additional competition. The telephony services which MediaOne
intends to offer will face competition from other providers of local exchange
services, including RBOCs, LECs, IXCs and other providers of local exchange
services. The degree of competition will be dependent upon the state and federal
regulations concerning entry, interconnection requirements and the degree of
unbundling of the LECs' networks. Competition will be based upon price, service
quality and breadth of services offered. The Internet access and high-speed data
services offered by MediaOne compete with other providers of such services,
including LECs, IXCs, ISPs and other on-line service providers.
MediaOne's international broadband and wireless communications businesses
also face competition in their respective markets. Telewest's cable television
services compete with broadcast television stations, DBS services, SMATV systems
and certain narrowband operators in the United Kingdom. Telewest's
telecommunications services compete with domestic telephone companies in the
United Kingdom, such as British Telecommunications plc. One2One competes with
two cellular operators and one PCS operator in the United Kingdom. Competition
is based upon price, geographic coverage and the quality of the services
offered.
REGULATION
The products and services of MediaOne are subject to varying degrees of
regulation. Under the Telecommunications Act, the regulation of all but basic
tier cable rates will be discontinued effective March 31, 1999, or earlier if
competition exists. The Telecommunications Act also (i) eliminates certain
cross-ownership restrictions among cable operations, broadcasters and MMDS
operations, (ii) removes
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<PAGE>
barriers to competition with LECs, and (iii) eliminates restrictions that
previously applied to MediaOne relating to long-distance services.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") authorizes the FCC to set standards for governmental
authorities to regulate the rates for certain cable television services, except
for services offered on a per-channel or per-program basis, and equipment.
Pursuant to authority granted under the 1992 Cable Act, the FCC adopted a series
of rate regulations. The FCC also publicly announced that it would consider
"social contracts" as an alternative form of rate regulation for cable
operations. Continental's social contract with the FCC was adopted by the FCC on
August 3, 1995 and amended on August 21, 1996 to include systems acquired by
Continental. The social contract is a six-year agreement covering all of
Continental's franchises, including those that were unregulated, and settled
Continental's pending rate cases. As part of the resolution, Continental agreed
to, among other things, invest at least $1.7 billion in domestic system rebuilds
and upgrades through the year 2000 to expand channel capacity and improve system
reliability and picture quality. As of December 31, 1997, the commitment has
been substantially met. Continental also agreed to reduce its benchmark
broadcast service tier service rates. The social contract also provides that, if
the laws and regulations applicable to services offered in any Continental
franchise change in a manner that would have a material favorable financial
impact on Continental, MediaOne may petition the FCC to terminate the social
contract.
Cable television systems are also subject to local regulation, typically
imposed through the franchising process. Local officials may be involved in the
initial franchise selection, system design and construction, safety, rate
regulation, customer service standards, billing practices, community-related
programming and services, franchise renewal and imposition of franchise fees.
MediaOne is also subject to various regulations in the foreign countries in
which it has operations. In the United Kingdom, the licensing, construction,
operation, sale and acquisition of cable and wireline and wireless
communications systems are regulated by various government entities, including
the Department of Trade and Industry and the Department of National Heritage.
EMPLOYEES
At December 31, 1997, the businesses of MediaOne had approximately 16,350
employees, none of whom were represented by unions. MediaOne believes that its
relations with its employees are good.
REAL PROPERTY
The properties of MediaOne do not lend themselves to description by
character and location of principal units. At December 31, 1997, the majority of
MediaOne's property was utilized in providing cable television services.
LEGAL PROCEEDINGS
MediaOne is currently subject to claims and proceedings that have arisen in
the ordinary course of business. While complete assurance cannot be given as to
the outcome of any contingent liabilities, in the opinion of MediaOne, any
financial impact to which MediaOne will be subject is not expected to be
material in amount to its financial position or results of operations. In
addition, the businesses in which MediaOne holds an investment, including TWE,
are also subject to claims and proceedings that may be material to such
businesses.
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MANAGEMENT OF MEDIAONE
MEDIAONE BOARD OF DIRECTORS
Immediately after the Separation, it is expected that the MediaOne Board
will consist of directors. Pursuant to the MediaOne Restated Certificate,
the MediaOne Board will consist of three classes of directors. Each class of
directors will be subject to election by stockholders every three years. In
addition, it is anticipated that the MediaOne Board will adopt a policy that
requires directors to retire at the annual meeting following the director's 72nd
birthday.
Prior to the Separation Time, it is anticipated that Messrs. Harad,
Jacobson, McCormick, Trujillo, Popoff and Williams and Ms. Nelson, who will
serve on the New U S WEST Board, will resign, effective as of the Separation
Time, from the U S WEST Board and that Messrs. Dove, Lillis, Russ, Simpson,
Grieve, Crandall, Gilmour and Slevin will continue as members of MediaOne Board
following the Separation Time. In addition, it is anticipated that, prior to the
Separation Time, the U S WEST Board will elect to the
MediaOne Board, effective as of the Separation Time, to fill the vacancies
created by such resignations. The following is a brief listing of the principal
occupations, other major affiliations and ages of each such individual who will
serve on the MediaOne Board as of the Separation Time who is not currently a
member of the U S WEST Board. For information about such individuals who are
currently members of the U S WEST Board, see "Chapter 4: Other Matters to be
Considered at the Annual Meeting--U S WEST Director and Officer Information."
DIRECTOR COMPENSATION
Following the Separation, it is expected that MediaOne will continue the
compensation currently in effect with respect to the directors of U S WEST. For
a description of such arrangements, see "Chapter 4--Other Matters to be
Considered at the Annual Meeting--U S WEST Director and Executive Officer
Information--Director Compensation."
COMMITTEES OF THE MEDIAONE BOARD
Following the Separation, the MediaOne Board will establish the standing
committees listed below. No final determination has been made as to the
memberships of any such standing committees.
AUDIT COMMITTEE. The Audit Committee's purpose will be to oversee
MediaOne's accounting and financial reporting policies and practices and to
assist the MediaOne Board in fulfilling its fiduciary and corporate
accountability responsibilities. MediaOne's internal auditors and independent
certified public accountants will periodically meet with the Audit Committee and
will always have unrestricted direct access to the Audit Committee members.
BOARD AFFAIRS COMMITTEE. The Board Affairs Committee will serve as a
nominating committee for the MediaOne Board. The Committee will also make
recommendations regarding director compensation and committee structure and
composition, and oversees corporate governance, also consider candidates
recommended by stockholders.
FINANCE COMMITTEE. The Finance Committee will be responsible for evaluating
MediaOne's growth strategies and financing for MediaOne's operations.
HUMAN RESOURCES COMMITTEE. The Human Resources Committee will be
responsible to assure the appropriateness of the compensation and benefits of
the Executive Officers of MediaOne and its subsidiaries and to provide for the
orderly succession of management.
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MEDIAONE EXECUTIVE OFFICERS
Set forth below is information with respect to the current positions of the
individuals who have been selected to serve as executive officers of MediaOne
upon consummation of the Separation. It is anticipated that these individuals
will be elected by the MediaOne Board as of the Separation Time. Unless
otherwise indicated, the positions to be held by each such individual will be
similar to their current positions.
A. GARY AMES, Executive Vice President, and President, MediaOne
International since 1995. Mr. Ames previously served for five and one-half years
as President of U S WEST Communications, and has held a variety of operations,
public policy and other management positions at U S WEST and its predecessors
for over 30 years. Age 53.
ROGER K. CHRISTENSEN, Vice President--Group Operations and Strategy of the
Media Group since 1995. Following the Separation, Mr. Christensen will become
Senior Vice President--Administration of MediaOne and will be responsible for
human resources, public relations and certain other corporate services. Mr.
Christensen has been a Vice President of U S WEST since 1993, and has held a
variety of finance and other management positions with U S WEST and its
predecessors for over 25 years. Age 49.
FRANK M. EICHLER, Vice President--Public Policy and Regulatory Law of the
Media Group since 1997. Following the Separation, Mr. Eichler will become
Executive Vice President, General Counsel and Secretary of MediaOne. Mr. Eichler
has served as a Vice President of U S WEST since 1994, and has held a variety of
positions in the Law Department of U S WEST since 1984. Age 41.
CHARLES M. LILLIS, President and Chief Executive Officer of the Media Group
since 1995. Mr. Lillis previously served as President and Chief Executive
Officer of U S WEST Diversified Group. Mr. Lillis joined U S WEST in 1985 as
Vice President of Strategic Marketing and was named Executive Vice President and
Chief Planning Officer in 1987. Age 56.
JANICE C. PETERS, President of the Media Group's domestic cable operations
since 1997. Ms. Peters previously served as President of the Media Group's
wireless operations. Ms. Peters has been a Vice President of U S WEST since
1992, and has held a variety of marketing and other management positions with U
S WEST and its predecessors for over 25 years. Age 46.
RICHARD A. POST, Vice President and Chief Financial Officer of the Media
Group since 1997. Mr. Post previously served as President of Corporate
Development of the Media Group. Mr. Post has been a Vice President of U S WEST
since 1990, and has held a variety of finance and other management positions
with U S WEST for over ten years. Age 39.
PEARRE A. WILLIAMS, Vice President and President, Multimedia Ventures, since
1997. Mr. Williams previously served as Vice President--Business Development for
the Media Group. Mr. Williams has been a Vice President of U S WEST since 1989,
and has held a variety of corporate development and other management positions
with U S WEST for over ten years. Age 43.
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MEDIAONE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined statements of
operations of MediaOne for the nine months ended September 30, 1997 and the year
ended December 31, 1996 give effect to (i) discontinuance of the businesses of
New U S WEST (the "Discontinued Operations Adjustments"), (ii) the Refinancing
(including the refinancing by New U S WEST of the Dex Indebtedness), the
distribution of all of the New U S WEST Common Stock to U S WEST's stockholders,
transfers of certain assets and liabilities of U S WEST to New U S WEST and
allocations of certain costs and expenses in connection with the Separation (the
"MediaOne Separation Adjustments") and (iii) the AirTouch Transaction (the
"AirTouch Transaction Adjustments") as if such transactions had been consummated
as of January 1, 1997 and 1996, respectively. The unaudited pro forma condensed
combined balance sheet gives effect to the Discontinued Operations Adjustments,
the MediaOne Separation Adjustments and the AirTouch Transaction Adjustments as
if such transactions had been consummated as of September 30, 1997. The
unaudited pro forma condensed combined statements of operations for the years
ended December 31, 1995 and 1994, give effect to the Discontinued Operations
Adjustments but do not give effect to the MediaOne Separation Adjustments and
the AirTouch Transaction Adjustments.
Additionally, the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1996 gives effect to the Continental
Acquisition, U S WEST's refinancing of Continental's revolving debt facilities
following the Continental Acquisition through the issuance of U S WEST notes and
debentures, and related transactions (the "Continental Adjustments"), as if they
had been consummated as of January 1, 1996.
The assets of New U S WEST will be accounted for at the historical book
values at which they were carried by U S WEST prior to the Separation. MediaOne
will account for the distribution of New U S WEST to U S WEST's stockholders at
fair value, and will recognize a gain on the distribution. The historical
results of New U S WEST will be reflected as discontinued operations by
MediaOne. See "Chapter 3: The Separation--Accounting Treatment."
The pro forma adjustments included herein are based on available information
and certain assumptions that management believes are reasonable and are
described in the accompanying notes. The unaudited pro forma financial
statements do not necessarily represent what MediaOne's financial position or
results of operations would have been had the transactions occurred at such
dates or to project MediaOne's financial position or results of operations at or
for any future date or period. In the opinion of management, all adjustments
necessary to present fairly the unaudited pro forma financial information have
been made. The unaudited pro forma financial statements should be read in
conjunction with the historical financial statements of U S WEST, including the
notes thereto, incorporated herein by reference. See "Chapter 8: The Annual
Meeting and Certain Other Matters--Where You Can Find More Information."
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MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 1997
DOLLARS IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
MEDIAONE MEDIAONE PRO
PRO FORMA
DISCONTINUED FORMA MEDIAONE EXCLUDING AIRTOUCH
U S WEST OPERATIONS EXCLUDING SEPARATION AIRTOUCH TRANSACTION
HISTORICAL ADJUSTMENTS(A) SEPARATION ADJUSTMENTS TRANSACTION ADJUSTMENTS(G)
-------- ------------ ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues.......................... $11,471 $ (8,595)(A) $2,876 $ 2,876 $ (1,071)(G)
Operating expenses before depreciation and
amortization.................................... 6,563 (4,690)(A) 1,873 1,873 (636)(G)
Depreciation and amortization..................... 2,495 (1,616)(A) 879 879 (133)(G)
-------- ------------ ------- ------------ ------------- -------------
Total operating expenses........................ 9,058 (6,306) 2,752 2,752 (769)
-------- ------------ ------- ------------ ------------- -------------
Operating income (loss) from continuing
operations...................................... 2,413 (2,289) 124 124 (302)
Other income (expense):
Interest expense................................ (823 ) 304(A) (519 ) 201(B) (318) 70(G)
Equity losses in unconsolidated ventures........ (495 ) (495 ) (495) 84(G)
Other income (expense)--net..................... 53 (26)(A) 27 (5)(B) 22 68(G)
35(G)
-------- ------------ ------- ------------ ------------- -------------
Income (loss) from continuing operations before
income taxes and extraordinary item............. 1,148 (2,011) (863 ) 196 (667) (45)
(Provision) benefit for income taxes.............. (485 ) 752(A) 267 (57)(C) 210 41(C)
-------- ------------ ------- ------------ ------------- -------------
Income (loss) from continuing operations before
extraordinary item.............................. 663 (1,259) (596 ) 139 (457) (4)
Discontinued operations(A):
Results of operations, net of tax............... 1,256(A) 1,256 (1,256)(D)
Gain on separation.............................. 23,567(D) 23,567
-------- ------------ ------- ------------ ------------- -------------
Income before extraordinary item.................. 663 (3) 660 22,450 23,110 (4)
Extraordinary item:
Loss on early extinguishment of debt, net of
tax........................................... (3 ) 3(A) (311)(E) (311)
-------- ------------ ------- ------------ ------------- -------------
Net income........................................ 660 660 22,139 22,799 (4)
Dividends on preferred stock...................... (39 ) (39 ) (39)
-------- ------------ ------- ------------ ------------- -------------
Earnings available for common stock............... $ 621 $ $ 621 $ 22,139 $ 22,760 $ (4)
-------- ------------ ------- ------------ ------------- -------------
-------- ------------ ------- ------------ ------------- -------------
EARNINGS PER SHARE OF COMMUNICATIONS COMMON
STOCK........................................... $ 2.08
--------
--------
AVERAGE SHARES OF COMMUNICATIONS COMMON STOCK
OUTSTANDING (millions).......................... 482.37
--------
--------
LOSS PER COMMON SHARE OF MEDIA STOCK.............. $ (0.64 )
--------
--------
AVERAGE COMMON SHARES OF MEDIA STOCK OUTSTANDING
(millions)...................................... 606.57
--------
--------
EARNINGS (LOSS) PER SHARE OF
MEDIAONE COMMON STOCK:
CONTINUING OPERATIONS........................... $ (0.82)
DISCONTINUED OPERATIONS......................... 38.85(D)
EXTRAORDINARY ITEM:
LOSS ON EARLY EXTINGUISHMENT OF DEBT.......... (0.51)
-------------
EARNINGS PER SHARE................................ $ 37.52
-------------
-------------
AVERAGE SHARES OF MEDIAONE COMMON STOCK
OUTSTANDING (millions).......................... 606.57(F)
-------------
-------------
<CAPTION>
MEDIAONE PRO
FORMA
-------------
<S> <C>
Sales and other revenues.......................... $ 1,805
Operating expenses before depreciation and
amortization.................................... 1,237
Depreciation and amortization..................... 746
-------------
Total operating expenses........................ 1,983
-------------
Operating income (loss) from continuing
operations...................................... (178)
Other income (expense):
Interest expense................................ (248)
Equity losses in unconsolidated ventures........ (411)
Other income (expense)--net..................... 125
-------------
Income (loss) from continuing operations before
income taxes and extraordinary item............. (712)
(Provision) benefit for income taxes.............. 251
-------------
Income (loss) from continuing operations before
extraordinary item.............................. (461)
Discontinued operations(A):
Results of operations, net of tax...............
Gain on separation.............................. 23,567
-------------
Income before extraordinary item.................. 23,106
Extraordinary item:
Loss on early extinguishment of debt, net of
tax........................................... (311)
-------------
Net income........................................ 22,795
Dividends on preferred stock...................... (39)
-------------
Earnings available for common stock............... $ 22,756
-------------
-------------
EARNINGS PER SHARE OF COMMUNICATIONS COMMON
STOCK...........................................
AVERAGE SHARES OF COMMUNICATIONS COMMON STOCK
OUTSTANDING (millions)..........................
LOSS PER COMMON SHARE OF MEDIA STOCK..............
AVERAGE COMMON SHARES OF MEDIA STOCK OUTSTANDING
(millions)......................................
EARNINGS (LOSS) PER SHARE OF
MEDIAONE COMMON STOCK:
CONTINUING OPERATIONS........................... $ (0.82)
DISCONTINUED OPERATIONS......................... 38.85(D)
EXTRAORDINARY ITEM:
LOSS ON EARLY EXTINGUISHMENT OF DEBT.......... (0.51)
-------------
EARNINGS PER SHARE................................ $ 37.52
-------------
-------------
AVERAGE SHARES OF MEDIAONE COMMON STOCK
OUTSTANDING (millions).......................... 606.57(F)
-------------
-------------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
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<PAGE>
MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
PRO FORMA MEDIAONE
FOR THE DISCONTINUED PRO FORMA MEDIAONE
U S WEST CONTINENTAL CONTINENTAL OPERATIONS EXCLUDING SEPARATION
HISTORICAL ADJUSTMENTS(L) ACQUISITION ADJUSTMENTS(A) SEPARATION ADJUSTMENTS
----------- ----------------- ----------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C>
Sales and other revenues..... $ 12,911 $ 1,707(L) $ 14,618 $ (11,074)(A) $ 3,544
Operating expenses before
depreciation and
amortization............... 7,512 1,011(L) 8,523 (6,105)(A) 2,418
Depreciation and
amortization............... 2,544 756(L) 3,300 (2,158)(A) 1,142
----------- ------ ----------- --------------- ----------- -------
Total operating
expenses............... 10,056 1,767 11,823 (8,263) 3,560
----------- ------ ----------- --------------- ----------- -------
Operating income (loss) from
continuing operations...... 2,855 (60) 2,795 (2,811) (16)
Other expense:
Interest expense........... (612) (515)(L) (1,127) 448(A) (679) 262(B)
Equity losses in
unconsolidated ventures.. (346) (40)(L) (386) (386)
Other income (expense)--
net...................... (57) (13)(L) (70) (14)(A) (84) (6)(B)
----------- ------ ----------- --------------- ----------- -------
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle.................. 1,840 (628) 1,212 (2,377) (1,165) 256
(Provision) benefit for
income taxes............... (696) 186(C) (510) 876(A) 366 (121)(C)
----------- ------ ----------- --------------- ----------- -------
Income (loss) from continuing
operations before
cumulative effect of change
in accounting principle.... 1,144 (442) 702 (1,501) (799) 135
Income from discontinued
operations(A).............. 1,501 1,501 (1,501)(D)
----------- ------ ----------- --------------- ----------- -------
Income (loss) before
cumulative effect of change
in accounting principle.... 1,144 (442) 702 702 (1,366)
Dividend and preferences on
preferred stock............ (9) (41)(L) (50) (50)
----------- ------ ----------- --------------- ----------- -------
Income (loss) before
cumulative effect of change
in accounting principle
available for common
stock...................... $ 1,135 $ (483) $ 652 $ $ 652 $ (1,366)
----------- ------ ----------- --------------- ----------- -------
----------- ------ ----------- --------------- ----------- -------
<CAPTION>
MEDIAONE
PRO FORMA
EXCLUDING AIRTOUCH
AIRTOUCH TRANSACTION MEDIAONE
TRANSACTION ADJUSTMENTS(G) PRO FORMA
------------- --------------- -----------
<S> <C> <C> <C>
Sales and other revenues..... $ 3,544 $ (1,182)(G) $ 2,362
Operating expenses before
depreciation and
amortization............... 2,418 (792)(G) 1,626
Depreciation and
amortization............... 1,142 (147)(G) 995
------ ------- -----------
Total operating
expenses............... 3,560 (939) 2,621
------ ------- -----------
Operating income (loss) from
continuing operations...... (16) (243) (259)
Other expense:
Interest expense........... (417) 108(G) (309)
Equity losses in
unconsolidated ventures.. (386) 42(G) (344)
Other income (expense)--
net...................... (90) 90(G) 37
37(G)
------ ------- -----------
Income (loss) from continuing
operations before income
taxes and cumulative effect
of change in accounting
principle.................. (909) 34 (875)
(Provision) benefit for
income taxes............... 245 (13)(C) 232
------ ------- -----------
Income (loss) from continuing
operations before
cumulative effect of change
in accounting principle.... (664) 21 (643)
Income from discontinued
operations(A)..............
------ ------- -----------
Income (loss) before
cumulative effect of change
in accounting principle.... (664) 21 (643)
Dividend and preferences on
preferred stock............ (50) (50)
------ ------- -----------
Income (loss) before
cumulative effect of change
in accounting principle
available for common
stock...................... $ (714) $ 21 $ (693)
------ ------- -----------
------ ------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
118
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1996
IN MILLIONS (EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA FOR MEDIAONE
THE DISCONTINUED PRO FORMA MEDIAONE
U S WEST CONTINENTAL CONTINENTAL OPERATIONS EXCLUDING SEPARATION
HISTORICAL ADJUSTMENTS(L) ACQUISITION ADJUSTMENTS(A) SEPARATION ADJUSTMENTS
----------- ----------------- -------------- --------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER
SHARE OF COMMUNICATIONS
STOCK.................... $ 2.55 $ 2.55
----------- ------
----------- ------
AVERAGE COMMON SHARES OF
COMMUNICATIONS STOCK
OUTSTANDING.............. 477.55 477.55
----------- ------
----------- ------
LOSS PER COMMON SHARE OF
MEDIA STOCK.............. $ (0.16) $ (0.90)(L)
----------- ------
----------- ------
AVERAGE COMMON SHARES OF
MEDIA STOCK
OUTSTANDING.............. 491.92 623.20(L)
----------- ------
----------- ------
LOSS FROM CONTINUING
OPERATIONS PER SHARE OF
MEDIAONE COMMON STOCK....
AVERAGE SHARES OF MEDIAONE
COMMON STOCK
OUTSTANDING..............
<CAPTION>
MEDIAONE
PRO FORMA
EXCLUDING AIRTOUCH
AIRTOUCH TRANSACTION MEDIAONE PRO
TRANSACTION ADJUSTMENTS(G) FORMA
-------------- --------------- ------------
<S> <C> <C> <C>
INCOME BEFORE CUMULATIVE
EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE PER
SHARE OF COMMUNICATIONS
STOCK....................
AVERAGE COMMON SHARES OF
COMMUNICATIONS STOCK
OUTSTANDING..............
LOSS PER COMMON SHARE OF
MEDIA STOCK..............
AVERAGE COMMON SHARES OF
MEDIA STOCK
OUTSTANDING..............
LOSS FROM CONTINUING
OPERATIONS PER SHARE OF
MEDIAONE COMMON STOCK.... $(1.15) $ (1.11 )
------ ------
------ ------
AVERAGE SHARES OF MEDIAONE
COMMON STOCK
OUTSTANDING.............. 623.20 (F) 623.20 (F)
------ ------
------ ------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
119
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1997
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
MEDIAONE
MEDIAONE PRO FORMA
DISCONTINUED PRO FORMA MEDIAONE EXCLUDING
U S WEST OPERATIONS EXCLUDING SEPARATION AIRTOUCH
HISTORICAL ADJUSTMENTS(A) SEPARATION ADJUSTMENTS TRANSACTION
----------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets................................... $ 3,133 $ (2,424)(A) $ 709 $ (12)(H) $ 697
Net investment in assets of discontinued
operations(A).................................. 4,409(A) 4,409 (3,855)(J)
(554)(D)
----------- --------------- ----------- ------------- -----------
Total current assets............................. 3,133 1,985 5,118 (4,421) 697
----------- --------------- ----------- ------------- -----------
Property, plant and equipment--net............... 18,549 (13,860)(A) 4,689 (26)(H) 4,663
Investment in Time Warner Entertainment.......... 2,483 2,483 2,483
Investment in AirTouch Communications............
Net investments in international ventures........ 1,370 1,370 1,370
Intangible assets--net........................... 12,385 (59)(A) 12,326 12,326
Net investment in assets held for sale........... 410 410 410
Other assets..................................... 2,224 (857)(A) 1,367 (27)(H) 1,289
(51)(K)
----------- --------------- ----------- ------------- -----------
Total assets..................................... $ 40,554 $ (12,791) $ 27,763 $ (4,525) $ 23,238
----------- --------------- ----------- ------------- -----------
----------- --------------- ----------- ------------- -----------
LIABILITIES AND EQUITY
Short-term debt.................................. $ 2,286 $ (771)(A) $ 1,515 $ (315)(J) $ 1,197
(21)(H)
18(I)
Total other current liabilities.................. 4,279 (3,049)(A) 1,230 (22)(H) 1,208
Long-term debt................................... 13,422 (5,024)(A) 8,398 (3,540)(J) 5,055
197(K)
Deferred taxes................................... 4,308 (729)(A) 3,579 9(H) 3,588
Deferred credits and other....................... 3,557 (3,218)(A) 339 (31)(H) 308
Redeemable trust and preferred securities........ 1,180 1,180 1,180
Total equity..................................... 11,522 11,522 (24,167)(D) 10,702
23,567(D)
(311)(E)
109(K)
(18)(I)
----------- --------------- ----------- ------------- -----------
Total liabilities and equity..................... $ 40,554 $ (12,791) $ 27,763 $ (4,525) $ 23,238
----------- --------------- ----------- ------------- -----------
----------- --------------- ----------- ------------- -----------
<CAPTION>
AIRTOUCH
TRANSACTION MEDIAONE
ADJUSTMENTS(G) PRO FORMA
----------------- -----------
<S> <C> <C>
ASSETS
Current assets................................... $ (197)(G) $ 500
Net investment in assets of discontinued
operations(A)..................................
------ -----------
Total current assets............................. (197) 500
------ -----------
Property, plant and equipment--net............... (984)(G) 3,679
Investment in Time Warner Entertainment.......... 2,483
Investment in AirTouch Communications............ 4,339(G) 4,339
Net investments in international ventures........ 1,370
Intangible assets--net........................... (418)(G) 11,908
Net investment in assets held for sale........... 410
Other assets..................................... (451)(G) 838
------ -----------
Total assets..................................... $ 2,289 $ 25,527
------ -----------
------ -----------
LIABILITIES AND EQUITY
Short-term debt.................................. $ (149)(G) $ 1,048
Total other current liabilities.................. (292)(G) 916
Long-term debt................................... (1,206)(G) 3,849
Deferred taxes................................... 1,712(G) 5,300
Deferred credits and other....................... (116)(G) 192
Redeemable trust and preferred securities........ 1,180
Total equity..................................... 2,340(G) 13,042
------ -----------
Total liabilities and equity..................... $ 2,289 $ 25,527
------ -----------
------ -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
120
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
MEDIAONE
DISCONTINUED PRO FORMA
U S WEST OPERATIONS EXCLUDING
HISTORICAL ADJUSTMENTS(A) SEPARATION
----------- --------------- -----------
<S> <C> <C> <C>
Sales and other revenues................................................ $ 11,746 $ (10,416) $ 1,330
Operating expenses before depreciation and amortization................. 6,810 (5,774) 1,036
Depreciation and amortization........................................... 2,291 (2,066) 225
----------- --------------- -----------
Total operating expenses.............................................. 9,101 (7,840) 1,261
----------- --------------- -----------
Operating income from continuing operations............................. 2,645 (2,576) 69
Other income (expense):
Interest expense...................................................... (527) 429 (98)
Equity losses in unconsolidated ventures.............................. (207) (207)
Other income--net..................................................... 243 (101) 142
----------- --------------- -----------
Income (loss) from continuing operations before income taxes and
extraordinary item.................................................... 2,154 (2,248) (94)
Provision for income taxes.............................................. (825) 817 (8)
----------- --------------- -----------
Income (loss) from continuing operations before extraordinary item...... 1,329 (1,431) (102)
Income from discontinued operations(A).................................. 1,431 1,431
----------- --------------- -----------
Income before extraordinary item........................................ $ 1,329 $ -- $ 1,329
----------- --------------- -----------
----------- --------------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
121
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
MEDIAONE
DISCONTINUED PRO FORMA
U S WEST OPERATIONS EXCLUDING
HISTORICAL ADJUSTMENTS(A) SEPARATION
----------- -------------- -----------
<S> <C> <C> <C>
Sales and other revenues................................................. $ 10,953 $ (10,029) $ 924
Operating expenses before depreciation and amortization.................. 6,394 (5,585) 809
Depreciation and amortization............................................ 2,052 (1,928) 124
----------- -------------- -----------
Total operating expenses............................................. 8,446 (7,513) 933
----------- -------------- -----------
Operating income (loss) from continuing operations....................... 2,507 (2,516) (9)
Other income (expense):
Interest expense....................................................... (442) 381 (61)
Equity losses in unconsolidated ventures............................... (121) (121)
Other income--net...................................................... 339 (79) 260
----------- -------------- -----------
Income from continuing operations before income taxes.................... 2,283 (2,214) 69
Provision for income taxes............................................... (857) 811 (46)
----------- -------------- -----------
Income from continuing operations........................................ 1,426 (1,403) 23
Income from discontinued operations(A) .................................. 1,403 1,403
----------- -------------- -----------
Net income............................................................... $ 1,426 $ -- $ 1,426
----------- -------------- -----------
----------- -------------- -----------
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
122
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(A) Reflects the removal of the assets, liabilities, revenues and expenses of
the businesses of New U S WEST, and the reclassification of New U S WEST's
results to net investment in and income from discontinued operations. The
measurement date of the Separation, for discontinued operations accounting
purposes, will be the date upon which U S WEST stockholder approval,
necessary regulatory approvals and a favorable IRS Ruling are received.
(B) Reflects a reduction of historical interest expense of $201 million for the
nine-month period ended September 30, 1997 and $262 million for the year
ended December 31, 1996 as a result of the Refinancing, including the
refinancing by New U S WEST of the Dex Indebtedness. Incremental guaranteed
minority interest expense (included in "other income (expense)--net")
related to the refinancing of Trust Securities, as part of the Refinancing,
is included in the nine-month and annual results totaling $5 million and $6
million, respectively. The interest effects of the Refinancing were
calculated at the anticipated rates MediaOne will achieve on the
Refinancing. The actual interest rates achieved on Refinancing may vary
based on movement in interest rates and the cost of new debt available to
MediaOne. A 1/8 percentage point change in the assumed Refinancing rates
would change nine-month and annual interest expense by $4.2 million and
$5.6 million, respectively.
(C) Reflects the estimated income tax effects of the pro forma adjustments.
(D) Reflects the distribution of the New U S WEST Common Stock to U S WEST's
stockholders. The distribution will be accounted for as a dividend. Because
the distribution is non pro-rata, as compared with the businesses
previously attributed to U S WEST's two classes of stockholders, it will be
accounted for at fair value. The estimated gain on the distribution
represents the difference between the fair value of New U S WEST (as of
January 30, 1998) and the historical investment in New U S WEST. The actual
gain will be determined upon Separation. Since the distribution is
accounted for at fair value, the related distribution of the net pension
assets and net postretirement and other postemployment obligations are also
accounted for at fair value. The estimated gain on the distribution
includes a net gain of $1,820 million for the distribution of net pension
assets and net postretirement and other postemployment obligations at fair
value. The estimated gain is calculated as follows (dollars in millions):
<TABLE>
<S> <C>
Market capitalization of Communications Group
(484,515,415 shares of Communications Stock
at $48.125 per share)............................................ $ 23,317
Dex Dividend....................................................... 850
---------
Fair value of New U S WEST......................................... 24,167
Investment in New U S WEST......................................... (554)
Separation costs (net of taxes of $14)............................. (46)
---------
Gain on distribution............................................... $ 23,567
---------
---------
</TABLE>
(E) Reflects debt extinguishment costs of $311 million (net of taxes of $208
million) associated with the Refinancing. Debt extinguishment costs include
the difference between the market and face value of U S WEST debt and Trust
Securities and the write-off of debt issuance costs.
(F) As a result of the separation each share of Media Stock will remain
outstanding as one share of MediaOne Common Stock.
123
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
(G) Reflects the consummation of the AirTouch Transaction. MediaOne will retain
the international portion of its wireless business segment. The pro forma
adjustments reflect the following:
- Receipt of 67.1 million to 60.8 million shares of AirTouch Common Stock,
representing an approximate 11 to 12 percent ownership interest in
AirTouch. This interest will be accounted for by MediaOne as a marketable
equity security. Applying the AirTouch Determination Price as of January
30, 1998, MediaOne would receive 65,849,170 shares of AirTouch Common
Stock with a market value of $43.875 per share or $2,889 million in the
aggregate. See "Chapter 6: Business of MediaOne--AirTouch Transaction."
- Receipt of $1,450 million of AirTouch Preferred Stock at market value
(liquidation value of $1,600).
- Receipt of $68 million and $90 million in dividends on the AirTouch
Preferred Stock for the nine-month and annual periods, respectively, at an
estimated annual rate of 5.13 percent. The actual dividend rate will vary
based on the 30 year U. S. Treasury rate and will be determined upon
closing of the AirTouch Transaction.
- Reduction in debt of $1,400 million and a corresponding reduction of
nine-month and annual interest expense of $70 million and $108 million,
respectively.
- Removal of the consolidated assets, liabilities, revenues and expenses of
MediaOne's domestic cellular operations.
- Removal of MediaOne's equity method investment and related equity losses
associated with its investment in PrimeCo Personal Communications, L.P.
- Recognition of a gain on the disposition calculated as follows (in
millions):
<TABLE>
<S> <C>
AirTouch Common Stock.............................................. $ 2,889
AirTouch Preferred Stock (at market value)......................... 1,450
Debt reduction..................................................... 1,400
---------
Total proceeds..................................................... 5,739
Net book value of assets sold...................................... (1,637)
Sale related costs................................................. (50)
---------
Gain (before income taxes)......................................... 4,052
Deferred tax expense............................................... (1,712)
---------
Gain (after income taxes).......................................... $ 2,340
---------
---------
</TABLE>
Such gain has been excluded from the unaudited pro forma condensed combined
statement of operations.
(H) Reflects the transfer of assets and liabilities of U S WEST previously
shared by New U S WEST and MediaOne and a corresponding reduction in debt.
(I) Reflects an $18 million contribution to New U S WEST for insurance premiums
paid by New U S WEST to MediaOne in excess of liabilities incurred.
(J) Reflects a reduction in MediaOne debt totaling $3.9 billion in conjunction
with the refinancing by New U S WEST of the Dex Indebtedness. $45 million
of Dex debt reduction is included in the Discontinued Operations
Adjustments and the remaining $3,855 million is reflected as a MediaOne
Separation Adjustment.
(K) Reflects incremental borrowing to finance $311 million of debt
extinguishment costs (net of taxes of $208 million) and $46 million of
Separation costs (net of taxes of $14 million). The incremental
124
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
MEDIAONE
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (CONTINUED)
borrowing is net of a $51 million net reduction in debt issuance costs and
a $109 million reimbursement from New U S WEST for its share of debt
extinguishment costs. Such reimbursement is reflected as a dividend from
New U S WEST to MediaOne. Separation costs include severance, financial
advisory, legal, registration fee, printing and mailing costs related to
the Separation.
(L) U S WEST accounted for the Continental Acquisition by the purchase method
of accounting. Accordingly, U S WEST's cost to acquire Continental of
approximately $11.7 billion was allocated to the assets acquired and
liabilities assumed according to their respective fair values at November
15, 1996 as follows (in millions):
<TABLE>
<S> <C>
Purchase Price:
Media Stock issued............................................... $ 2,590
Series D Preferred Stock issued at fair value.................... 920
Cash paid through issuance of commercial paper................... 1,142
Acquisition costs................................................ 22
---------
Total consideration.............................................. 4,674
Debt and other liabilities assumed at fair value................. 7,048
---------
Purchase price, excluding deferred income tax gross up........... $ 11,722
---------
---------
Excess of Purchase Price over Net Tangible Assets Acquired:
Purchase price................................................... $ 11,722
Net tangible assets acquired (including acquisitions)............ 3,759
---------
Excess of purchase price over net tangible assets acquired....... 7,963
Deferred income tax gross up..................................... 3,324
---------
Total intangible assets acquired................................. $ 11,287
---------
---------
Allocation of intangible assets:
Identifiable intangible assets, primarily cable television
franchises..................................................... $ 7,203
Goodwill......................................................... 3,710
Investments in other unconsolidated ventures..................... 374
</TABLE>
Pro forma adjustments for the Continental Acquisition reflect the following:
- Historical Continental results for the period January 1, 1996 through
November 14, 1996 (the "Pre-Acquisition" period).
- Incremental amortization expense for the excess of the purchase price over
net tangible assets acquired (including intangible assets related to
Continental's equity method investments). The excess of the purchase price
over the net tangible cable assets acquired is being amortized over 25
years. The intangible assets acquired consist principally of the cable
television franchises of Continental and goodwill.
- Incremental interest expense related to financing the cash consideration
and the assumption and refinancing of Continental bank debt totaling
$3,657 million at the date of the Continental Acquisition.
- Dividends associated with the issuance of $1 billion in liquidation value
of Series D Preferred Stock.
- The issuance of 150.6 million shares of Media Stock as consideration in
the Continental Acquisition on January 1, 1996.
- Reversal of one-time items included in Continental Pre-Acquisition
earnings directly related to the Continental Acquisition.
125
CHAPTER 6: INFORMATION ABOUT MEDIAONE
<PAGE>
CHAPTER 7: CAPITAL STOCK
NEW U S WEST CAPITAL STOCK
GENERAL
The following is a summary of the terms of the capital stock of New U S WEST
as of the Separation Time. This summary does not purport to be complete and is
qualified in its entirety by reference to the complete text of such capital
stock set forth in the New U S WEST Restated Certificate. A copy of the form of
New U S WEST Restated Certificate has been filed as an exhibit to the New U S
WEST Registration Statement. See "Chapter 8: The Annual Meeting and Certain
Other Matters--Where You Can Find More Information."
New U S WEST will be authorized by the New U S WEST Restated Certificate to
issue (i) two billion (2,000,000,000) shares of New U S WEST Common Stock and
(ii) two hundred million (200,000,000) shares of preferred stock, issuable in
series ("New U S WEST Preferred Stock"), of which ten million shares will be
designated Series A Junior Preferred Stock pursuant to the New U S WEST Restated
Certificate.
NEW U S WEST COMMON STOCK
The holders of New U S WEST Common Stock will be entitled to receive
dividends when, as and if declared by the New U S WEST Board out of funds
legally available therefor, subject to the rights of any shares of New U S WEST
Preferred Stock at the time outstanding. The holders of New U S WEST Common
Stock will be entitled to one vote for each share on all matters voted on by
stockholders under the New U S WEST Restated Certificate, including the election
of directors. The holders of New U S WEST Common Stock will not have any
cumulative voting, conversion, redemption or preemptive rights. In the event of
dissolution, liquidation or winding up of New U S WEST, holders of New U S WEST
Common Stock will be entitled to share ratably in any assets remaining after the
satisfaction in full of the prior rights of creditors, including holders of New
U S WEST's outstanding indebtedness, and subject to the aggregate liquidation
preference and participation rights of any New U S WEST Preferred Stock then
outstanding. The additional shares of authorized stock available for issuance by
New U S WEST may be issued at such times and under such circumstances as to have
a dilutive effect on earnings per share and on the equity ownership of the
holders of New U S WEST Common Stock.
NEW U S WEST PREFERRED STOCK
The New U S WEST Board will be authorized to issue shares of New U S WEST
Preferred Stock, in one or more series, and to fix for each such series voting
powers, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereon as are
permitted by the DGCL. Although the New U S WEST Board has no current plans to
issue New U S WEST Preferred Stock, the issuance of shares of New U S WEST
Preferred Stock could be used to discourage an unsolicited acquisition proposal.
For example, a business combination could be impeded by the issuance of a series
of New U S WEST Preferred Stock containing class voting rights that would enable
the holder or holders of such series to block any such transaction.
Alternatively, a business combination could be facilitated by the issuance of a
series of New U S WEST Preferred Stock having sufficient voting rights to
provide a required percentage vote of the stockholders. In addition, under
certain circumstances, the issuance of New U S WEST Preferred Stock could
adversely affect the voting power of the holders of New U S WEST Common Stock.
Although the New U S WEST Board is required to make any determination to issue
any such stock based on its judgment as to the best interests of the
stockholders of New U S WEST, the New U S WEST Board could act in a manner that
would discourage an acquisition attempt or other transaction that some, or a
majority, of the stockholders might believe to be in their best interests or in
which stockholders might receive a
126
CHAPTER 7: CAPITAL STOCK
<PAGE>
premium for their stock over prevailing market prices of such stock. The New U S
WEST Board does not at present intend to seek stockholder approval prior to any
issuance of currently authorized stock, unless otherwise required by applicable
law, regulation or applicable stock exchange listing requirements.
NEW U S WEST RIGHTS AGREEMENT
Prior to the Separation, the New U S WEST Board will enter into a Rights
Agreement (the "New U S WEST Rights Agreement") with State Street Bank and Trust
Company, as Rights Agent. The following is a description of the terms of the New
U S WEST Rights Agreement. A copy of the New U S WEST Rights Agreement has been
filed with the Commission as an Exhibit to the New U S WEST Registration
Statement. This summary description of the New U S WEST Rights Agreement does
not purport to be complete and is qualified in its entirety by reference to the
New U S WEST Rights Agreement which is incorporated in this summary description
herein by reference.
Pursuant to the New U S WEST Rights Agreement, one preferred stock purchase
right (a "New U S WEST Right") will be distributed with each share of New U S
WEST Common Stock issued in connection with the Separation. Each New U S WEST
Right entitles the registered holder to purchase from New U S WEST one
one-hundredth (1/100) of a share of preferred stock of New U S WEST, designated
as Series A Junior Preferred Stock (the "New U S WEST Series A Preferred Stock")
at a price per one one-hundredth (1/100) of a share which will be determined as
described below (the "New U S WEST Exercise Price"). The description and terms
of the New U S WEST Rights are set forth in the New U S WEST Rights Agreement.
The New U S WEST Rights, unless earlier redeemed by the New U S WEST Board,
become exercisable upon the close of business on the day (the "New U S WEST
Distribution Date") that is the earlier of (i) the tenth day following a public
announcement that a person or group of affiliated or associated persons, with
certain exceptions set forth below, has acquired beneficial ownership of 15% or
more of the outstanding voting stock of New U S WEST (a "New U S WEST Acquiring
Person") and (ii) the tenth business day (or such later date as may be
determined by the New U S WEST Board prior to such time as any person or group
of affiliated or associated persons becomes a New U S WEST Acquiring Person)
after the date of the commencement or announcement of a person's or group's
intention to commence a tender or exchange offer the consummation of which would
result in the ownership of 15% or more of New U S WEST's outstanding voting
stock (even if no shares are actually purchased pursuant to such offer). Prior
thereto, the New U S WEST Rights would not be exercisable, would not be
represented by a separate book-entry or certificate, and would not be
transferable apart from the New U S WEST Common Stock, but will instead be
evidenced by the book-entry or certificate representing the New U S WEST Common
Stock. A New U S WEST Acquiring Person does not include (A) New U S WEST, (B)
any subsidiary of New U S WEST, (C) any employee benefit plan or employee stock
plan of New U S WEST or of any subsidiary of New U S WEST, or any trust or other
entity organized, appointed, established or holding New U S WEST Common Stock
for or pursuant to the terms of any such plan or (D) any person or group whose
ownership of 15% or more of the shares of voting stock of New U S WEST then
outstanding results solely from (i) any action or transaction or transactions
approved by the New U S WEST Board before such person or group became a New U S
WEST Acquiring Person or (ii) a reduction in the number of issued and
outstanding shares of voting stock of New U S WEST pursuant to a transaction or
transactions approved by the New U S WEST Board (provided that any person or
group that does not become a New U S WEST Acquiring Person by reason of clause
(i) or (ii) above shall become a New U S WEST Acquiring Person upon acquisition
of an additional 1% of New U S WEST's voting stock unless such acquisition of
additional voting stock will not result in such person or group becoming a New U
S WEST Acquiring Person by reason of such clause (i) or (ii)).
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Until the New U S WEST Distribution Date (or earlier redemption or
expiration of the New U S WEST Rights), New U S WEST Common Stock certificates
will contain a legend, and holders of shares of New U S WEST Common Stock issued
in book-entry form will receive a notice, incorporating the New U S WEST Rights
Agreement by reference. Until the New U S WEST Distribution Date (or earlier
redemption or expiration of the New U S WEST Rights), the surrender for transfer
of any New U S WEST Common Stock in book-entry or certificated form will also
constitute the transfer of the New U S WEST Rights associated with the New U S
WEST Common Stock represented by such book-entry or certificate. As soon as
practicable following the New U S WEST Distribution Date, separate book entries
representing New U S WEST Rights will be established for shares of New U S WEST
Common Stock held in uncertificated book-entry form and separate certificates
evidencing the New U S WEST Rights will be mailed to holders of record of the
New U S WEST Common Stock in certificated form as of the close of business on
the New U S WEST Distribution Date and such separate book entries and
certificates alone will evidence the New U S WEST Rights from and after the New
U S WEST Distribution Date.
The New U S WEST Rights are not exercisable until the New U S WEST
Distribution Date. The New U S WEST Rights will expire at the close of business
on the tenth anniversary of the Separation Date, unless earlier redeemed by New
U S WEST as described below.
The New U S WEST Series A Preferred Stock is nonredeemable and, unless
otherwise provided in connection with the creation of a subsequent series of
preferred stock, subordinate to any other series of New U S WEST's Preferred
Stock. The New U S WEST Series A Preferred Stock may not be issued except upon
exercise of New U S WEST Rights. Each share of New U S WEST Series A Preferred
Stock will be entitled to receive when, as and if declared, a quarterly dividend
in an amount equal to the greater of $100 per share or 100 times the cash
dividends declared on New U S WEST's Common Stock. In addition, New U S WEST
Series A Preferred Stock is entitled to 100 times any non-cash dividends (other
than dividends payable in equity securities) declared on the New U S WEST Common
Stock, in like kind. In the event of the liquidation of New U S WEST, the
holders of New U S WEST Series A Preferred Stock will be entitled to receive,
for each share of New U S WEST Series A Preferred Stock, a payment in an amount
equal to the greater of $100 or 100 times the payment made per share of New U S
WEST Common Stock. Each share of New U S WEST Series A Preferred Stock will have
100 votes, voting together with the New U S WEST Common Stock. In the event of
any merger, consolidation or other transaction in which New U S WEST Common
Stock is exchanged, each share of New U S WEST Series A Preferred Stock will be
entitled to receive 100 times the amount received per share of New U S WEST
Common Stock. The rights of New U S WEST Series A Preferred Stock as to
dividends, liquidation and voting are protected by anti-dilution provisions.
The number of shares of New U S WEST Series A Preferred Stock issuable upon
exercise of the New U S WEST Rights is subject to certain adjustments from time
to time in the event of a stock dividend on, or a subdivision or combination of,
the New U S WEST Common Stock. The New U S WEST Exercise Price for the New U S
WEST Rights is subject to adjustment in the event of extraordinary distributions
of cash or other property to holders of New U S WEST Common Stock.
Unless the New U S WEST Rights are earlier redeemed, in the event that,
after the time that a person becomes a New U S WEST Acquiring Person, New U S
WEST were to be acquired in a merger or other business combination (in which any
shares of New U S WEST Common Stock are changed into or exchanged for other
securities or assets) or more than 50% of the assets or earning power of New U S
WEST and its subsidiaries (taken as a whole) were to be sold or transferred in
one or a series of related transactions, the New U S WEST Rights Agreement
provides that proper provision will be made so that each holder of record of a
Right will, from and after such date, have the right to receive, upon payment of
the New U S WEST Exercise Price, that number of shares of common stock
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of the acquiring company having a market value at the time of such transaction
equal to two times the New U S WEST Exercise Price.
In addition, unless the New U S WEST Rights are earlier redeemed, in the
event that a person or group becomes the beneficial owner of 15% or more of New
U S WEST's voting stock, the New U S WEST Rights Agreement provides that proper
provisions will be made so that each holder of record of a Right, other than the
New U S WEST Acquiring Person (whose New U S WEST Rights will thereupon become
null and void), will thereafter have the right to receive, upon payment of the
New U S WEST Exercise Price, that number of shares of the New U S WEST Series A
Preferred Stock having a market value at the time of the transaction equal to
two times the New U S WEST Exercise Price (such market value to be determined
with reference to the market value of New U S WEST's New U S WEST Common Stock
as provided in the New U S WEST Rights Agreement).
At any time after any person or group becomes a New U S WEST Acquiring
Person and prior to the acquisition by such person or group of 50% or more of
the outstanding voting stock, the New U S WEST Board may exchange the New U S
WEST Rights (other than New U S WEST Rights owned by such person or group that
will have become void), in whole or in part, at an exchange ratio of one share
of New U S WEST Common Stock per New U S WEST Right (subject to adjustment).
Fractions of shares of New U S WEST Series A Preferred Stock (other than
fractions that are integral multiples of one one-hundredth (1/100) of a share)
may, at the election of New U S WEST, be evidenced by depositary receipts. New U
S WEST may also issue cash in lieu of fractional shares which are not integral
multiples of one one-hundredth (1/100) of a share.
At any time on or prior to the close of business on the earlier of (i) the
tenth day after the time that a person has become a New U S WEST Acquiring
Person (or such later date as a majority of the New U S WEST Board may
determine) or (ii) the tenth anniversary of the Separation Date, New U S WEST
may redeem the New U S WEST Rights in whole, but not in part, at a price of
$.005 per Right (the "New U S WEST Redemption Price"). Immediately upon the
effective time of the action of the Board of Directors of New U S WEST
authorizing redemption of the New U S WEST Rights, the right to exercise the New
U S WEST Rights will terminate and the only right of the holders of New U S WEST
Rights will be to receive the New U S WEST Redemption Price.
For as long as the New U S WEST Rights are then redeemable, New U S WEST
may, except with respect to the redemption price or date of expiration of the
New U S WEST Rights, amend the New U S WEST Rights in any manner, including an
amendment to extend the time period in which the New U S WEST Rights may be
redeemed. At any time when the New U S WEST Rights are not then redeemable, New
U S WEST may amend the New U S WEST Rights in any manner that does not
materially adversely affect the interests of holders of the New U S WEST Rights
as such. Amendments to the New U S WEST Rights Agreement from and after the time
that any Person becomes a New U S WEST Acquiring Person requires the approval of
a majority of the New U S WEST Continuing Directors (as defined and as provided
in the New U S WEST Rights Agreement).
Until a New U S WEST Right is exercised, the holder, as such, will have no
rights as a stockholder of New U S WEST, including, without limitation, the
right to vote or to receive dividends.
Prior to the Separation Time, the New U S WEST Board will establish the New
U S WEST Exercise Price. It is anticipated that the New U S WEST Exercise Price
will be equal to a multiple of the trading price of the Communications Stock
prior to the Separation Time.
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MEDIAONE CAPITAL STOCK
GENERAL
The following is a summary of the terms of the capital stock of MediaOne as
of the Separation Time. This summary does not purport to be complete and is
qualified in its entirety by reference to the complete text of such capital
stock set forth in the U S WEST Restated Certificate, as amended by the Charter
Amendments (as so amended, the "MediaOne Restated Certificate"). A copy of the
full text of the MediaOne Restated Certificate is included as Annex A-2 to this
Proxy Statement.
MediaOne will be authorized by the MediaOne Restated Certificate to issue
(i) 2 billion shares of MediaOne Common Stock and (ii) 200 million shares of
preferred stock, issuable in series ("MediaOne Preferred Stock"), of which (a)
10 million shares have been designated Series A Junior Participating Cumulative
Preferred Stock (the "MediaOne Series A Preferred Stock"), (b) 50,000 shares
have been designated as MediaOne Series C Preferred Stock, (c) 20 million shares
have been designated as MediaOne Series D Preferred Stock, and (d) 1 million
shares have been designated as MediaOne Series E Preferred Stock.
MEDIAONE COMMON STOCK
The holders of MediaOne Common Stock will be entitled to receive dividends
when, as and if declared by the MediaOne Board out of funds legally available
therefor, subject to the rights of any shares of MediaOne Preferred Stock at the
time outstanding. The holders of MediaOne Common Stock will be entitled to one
vote for each share on all matters voted on by stockholders under the Restated
MediaOne Certificate, including the election of directors. The holders of
MediaOne Common Stock do not have any cumulative voting, conversion, redemption
or preemptive rights. In the event of dissolution, liquidation or winding up of
MediaOne, holders of the MediaOne Common Stock will be entitled to share ratably
in any assets remaining after the satisfaction in full of the prior rights of
creditors, including holders of MediaOne Indebtedness, and subject to the
aggregate liquidation preference and participation rights of any MediaOne
Preferred Stock then outstanding. The additional shares of authorized stock
available for issuance by MediaOne may be issued at such times and under such
circumstances as to have a dilutive effect on earnings per share and on the
equity ownership of the holders of MediaOne Common Stock.
MEDIAONE PREFERRED STOCK
GENERAL. The MediaOne Board will be authorized to issue shares of MediaOne
Preferred Stock, in one or more series, and to fix for each such series voting
powers, preferences and relative, participating, optional or other special
rights and such qualifications, limitations or restrictions thereof as are
permitted by the DGCL. Although the MediaOne Board has no current plans to issue
MediaOne Preferred Stock, the issuance of shares of MediaOne Preferred Stock
could be used to discourage an unsolicited acquisition proposal. For example, a
business combination could be impeded by the issuance of a series of MediaOne
Preferred Stock containing class voting rights that would enable the holder or
holders of such series to block any such transaction. Alternatively, a business
combination could be facilitated by the issuance of a series of MediaOne
Preferred Stock having sufficient voting rights to provide a required percentage
vote of the stockholders. In addition, under certain circumstances, the issuance
of MediaOne Preferred Stock could adversely affect the voting power of the
holders of MediaOne Common Stock. Although the MediaOne Board is required to
make any determination to issue any such stock based on its judgment as to the
best interests of the stockholders of MediaOne, the MediaOne Board could act in
a manner that would discourage an acquisition attempt or other transaction that
some, or a majority, of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
prevailing market prices of such stock. The MediaOne Board does not at present
intend to seek stockholder approval prior to any issuance of
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currently authorized stock, unless otherwise required by applicable law,
regulation or stock exchange listing requirements.
MEDIAONE SERIES C PREFERRED STOCK. Dividends on the MediaOne Series C
Preferred Stock are payable quarterly in cash at the rate of $70.00 per annum
per share. The MediaOne Series C Preferred Stock ranks senior to the MediaOne
Common Stock and PARI PASSU with the MediaOne Series A Preferred Stock, MediaOne
Series D Preferred Stock and MediaOne Series E Preferred Stock as to dividends
and upon liquidation. Beginning September 2, 1999, the MediaOne Series C
Preferred Stock will be redeemable at the option of MediaOne, in whole or part,
at established redemption prices, plus accrued and unpaid dividends. The
MediaOne Series C Preferred Stock is also redeemable at the option of MediaOne
at any time upon the exercise by the holder of the MediaOne Series C Preferred
Stock of certain options to acquire shares of common stock of Financial Security
Assurance Holdings Ltd. granted to such holder by a subsidiary of MediaOne, at a
redemption price of $1,000.00 per share, plus accrued and unpaid dividends. The
MediaOne Series C Preferred Stock will be mandatorily redeemable on September 2,
2004, at a redemption price of $1,000.00 per share, plus accrued and unpaid
dividends. Except under certain limited circumstances or as required by law, the
holders of shares of the MediaOne Series C Preferred Stock do not have voting
rights. Upon the liquidation of MediaOne, the holders of shares of the MediaOne
Series C Preferred Stock will be entitled to receive $1,000.00 for each share of
the MediaOne Series C Preferred Stock plus accrued and unpaid dividends.
MEDIAONE SERIES D PREFERRED STOCK. Dividends on the MediaOne Series D
Preferred Stock are payable quarterly at the annual rate of 4.50%. The MediaOne
Series D Preferred Stock ranks senior to the MediaOne Common Stock and PARI
PASSU with the MediaOne Series A Preferred Stock, MediaOne Series C Preferred
Stock and MediaOne Series E Preferred Stock as to dividends and upon
liquidation. Shares of the MediaOne Series D Preferred Stock are convertible at
any time at the option of the holder into shares of MediaOne Common Stock. The
conversion rate at which shares of U S WEST Series D Preferred Stock are
currently convertible into Media Stock is 1.905 (subject to certain
adjustments). The MediaOne Board will appropriately adjust such conversion rate
pursuant to the formula set forth in the terms of the U S WEST Series D
Preferred Stock to reflect the fact that holders of U S WEST Series D Preferred
Stock will not receive the Dex Dividend. As a result, following the Separation,
the MediaOne Series D Preferred Stock will be convertible into shares of
MediaOne Common Stock at a rate that is higher than 1.905. The MediaOne Series D
Preferred Stock is not redeemable or exchangeable by MediaOne prior to November
15, 1999. Thereafter, the MediaOne Series D Preferred Stock is, in certain
circumstances, at the option of MediaOne, redeemable for cash at a redemption
price of $50.00 per share plus accrued and unpaid dividends and/or exchangeable
by MediaOne for shares of MediaOne Common Stock at an exchange rate equal to
$50.00 plus accrued and unpaid dividends, divided by .95, multiplied by the
current market price of MediaOne Common Stock. The MediaOne Series D Preferred
Stock will be mandatorily redeemable by MediaOne on November 15, 2016, at a
redemption price of $50.00 per share, plus accrued and unpaid dividends. Except
under certain limited circumstances or as required by law, the holders of shares
of MediaOne Series D Preferred Stock do not have voting rights. Special voting
rights exist for holders of MediaOne Series D Preferred Stock in the event that
dividends on the MediaOne Series D Preferred Stock are not paid in an amount
equivalent to the amount of dividends payable thereon for six quarterly
dividends. Upon the liquidation of MediaOne, the holders of shares of MediaOne
Series D Preferred Stock will be entitled to receive $50.00 per share, plus
accrued and unpaid dividends.
MEDIAONE SERIES E PREFERRED STOCK. Dividends on the MediaOne Series E
Preferred Stock are payable quarterly at the annual rate of 6.34%. The MediaOne
Series E Preferred Stock ranks senior to the MediaOne Common Stock and PARI
PASSU with the MediaOne Series A Preferred Stock, MediaOne Series C Preferred
Stock and MediaOne Series D Preferred Stock as to dividends and upon
liquidation. The MediaOne Series E Preferred Stock is not redeemable by MediaOne
prior to the fifth anniversary of the date of issuance. Thereafter, the MediaOne
Series E Preferred Stock is redeemable at the option
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of MediaOne at a redemption price of $50.00 per share, plus accrued and unpaid
dividends. Beginning on the tenth anniversary of the date of issuance, the
MediaOne Series E Preferred Stock will be subject to a sinking fund and any
remaining outstanding shares of MediaOne Series E Preferred Stock will be
mandatorily redeemable on the twentieth anniversary of the date of issuance at a
redemption price of $50.00 per share, plus accrued and unpaid dividends. At any
time during the period from the receipt by the holders of MediaOne Series E
Preferred Stock from MediaOne of a notice of redemption of the MediaOne Series E
Preferred Stock until the date of redemption, each share of MediaOne Series E
Preferred Stock will be convertible into shares of MediaOne Common Stock at a
conversion rate equal to $47.50 divided by the then current market price of the
MediaOne Common Stock. Except under certain limited circumstances or as required
by law, the holders of shares of MediaOne Series E Preferred Stock do not have
voting rights. Special voting rights exist for holders of MediaOne Series E
Preferred Stock in the event that dividends on the MediaOne Series E Preferred
Stock are not paid in an amount equivalent to the amount of dividends payable
thereon for six quarterly dividends. Upon the liquidation of MediaOne, the
holders of shares of MediaOne Series E Preferred Stock will be entitled to
receive $50.00 per share, plus accrued and unpaid dividends.
MEDIAONE RIGHTS AGREEMENT
U S WEST is a party to an Amended and Restated Rights Agreement, dated as of
October 31, 1995 (the "U S WEST Rights Agreement"), with State Street Bank and
Trust Company, as Rights Agent. Pursuant to the U S WEST Rights Agreement, a U S
WEST Communications Group Right (a "Communications Right") is attached to each
outstanding share of Communications Stock and a U S WEST Media Group Right (a
"Media Right") is attached to each outstanding share of Media Stock. In
connection with the Separation, the U S WEST Rights Agreement will be amended
and restated (as so amended and restated, the "MediaOne Rights Agreement") to
provide (i) that the Communications Rights and the Media Rights will not become
exercisable, distributed or unredeemable as a result of the consummation of the
Separation, (ii) that the Communications Rights will expire at the Separation
Time, (iii) that the percentage of beneficial ownership of the outstanding
voting stock of MediaOne acquired by a person or group that causes the MediaOne
Rights (as defined herein) to become exercisable will be reduced from 20% to
15%, (iv) that the percentage of beneficial ownership that would result from the
consummation of a person's or group's commencement or announcement of a tender
or exchange offer that causes the MediaOne Rights to become exercisable will be
reduced from 30% to 15%, (v) for the deletion of a provision of the U S WEST
Restated Rights Agreement, which provided that in the event MediaOne receives a
fully financed cash tender offer proposal for any and all of the voting shares
of MediaOne, the MediaOne Board of Directors is required to engage an investment
banking firm to render an opinion as to whether the tender offer purchase price
is fair and adequate to stockholders or to call a special meeting of
stockholders to vote upon such tender offer, and (vi) for certain amendments to
the terms of the Media Rights to reflect the redemption of the Communications
Stock and the modification of certain terms of the Media Stock. The Media
Rights, after giving effect to such amendments, are referred to herein as
"MediaOne Rights." The following description of the terms of the MediaOne Rights
Agreement and the MediaOne Rights does not purport to be complete and is
qualified in its entirety by reference to the MediaOne Rights Agreement, the
form of which will be filed by U S WEST with the Commission under the Exchange
Act prior to the Separation Time as an exhibit to a Current Report on Form 8-K.
Each MediaOne Right entitles the registered holder to purchase from MediaOne
one one-hundredth (1/100) of a share of MediaOne Series A Preferred Stock at a
price per one one-hundredth (1/100) of a share equal to $80 (the "MediaOne
Exercise Price"), subject to adjustment. The description and terms of the
MediaOne Rights are set forth in the MediaOne Rights Agreement.
The MediaOne Rights, unless earlier redeemed by the MediaOne Board, become
exercisable upon the close of business on the day (the "MediaOne Distribution
Date") that is the earlier of (i) the tenth
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day following a public announcement that a person or group of affiliated or
associated persons, with certain exceptions set forth below, has acquired
beneficial ownership of 15% or more of the outstanding voting stock of MediaOne
(a "MediaOne Acquiring Person") and (ii) the tenth business day (or such later
date as may be determined by the MediaOne Board prior to such time as any person
or group of affiliated or associated persons becomes a MediaOne Acquiring
Person) after the date of the commencement or announcement of a person's or
group's intention to commence a tender or exchange offer the consummation of
which would result in the ownership of 15% or more of MediaOne's outstanding
voting stock (even if no shares are actually purchased pursuant to such offer).
Prior thereto, the MediaOne Rights would not be exercisable, would not be
represented by a separate certificate, and would not be transferable apart from
the MediaOne Common Stock, but will instead be evidenced by the certificates
evidencing the MediaOne Common Stock certificate. A MediaOne Acquiring Person
does not include (A) MediaOne, (B) any subsidiary of MediaOne, (C) any employee
benefit plan or employee stock plan of MediaOne or of any subsidiary of
MediaOne, or any trust or other entity organized, appointed, established or
holding MediaOne Common Stock for or pursuant to the terms of any such plan or
(D) any person or group whose ownership of 15% or more of the shares of voting
stock of MediaOne then outstanding results solely from a reduction in the number
of issued and outstanding shares of voting stock of MediaOne pursuant to a
transaction or transactions approved by the MediaOne Board (provided that any
person or group that does not become a MediaOne Acquiring Person by reason of
clause (i) or (ii) above shall become a MediaOne Acquiring Person upon
acquisition of an additional 1% of MediaOne's voting stock unless such
acquisition of additional voting stock will not result in such person or group
becoming a MediaOne Acquiring Person by reason of such clause (i) or (ii)).
Until the MediaOne Distribution Date (or earlier redemption or expiration of
the MediaOne Rights), MediaOne Common Stock certificates issued will contain a
legend incorporating the MediaOne Rights Agreement by reference. Until the
MediaOne Distribution Date (or earlier redemption or expiration of the MediaOne
Rights), the surrender for transfer of any of the MediaOne Common Stock
certificates will also constitute the transfer of the MediaOne Rights associated
with the MediaOne Common Stock represented by such certificate. As soon as
practicable following the MediaOne Distribution Date, separate certificates
evidencing the MediaOne Rights will be mailed to holders of record of the
MediaOne Common Stock as of the close of business on the MediaOne Distribution
Date and such separate certificates alone will evidence the MediaOne Rights from
and after the MediaOne Distribution Date.
The MediaOne Rights are not exercisable until the MediaOne Distribution
Date. The MediaOne Rights will expire at the close of business on April 6, 1999,
unless earlier redeemed by MediaOne as described below.
The MediaOne Series A Preferred Stock is nonredeemable and, shall rank pari
passu to the MediaOne Series C Preferred Stock, MediaOne Series D Preferred
Stock and MediaOne Series E Preferred Stock and unless otherwise provided in
connection with the creation of a subsequent series of preferred stock,
subordinate to any other series of MediaOne's Preferred Stock. The MediaOne
Series A Preferred Stock may not be issued except upon exercise of MediaOne
Rights. Each share of MediaOne Series A Preferred Stock will be entitled to
receive when, as and if declared, a quarterly dividend in an amount equal to the
greater of $100 per share or 100 times the cash dividends declared on MediaOne
Common Stock. In addition, MediaOne Series A Preferred Stock is entitled to 100
times any non-cash dividends (other than dividends payable in shares of common
stock) declared on the MediaOne Common Stock, in like kind. In the event of the
liquidation of MediaOne, the holders of MediaOne Series A Preferred Stock will
be entitled to receive, for each share of MediaOne Series A Preferred Stock, a
payment in an amount equal to the greater of $100 plus an amount equal to all
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment or 100 times the payment made per share of MediaOne
Common Stock. Each share of
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MediaOne Series A Preferred Stock will have 100 votes, voting together with the
MediaOne Common Stock. In the event of any merger, consolidation or other
transaction in which MediaOne Common Stock is exchanged, each share of MediaOne
Series A Preferred Stock will be entitled to receive 100 times the amount
received per share of MediaOne Common Stock. The rights of MediaOne Series A
Preferred Stock as to dividends, liquidation and voting are protected by
anti-dilution provisions.
Unless the MediaOne Rights are earlier redeemed, in the event that, after
the time that a person becomes a MediaOne Acquiring Person, MediaOne were to be
acquired in a merger or other business combination (in which any shares of
MediaOne Common Stock are changed into or exchanged for other securities or
assets) or more than 50% of the assets or earning power of MediaOne and its
subsidiaries (taken as a whole) were to be sold or transferred in one or a
series of related transactions, the MediaOne Rights Agreement provides that
proper provision will be made so that each holder of record of a MediaOne Right
will, from and after such date, have the right to receive, upon payment of the
MediaOne Exercise Price, that number of shares of common stock of the acquiring
company having a market value at the time of such transaction equal to two times
the MediaOne Exercise Price.
In addition, unless the MediaOne Rights are earlier redeemed, in the event
that a person or group becomes the beneficial owner of 15% or more of MediaOne's
voting stock, the MediaOne Rights Agreement provides that proper provisions will
be made so that each holder of record of a MediaOne Right, other than the
MediaOne Acquiring Person (whose MediaOne Rights will thereupon become null and
void), will thereafter have the right to receive, upon payment of the MediaOne
Exercise Price, that number of shares of the MediaOne Series A Preferred Stock
having a market value at the time of the transaction equal to two times the
MediaOne Exercise Price (such market value to be determined with reference to
the market value of MediaOne's MediaOne Common Stock as provided in the MediaOne
Rights Agreement).
At any time after any person or group becomes a MediaOne Acquiring Person
and prior to the acquisition by such person or group of 50% or more of the
outstanding voting stock, the MediaOne Board may exchange the MediaOne Rights
(other than MediaOne Rights owned by such person or group that will have become
void), in whole or in part, at an exchange ratio of one share of MediaOne Common
Stock per MediaOne Right (subject to adjustment).
Fractions of shares of MediaOne Series A Preferred Stock (other than
fractions which are integral multiples of one one-hundredth (1/100) of a share)
may, at the election of MediaOne, be evidenced by depositary receipts. MediaOne
may also issue cash in lieu of fractional shares that are not integral multiples
of one one-hundredth (1/100) of a share.
At any time on or prior to the close of business on the earlier of (i) the
tenth day after the time that a person has become a MediaOne Acquiring Person
(or such later date as a majority of the MediaOne Board may determine) or (ii)
April 6, 1999, MediaOne may redeem the MediaOne Rights in whole, but not in
part, at a price of $.005 per Right (the "MediaOne Redemption Price").
Immediately upon the effective time of the action of the Board of Directors of
MediaOne authorizing redemption of the MediaOne Rights, the right to exercise
the MediaOne Rights will terminate and the only right of the holders of MediaOne
Rights will be to receive the MediaOne Redemption Price.
For as long as the MediaOne Rights are then redeemable, MediaOne may, except
with respect to the redemption price or date of expiration of the MediaOne
Rights, amend the MediaOne Rights in any manner, including an amendment to
extend the time period in which the MediaOne Rights may be redeemed. At any time
when the MediaOne Rights are not then redeemable, MediaOne may amend the
MediaOne Rights in any manner that does not materially adversely affect the
interests of holders of the MediaOne Rights as such. Amendments to the MediaOne
Rights Agreement from and after the time that any Person becomes a MediaOne
Acquiring Person requires the approval of a majority of the MediaOne Continuing
Directors (as defined and as provided in the MediaOne Rights Agreement).
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Until a MediaOne Right is exercised, the holder, as such, will have no
rights as a stockholder of MediaOne, including, without limitation, the right to
vote or to receive dividends.
COMPARISON OF RIGHTS OF STOCKHOLDERS
U S WEST is a Delaware corporation and, following consummation of the
Separation, New U S WEST and MediaOne will be Delaware corporations. The rights
of holders of Communications Stock and Media Stock are currently governed by the
DGCL, the U S WEST Restated Certificate and U S WEST Bylaws. Following
consummation of the Separation, the rights of holders of New U S WEST Common
Stock will be governed by the DGCL, the New U S WEST Restated Certificate and
the New U S WEST Bylaws and the rights of holders of MediaOne Common Stock will
be governed by the DGCL, the MediaOne Restated Certificate and the MediaOne
Bylaws. The terms of the New U S WEST Restated Certificate and the MediaOne
Restated Certificate will be substantially similar to the terms of the U S WEST
Restated Certificate and the terms of the New U S WEST Bylaws and the MediaOne
Bylaws will be substantially similar to the terms of the U S WEST Bylaws, except
for the matters described below. The principal differences between the rights of
holders of Communications Stock and Media Stock, on one hand, and the holders of
New U S WEST Common Stock and MediaOne Common Stock, on the other hand, relate
to the fact that the Communications Stock and the Media Stock are Targeted
Stocks.
VOTING RIGHTS
Under the U S WEST Restated Certificate, with respect to matters to be voted
upon by both the Communications Stock and the Media Stock as a single class,
each share of Communications Stock is entitled to one vote and each share of
Media Stock is entitled to a variable number of votes equal to the ratio of the
time-weighted average market value of one share of Media Stock to the
time-weighted average market value of one share of Communications Stock,
calculated over the 20-trading day period ending ten trading days prior to the
record date, and may have more than, less or exactly one vote per share. Under
the New U S WEST Restated Certificate, each share of New U S WEST Common Stock
will be entitled to one vote. Under the MediaOne Restated Certificate, each
share of MediaOne Common Stock will be entitled to one vote.
DIVIDENDS
Under the U S WEST Restated Certificate, (i) dividends on the Communications
Stock are payable out of the lesser of (a) the funds of U S WEST legally
available for the payment of dividends and (b) the "Communications Group
Available Dividend Amount" (an amount similar to the amount that would be
legally available for the payment of dividends on the Communications Stock under
Delaware law if the Communications Group were a separate company) and (ii)
dividends on the Media Stock are payable out of the lesser of (a) the funds of U
S WEST legally available for the payment of dividends and (b) the "Media Group
Available Dividend Amount" (an amount similar to the amount that would be
legally available for the payment of dividends on the Media Stock under Delaware
law if the Media Group were a separate company). Holders of New U S WEST Common
Stock and MediaOne Common Stock will be entitled to receive dividends when, as
and if declared by the respective boards of directors out of funds legally
available therefor.
CONVERSION
Pursuant to the U S WEST Restated Certificate, at any time following
November 1, 2004, U S WEST has the right to convert each share of Communications
Stock into a number of shares of Media Stock equal to 100% of the ratio of the
time-weighted average market value of one share of Communications Stock to the
time-weighted average market value of one share of Media Stock, calculated over
the 20-trading day period ending five trading days prior to the date of notice
of such
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CHAPTER 7: CAPITAL STOCK
<PAGE>
conversion. In addition, U S WEST has the right, at any time, to convert each
share of Media Stock into a number of shares of Communications Stock equal to
115% of the ratio of the time-weighted average market value of one share of
Media Stock to the time-weighted average market value of one share of
Communications Stock, calculated over the 20-trading day period ending five
trading days prior to the date of notice of such conversion, until November 1,
2000, and thereafter declining annually to 100% on November 1, 2004. Neither the
New U S WEST Restated Certificate nor the MediaOne Restated Certificate will
provide for conversion rights.
REDEMPTION IN EXCHANGE FOR STOCK OF SUBSIDIARY
U S WEST may at any time redeem (i) the Communications Stock for all of the
shares of the common stock of one or more wholly owned subsidiaries of U S WEST
that hold all of the assets and liabilities attributed to the Communications
Group and/or (ii) the Media Stock for a number of the shares of the common stock
of one or more wholly owned subsidiaries of U S WEST that hold all of the assets
and liabilities attributed to the Media Group equal to the proportionate
interest in the Media Group represented by the Media Stock. Neither the New U S
WEST Restated Certificate nor the MediaOne Restated Certificate will provide for
redemption rights.
LIQUIDATION
Pursuant to the U S WEST Restated Certificate, in the event of the
liquidation of U S WEST, holders of Communications Stock and Media Stock will be
entitled to a portion of the assets remaining for distribution to holders of
Communications Stock and Media Stock on a per share basis in proportion to the
Liquidation Units per share of Communications Stock and Media Stock. Each share
of Communications Stock has one Liquidation Unit and each share of Media Stock
has .80 of a Liquidation Unit, subject to certain adjustments. Pursuant to the
New U S WEST Restated Certificate, in the event of a liquidation of New U S
WEST, holders of New U S WEST Common Stock will be entitled to share ratably in
the assets of New U S WEST remaining for distribution to holders of New U S WEST
Common Stock. Pursuant to the MediaOne Restated Certificate, in the event of a
liquidation of MediaOne, holders of MediaOne Common Stock will be entitled to
share ratably in the assets of MediaOne remaining for distribution to holders of
MediaOne.
RIGHTS ON DISPOSITION
Pursuant to the U S WEST Restated Certificate, subject to certain
exceptions, if U S WEST disposes of all or substantially all of the properties
and assets attributed to the Communications Group, U S WEST is required to
either (i) distribute to holders of Communications Stock an amount in cash
and/or securities or other property equal to the fair value of the net proceeds
of such disposition, either by special dividend or by redemption of all or part
of the outstanding shares of Communications Stock or (ii) convert each share of
Communications Stock into a number of shares of Media Stock equal to 110% of the
ratio of the average market value of one share of Communications Stock to the
average market value of one share of Media Stock, calculated over the
ten-trading day period beginning on the 16th trading day after consummation of
the disposition transaction. Similarly, subject to certain exceptions, if U S
WEST disposes of all or substantially all of the properties and assets
attributed to the Media Group, U S WEST is required to either (i) distribute to
holders of Media Stock an amount in cash and/or securities or other property
equal to their proportionate interest in the fair value of the net proceeds of
such disposition, either by special dividend or by redemption of all or part of
the outstanding shares of Media Stock, or (ii) convert each share of Media Stock
into a number of shares of Communications Stock equal to 110% of the ratio of
the average market value of one share of Media Stock to the average market value
of one share of Communications Stock, calculated over the ten-trading day period
beginning on the 16th trading day after consummation of the disposition
transaction.
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CHAPTER 7: CAPITAL STOCK
<PAGE>
Neither the New U S WEST Restated Certificate nor the MediaOne Restated
Certificate provides for similar rights upon dispositions of assets.
AUTHORIZED CAPITAL
Pursuant to the U S WEST Restated Certificate, the authorized capital stock
of U S WEST consists of two billion shares of Communications Stock, two billion
shares of Media Stock and 200 million shares of U S WEST Preferred Stock.
Pursuant to the New U S WEST Restated Certificate, the authorized capital stock
of New U S WEST will consist of two billion shares of New U S WEST Common Stock
and 200 million shares of New U S WEST Preferred Stock. Pursuant to the New
MediaOne Restated Certificate, the authorized capital stock of MediaOne will
consist of two billion shares of MediaOne Common Stock and 200 million shares of
MediaOne Preferred Stock.
CERTAIN ANTITAKEOVER CONSIDERATIONS
The DGCL, the New U S WEST Restated Certificate and the New U S WEST Bylaws,
and the MediaOne Restated Certificate and the MediaOne Bylaws contain provisions
that could serve to discourage or make more difficult a change in control of New
U S WEST or MediaOne without the support of the New U S WEST Board or the
MediaOne Board, or without meeting various other conditions. A summary of such
provisions is set forth below.
The New U S WEST Restated Certificate and the MediaOne Restated Certificate
each will provide for the issuance of preferred stock, at the discretion of the
New U S WEST Board or the MediaOne Board, as the case may be, from time to time,
in one or more series, without further action by the stockholders of New U S
WEST or MediaOne, unless approval of the stockholders is deemed advisable by the
New U S WEST Board or MediaOne Board or required by applicable law, regulation
or stock exchange listing requirements. In addition, the authorized but unissued
shares of New U S WEST Common Stock will be available for issuance from time to
time at the discretion of the New U S WEST Board without the approval of the
stockholders of New U S WEST, and the authorized but unissued shares of MediaOne
Common Stock will be available for issuance from time to time at the discretion
of the MediaOne Board without the approval of the stockholders of MediaOne, in
each case unless such approval is deemed advisable by the New U S WEST Board or
MediaOne Board, as the case may be, or required by applicable law, regulation or
stock exchange listing requirements. One of the effects of the existence of
authorized, unissued and unreserved New U S WEST Common Stock and MediaOne
Common Stock and preferred stock could be to enable the New U S WEST Board and
MediaOne Board to issue shares to persons friendly to current management that
could render more difficult or discourage an attempt to obtain control of New U
S WEST or MediaOne by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of New U S WEST's or MediaOne's
management. Such additional shares also could be used to dilute the stock
ownership of persons seeking to obtain control of New U S WEST or MediaOne.
The New U S WEST Restated Certificate and the MediaOne Restated Certificate
each will provide for a classified board of directors under which one-third of
the total number of directors are elected each year and will prohibit the
removal of directors unless such removal is for cause and is approved by the
holders of 80% of the New U S WEST Common Stock or MediaOne Common Stock, as the
case may be. In addition, pursuant to the New U S WEST Restated Certificate and
the MediaOne Restated Certificate, only the Chairman of the Board or the Board
of Directors, and not the stockholders, will be permitted to call a special
meeting of stockholders, and no actions will be considered at such special
meeting other than those specified in the notice thereof.
The New U S WEST Restated Certificate and the MediaOne Restated Certificate
will each contain a "fair price provision" pursuant to which the affirmative
vote of the holders 80% of the New U S WEST Common Stock or MediaOne Common
Stock, as the case may be, will be required to
137
CHAPTER 7: CAPITAL STOCK
<PAGE>
approve certain business combinations involving New U S WEST or MediaOne, as
applicable, and certain significant stockholders. In addition, Section 203 of
the DGCL will prohibit New U S WEST or MediaOne from engaging in certain
transactions with an "interested stockholder."
The New U S WEST Bylaws and MediaOne Bylaws will each establish an advance
notice procedure for stockholders to bring business before an annual or special
meeting of stockholders. The New U S WEST Bylaws and MediaOne Bylaws each will
provide that a stockholder may present a proposal for action at an annual
meeting of stockholders only if such stockholder delivers a written notice of
the proposal, together with certain specified information relating to such
stockholder's stock ownership and identity, to the Secretary of New U S WEST or
MediaOne, as applicable, at least 90 days before the annual meeting. In
addition, the New U S WEST Bylaws and MediaOne Bylaws each will provide that a
stockholder may nominate individuals for election to the Board of Directors at
any annual meeting or special meeting of stockholders at which directors are to
be elected only if such stockholder delivers written notice, containing certain
specified information with respect to the nominee and nominating stockholder, to
the Secretary of New U S WEST or MediaOne, as applicable, at least 90 days
before the annual meeting or within 15 days following the announcement of the
date of the special meeting.
The New U S WEST Rights and the MediaOne Rights each will permit
disinterested stockholders to acquire additional shares of New U S WEST or
MediaOne, as applicable, or of an acquiring company at a substantial discount in
the event of certain described changes in control. See "--New U S WEST Capital
Stock--New U S WEST Rights Agreement" and "--MediaOne Capital Stock-- MediaOne
Rights Agreement."
Certain provisions described above may have the effect of delaying
stockholder actions with respect to certain business combinations. As such, the
provisions could have the effect of discouraging open market purchases of the
New U S WEST Common Stock or the MediaOne Common Stock because such provisions
may be considered disadvantageous by a stockholder who desires to participate in
a business combination.
138
CHAPTER 7: CAPITAL STOCK
<PAGE>
CHAPTER 8: THE ANNUAL MEETING AND CERTAIN OTHER MATTERS
THE ANNUAL MEETING
GENERAL
This Proxy Statement is being furnished to holders of Communications Stock
and Media Stock in connection with the solicitation of proxies by and on behalf
of the U S WEST Board for use at the Annual Meeting to be held at 1:30 p.m.,
Eastern Time, on June , 1998, at , Colorado, and at any
adjournments or postponements thereof. This Proxy Statement and the accompanying
proxy card are first being mailed to holders of Communications Stock and Media
Stock entitled to notice of, and to vote at, the Annual Meeting, on or about
, 1998.
Enclosed with this Proxy Statement is an admission ticket for use in
attending the Annual Meeting as well as a proxy card. Shares of Communications
Stock and Media Stock can be voted at the Annual Meeting by proxy or by
attending the Annual Meeting. Votes by proxy may be made (i) by mail, by
completing and returning the enclosed proxy card, (ii) by telephone, by calling
1-800- or (iii) via the Internet, by accessing a special site at
http://www. .com. Additional information regarding voting by telephone or via
the Internet is included on the enclosed proxy card. STOCKHOLDERS ARE URGED TO
VOTE BY PROXY REGARDLESS OF WHETHER THEY PLAN TO ATTEND THE ANNUAL MEETING. If a
stockholder returns a proxy and later attends and votes at the Annual Meeting,
that stockholder's proxy will be revoked. See "--Proxies; Revocation of
Proxies." Stockholders of record who do not have admission tickets will be
admitted to the Annual Meeting upon verification of ownership at the
stockholders' admission counter. Stockholders who hold their shares in "street
name" can obtain admission tickets at the stockholders' admission counter by
presenting evidence of holdings such as a bank or brokerage firm account
statement.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
At the Annual Meeting, stockholders will be asked to consider and vote upon
the following proposals:
/ / A proposal to approve the Separation, which will also constitute
approval and adoption of the Charter Amendments. See "Chapter 3: The
Separation." THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
APPROVAL OF THE SEPARATION.
/ / A proposal to elect five directors to the U S WEST Board. See "Chapter
4: Other Matters to be Considered at the Annual Meeting--Election of
Directors." THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR"
EACH OF THE DIRECTORS NOMINATED.
/ / A proposal to ratify the U S WEST Board's appointment of Arthur
Andersen LLP, Certified Public Accountants, as independent auditors to
make an examination of the accounts of U S WEST for calendar year 1998.
See "Chapter 4: Other Matters to be Considered at the Annual
Meeting--Ratification of Accountants." THE U S WEST BOARD RECOMMENDS
THAT STOCKHOLDERS VOTE "FOR" RATIFICATION OF THIS APPOINTMENT.
/ / A proposal to approve the 1998 New U S WEST Stock Plan. See "Chapter 4:
Other Matters to be Considered at the Annual Meeting--Proposal to
Approve the 1998 New U S WEST Stock Plan." THE U S WEST BOARD
RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
/ / A proposal to approve the New U S WEST Long-Term Incentive Plan. See
"Chapter 4: Other Matters to be Considered at the Annual
Meeting--Proposal to Approve the New U S WEST
139
CHAPTER 8: THE ANNUAL MEETING
AND CERTAIN OTHER MATTERS
<PAGE>
Long-Term Incentive Plan." THE U S WEST BOARD RECOMMENDS THAT
STOCKHOLDERS VOTE "FOR" THIS PROPOSAL.
/ / A proposal to approve the New U S WEST Executive Short-Term Incentive
Plan. See "Chapter 4: Other Matters to be Considered at the Annual
Meeting--Proposal to Approve the New U S WEST Executive Short-Term
Incentive Plan." THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" EACH OF THIS PROPOSAL.
/ / A proposal to approve an amendment to the MediaOne Stock Plan. See
"Chapter 4: Other Matters to be Considered at the Annual
Meeting--Proposal to Approve an Amendment to the U S WEST 1994 Stock
Plan." THE U S WEST BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THIS
PROPOSAL.
/ / Certain proposals made by stockholders of U S WEST pursuant to Rule
14a-8 under the Exchange Act. See "Chapter 4: Other Matters to be
Considered at the Annual Meeting-- Stockholder Proposals." THE U S WEST
BOARD RECOMMENDS THAT STOCKHOLDERS VOTE "AGAINST" EACH OF THESE
PROPOSALS.
The proposals to approve the New U S WEST Compensation Plans are conditioned
upon consummation of the Separation by U S WEST's stockholders. If the
Separation is not approved and consummated, the proposals to approve the New U S
WEST Compensation Plans will not be implemented.
STOCKHOLDERS ARE REQUESTED PROMPTLY TO VOTE BY PROXY IN THE MANNER DESCRIBED
HEREIN.
RECORD DATE; VOTING AT THE ANNUAL MEETING
The U S WEST Board has fixed the close of business on , 1998, as
the record date (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting. Accordingly, only
stockholders of record at the close of business on the Record Date will be
entitled to vote at the Special Meeting. At the close of business on the Record
Date, there were shares of Communications Stock and shares of Media
Stock outstanding and entitled to vote.
The presence, in person or by properly delivered proxy, of the holders of a
majority of the votes entitled to be cast by the holders of Communications Stock
and Media Stock as of the Record Date is necessary to constitute a quorum at the
Annual Meeting. The approval of the Separation will require (i) the affirmative
vote of the holders of a majority of the voting power of all of the outstanding
shares of Communications Stock and Media Stock, voting as a single class, (ii)
the affirmative vote of the holders of a majority of the outstanding shares of
Communications Stock, voting as a separate class, and (iii) the affirmative vote
of the holders of a majority of the outstanding shares of Media Stock, voting as
a separate class. Directors will be elected by a plurality of the votes of the
Communications Stock and the Media Stock represented in person or by proxy and
entitled to vote at the Annual Meeting, voting as a single class. All other
proposals to be considered at the Annual Meeting will require the affirmative
vote of a majority of the votes cast by holders of Communications Stock and
Media Stock represented in person or by proxy and entitled to vote at the Annual
Meeting, voting as a single class. Each stockholder's vote is confidential and
will not be disclosed to any party except to the extent necessary to meet legal
requirements.
Holders of record of Communications Stock are entitled to one vote per share
and holders of record of Media Stock are entitled to . of a vote per share upon
each matter properly submitted for the vote of the holders of Communications
Stock and Media Stock, voting as a single class, at the Annual Meeting. Holders
of record of Communications Stock are entitled to one vote per share upon each
matter properly submitted for the vote of the holders of Communications Stock,
voting as a
140
CHAPTER 8: THE ANNUAL MEETING
AND CERTAIN OTHER MATTERS
<PAGE>
separate class, at the Annual Meeting and holders of record of Media Stock are
entitled to one vote per share upon each matter properly submitted for the vote
of the holders of Media Stock, voting as a separate class, at the Annual
Meeting. The relative voting power of the Communications Stock and the Media
Stock on matters as to which the Communications Stock and Media Stock vote as a
single class has been determined by a formula set forth in the U S WEST Restated
Certificate. This formula provides that each share of Communications Stock has
one vote and each share of Media Stock has a variable number of votes equal to
the ratio of the time-weighted average market value of one share of Media Stock
to the time-weighted average market value of one share of Communications Stock,
calculated over the 20-trading day period ending ten trading days prior to the
record date for a meeting of stockholders. For the Annual Meeting, the
20-trading day period began on , 1998 and ended on , 1998
(the tenth trading day prior to the Record Date).
The holders of U S WEST Series C Preferred Stock, U S WEST Series D
Preferred Stock and U S WEST Series E Preferred Stock do not have any voting
rights with respect to the matters to be voted on at the Annual Meeting.
PROXIES; REVOCATION OF PROXIES
All shares of Communications Stock and Media Stock which are represented at
the Annual Meeting by proxies properly received and not duly and timely revoked
will be voted at the Annual Meeting in accordance with the instructions
contained therein. In the absence of contrary instructions, such shares will be
voted "FOR" each of the proposals to be considered at the Annual Meeting.
Proxies which are marked "ABSTAIN" will be counted as shares present by proxy at
the Annual Meeting for purposes of determining the presence of a quorum and for
purposes of determining the voting power of the Communications Stock and the
Media Stock present in person or by proxy and entitled to vote at the Annual
Meeting. Proxies relating to "street name" shares that are voted by brokers on
one or more but less than all of the proposals ("broker non-votes") will
nevertheless be treated as shares present for purposes of determining the
presence of a quorum, but will not be treated as shares present in person or by
proxy and entitled to vote at the Annual Meeting as to the proposal as to which
authority to vote is withheld by the broker.
The required vote of stockholders on the Separation is based on the voting
power of all of the outstanding shares of Communications Stock and Media Stock
as of the Record Date. As a result, the failure by a stockholder to vote in
person or by proxy, the abstention from voting by a stockholder and broker
non-votes will all have the same effect as a vote "AGAINST" approval of the
Separation. The required vote of the stockholders on all other proposals to be
considered at the Annual Meeting is based upon the votes cast at the Annual
Meeting. With respect to any such proposal, the failure by a stockholder to vote
in person or by proxy, the abstention from voting by a stockholder and broker
non-votes will not be counted in determining the voting power of the
Communications Stock and Media Stock present in person or by proxy at the Annual
Meeting and will therefore not constitute a vote "FOR" or "AGAINST" such
proposal.
A proxy may be revoked prior to its being voted by: (i) delivering to the
Secretary of U S WEST, at or before the Annual Meeting, a written instrument
bearing a later date than the proxy which instrument, by its terms, revokes the
proxy; (ii) delivering a subsequent proxy relating to the same shares (by mail
or telephony or via the Internet) at or before the Annual Meeting; or (iii)
attending and voting at the Annual Meeting. Attendance at the Annual Meeting
without voting will not of itself constitute revocation of a proxy. Any written
instrument revoking a proxy should be sent to: U S WEST, Inc., 7800 East Orchard
Road, Englewood, Colorado 80111, Attention: Secretary.
For participants in the U S WEST SIP, a proxy will cover the number of
shares of Communications Stock and Media Stock held in the account of a
participant as well as shares held by such
141
CHAPTER 8: THE ANNUAL MEETING
AND CERTAIN OTHER MATTERS
<PAGE>
participant in certificated form. For participants in the Savings Plan/ESOP, a
proxy will serve as a voting instruction card for the trustees of the Savings
Plan/ESOP with respect to the shares of Communications Stock and Media Stock
held in the participants' accounts. Shares held in the Savings Plan/ ESOP for
which proxies are not received (as well as shares held in the suspense account
of the Savings Plan/ESOP) will be voted in the same proportion as the shares for
which proxies are received.
If a quorum is not obtained, or if fewer shares of Communications Stock and
Media Stock than the number required therefor are voted in favor of approval and
adoption of the Separation, it is expected that the Annual Meeting will be
postponed or adjourned in order to permit additional time for soliciting and
obtaining additional proxies or votes, and, at any subsequent reconvening of the
Annual Meeting, all proxies will be voted in the same manner as such proxies
would have been voted at the original convening of the Annual Meeting, except
for any proxies which have theretofore effectively been revoked or withdrawn. In
the absence of a quorum, the Annual Meeting may be adjourned from time to time
by the chairman of the meeting or the holders of a majority of the shares
represented at the Annual Meeting in person or by proxy.
STOCKHOLDERS SHOULD NOT FORWARD ANY CERTIFICATES REPRESENTING COMMUNICATIONS
STOCK AND MEDIA STOCK WITH THEIR PROXY CARDS. IN THE EVENT THE SEPARATION IS
CONSUMMATED, CERTIFICATES SHOULD BE DELIVERED IN ACCORDANCE WITH INSTRUCTIONS
SET FORTH IN A LETTER OF TRANSMITTAL WHICH WILL BE SENT TO STOCKHOLDERS PROMPTLY
AFTER THE SEPARATION TIME.
SOLICITATION OF PROXIES
U S WEST will bear the costs of soliciting proxies from stockholders. U S
WEST has retained Beacon Hill Associates, Inc. at an estimated cost of $ ,
plus reimbursement of expenses, to assist U S WEST in the solicitation of
proxies from brokerage firms and other custodians, nominees and fiduciaries. In
addition to soliciting proxies by mail, directors, officers and employees of U S
WEST, without receiving additional compensation therefor, may solicit proxies by
telephone, by telegram, or in person. Arrangements also will be made with
brokerage firms and other custodians, nominees and fiduciaries to forward
solicitation materials to the beneficial owners of shares of Communications
Stock and Media Stock held of record by such persons, and U S WEST will
reimburse such brokerage firms, custodians, nominees and fiduciaries for
reasonable out-of-pocket expenses incurred by them in connection therewith.
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CHAPTER 8: THE ANNUAL MEETING
AND CERTAIN OTHER MATTERS
<PAGE>
MARKET PRICE AND DIVIDEND DATA OF COMMUNICATIONS STOCK AND MEDIA STOCK
The following table sets forth the high and low sales prices on the New York
Stock Exchange Composite Tape, and the dividends paid per share, of the
Communications Stock and the Media Stock for the periods indicated.
<TABLE>
<CAPTION>
HIGH SALES LOW SALES DIVIDENDS
PRICE PRICE PAID
----------- ---------- -----------
<S> <C> <C> <C>
Communications Stock
1996
First Quarter............................................................. $ 37.500 $ 30.250 $ 0.535
Second Quarter............................................................ 34.625 31.125 0.535
Third Quarter............................................................. 32.250 27.250 0.535
Fourth Quarter............................................................ 33.625 29.250 0.535
1997
First Quarter............................................................. $ 37.250 $ 31.750 $ 0.535
Second Quarter............................................................ 38.500 31.125 0.535
Third Quarter............................................................. 39.4375 35.625 0.535
Fourth Quarter............................................................ 46.9375 36.875 0.535
1998
First Quarter (through February 5, 1998).................................. 50.9375 43.375
Media Stock
1996
First Quarter............................................................. $ 23.000 $ 18.875 --
Second Quarter............................................................ 21.000 16.875 --
Third Quarter............................................................. 18.875 14.375 --
Fourth Quarter............................................................ 19.875 15.375 --
1997
First Quarter............................................................. $ 20.625 $ 17.625 --
Second Quarter............................................................ 22.375 16.000 --
Third Quarter............................................................. 24.250 19.8125 --
Fourth Quarter............................................................ 28.125 22.3125 --
1998
First Quarter (through February 5, 1998).................................. 30.1875 27.000
</TABLE>
On October 24, 1997, the trading day prior to the announcement of the
Separation, the closing sales prices of the Communications Stock and the Media
Stock, as reported on the Composite Tape, were $39.875 and $26.5625,
respectively. On February 5, 1998, the closing sales prices of the
Communications Stock and the Media Stock, as reported on the Composite Tape,
were $47.625 and $29.0625, respectively. Stockholders are urged to obtain
current trading price information with respect to the Communications Stock and
Media Stock. As of January 30, 1998, there were 485,060,950 shares of
Communications Stock and 608,145,521 shares of Media Stock outstanding and
669,060 holders of record of Communications Stock and 643,770 holders of record
of Media Stock.
U S WEST currently pays a quarterly dividend of $0.535 on the Communications
Stock. U S WEST does not currently pay dividends on the Media Stock. For a
description of the dividend policies of New U S WEST and MediaOne following
consummation of the Separation, see "Chapter 3: The Separation--Dividend
Policy." For a discussion of certain risks related to the trading prices of the
New U S WEST Common Stock and MediaOne Common Stock following the Separation,
see "Chapter 2: Risk Factors--Risk Factors Related to New U S WEST--No Prior
Public Market for New U S WEST Common Stock; No Assurance as to Market Price"
and "--Risk Factors Related to MediaOne--No Assurance as to Market Price of
MediaOne Common Stock following Separation."
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AND CERTAIN OTHER MATTERS
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth, as of September 30, 1997, information with
respect to each person who was known by U S WEST (based upon a review of
schedules and reports filed with the Commission) to be the beneficial owner of
more than 5% of the Communications Stock or the Media Stock.
<TABLE>
<CAPTION>
COMMUNICATIONS STOCK MEDIA STOCK
------------------------- -------------------------
NUMBER OF PERCENT OF NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS SHARES CLASS
- ------------------------------------------------------------------ ------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Amos B. Hostetter, Jr. ........................................... 53,318,500 8.5%(1)
The Pilot House
Lewis Wharf
Boston, MA 02110
The Capital Group Companies, Inc. ................................ 37,071,500 7.7%
Capital Research and Management Company
333 South Hope Street
Los Angeles, CA 90071
</TABLE>
- ------------------------------
(1) Includes 6,481,139 shares of Media Stock which Mr. Hostetter has the right
to receive upon conversion of 3,402,173 shares of U S WEST Series D
Preferred Stock beneficially owned by Mr. Hostetter.
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<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth information concerning the shares of
Communications Stock and Media Stock beneficially owned as of , 1998
by (i) each director and named executive officer of U S WEST and the directors
and executive officers of U S WEST as a group and (ii) each individual who will
be a director or named executive officer of New U S WEST and the individuals who
will be the directors and executive officers of New U S WEST as a group. These
shares represent less than one percent of the Communications Stock and the Media
Stock.
<TABLE>
<CAPTION>
COMMUNICATIONS STOCK MEDIA STOCK
--------------------------------------------- ---------------------------------------------
TOTAL NUMBER SHARES SUBJECT TO DEFERRAL TOTAL NUMBER SHARES SUBJECT TO DEFERRAL
NAME OF SHARES OPTIONS PLANS(1) OF SHARES OPTIONS PLANS(1)
- ------------------------------- ------------- ----------------- ----------- ------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
U S WEST
Robert L. Crandall...........
Grant A. Dove................
Allan D. Gilmour.............
Michael P. Glinsky...........
Pierson M. Grieve............
George J. Harad*.............
Allen R. Jacobson*...........
Charles M. Lillis............
Richard D. McCormick*........
Marilyn Carlson Nelson*......
Frank Popoff*................
Charles P. Russ III..........
Louis A. Simpson.............
John Slevin..................
Solomon D. Trujillo*.........
Jerry O. Williams*...........
All directors and executive
officers of U S WEST (as a
group).....................
NEW U S WEST
All directors and executive
officers of New U S WEST
(as a group)...............
</TABLE>
* Will also be a director or named executive officer of New U S WEST.
(1) Includes units denominated as common share equivalents held in deferred
compensation accounts.
145
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AND CERTAIN OTHER MATTERS
<PAGE>
LEGAL MATTERS
The validity of the New U S WEST Common Stock to be issued in connection
with the Separation will be passed upon by Weil, Gotshal & Manges LLP, counsel
to New U S WEST.
EXPERTS
The consolidated financial statements and the consolidated financial
statement schedule of U S WEST and the combined financial statements of the
Communications Group and the Media Group as of December 31, 1996 and for the
year ended December 31, 1996 included in U S WEST's Annual Report on Form 10-K
for the year ended December 31, 1996, incorporated herein by reference, have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
in giving said reports.
The consolidated financial statements and the consolidated financial
statement schedule of U S WEST and the combined financial statements of the
Communications Group and the Media Group as of December 31, 1995 and for each of
the two years in the period ended December 31, 1995 included in U S WEST's
Annual Report on Form 10-K for the year ended December 31, 1996 are incorporated
herein by reference in reliance on the reports of Coopers & Lybrand L.L.P.,
independent certified public accountants, given upon the authority of that firm
as experts in accounting and auditing.
The combined financial statements of New U S WEST as of December 31, 1996
and for the year ended December 31, 1996 included in this Proxy Statement have
been audited by Arthur Andersen LLP, independent public accountants, as
indicated on their reports with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing
on giving said reports.
The combined financial statements of New U S WEST as of December 31, 1995
and for each of the two years in the period ended December 31, 1995 included in
this Registration Statement and Proxy Statement have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent certified public
accountants, given on the authority of that firm as experts in accounting and
auditing.
WHERE YOU CAN FIND MORE INFORMATION
U S WEST is subject to the informational requirements of the Exchange Act
and in accordance therewith file reports, proxy statements and other information
with the Commission. Such reports, proxy statements and other information
concerning U S WEST can be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the Commission's Regional Office at Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
material also can be obtained, at prescribed rates, from the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549. The
Commission maintains a site on the Internet's World Wide Web at
http://www.sec.gov. that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including U S WEST. The Communications Stock and Media Stock are
listed and traded on the NYSE and the PSE and such reports, proxy statements and
other information concerning U S WEST may also be inspected at the offices of
the NYSE, 20 Broad Street, New York, New York 10005 and at the offices of the
PSE, 115 Sansome Street, 2nd Floor, San Francisco, California 94104. As a result
of the Separation, U S WEST (as MediaOne) will continue to be subject to the
informational requirements of the Exchange Act. In addition, upon consummation
of the Separation,
146
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AND CERTAIN OTHER MATTERS
<PAGE>
New U S WEST will become subject to the informational requirements of the
Exchange Act and will thereafter also file reports, proxy statements and other
information with the Commission.
New U S WEST has filed with the Commission a registration statement on Form
S-4 (such registration statement, together with all amendments, is referred to
herein as the "New U S WEST Registration Statement") under the Securities Act
covering the shares of New U S WEST Common Stock issuable in connection with the
Separation. This Proxy Statement does not contain all of the information set
forth in the New U S WEST Registration Statement and the exhibits thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information, reference is hereby made to the New
U S WEST Registration Statement, which is available for inspection and copying
as set forth above. Statements contained in this Proxy Statement or in any
document incorporated by reference in this Proxy Statement as to the contents of
any contract or other document referred to herein or therein are not necessarily
complete, and in each instance reference is made to the copy of such contract or
other document filed as an exhibit to the New U S WEST Registration Statement,
or such other document, each such statement being qualified in all respects by
such reference.
The following documents, which have been filed by U S WEST (File No. 1-8611)
with the Commission under the Exchange Act, are incorporated herein by
reference:
(a) U S WEST's Annual Report on Form 10-K for the year ended December 31,
1996.
(b) U S WEST's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997.
(c) U S WEST's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.
(d) U S WEST's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.
(e) U S WEST's Current Reports on Form 8-K dated January 12, 1997, March 27,
1997, March 28, 1997, March 31, 1997, May 16, 1997, June 30, 1997, August 7,
1997, October 29, 1997 and January 29, 1998.
All documents filed with the Commission by U S WEST pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date hereof and
prior to the date of the Annual Meeting shall be deemed to be incorporated by
reference herein and to be a part hereof from the date any such document is
filed.
Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes hereof to the extent that a statement contained herein (or in any
other subsequently filed document that also is or is deemed to be incorporated
by reference herein) modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part hereof.
THIS PROXY STATEMENT INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. THERE WILL BE PROVIDED WITHOUT CHARGE TO
EACH PERSON TO WHOM A COPY OF THIS PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR
ORAL REQUEST OF SUCH PERSON, FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS
WITHIN ONE BUSINESS DAY OF RECEIPT OF SUCH REQUEST, A COPY OF ANY OR ALL OF THE
DOCUMENTS THAT ARE INCORPORATED BY REFERENCE HEREIN, OTHER THAN EXHIBITS TO SUCH
DOCUMENTS (UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO
SUCH DOCUMENTS). REQUESTS SHOULD BE DIRECTED TO U S WEST, INC., INVESTOR
RELATIONS, 7800 EAST ORCHARD ROAD, ENGLEWOOD, COLORADO 80111 (TELEPHONE NUMBER
(303) 793-6500). IN ORDER TO ENSURE TIMELY DELIVERY OF SUCH DOCUMENTS, ANY
REQUEST SHOULD BE MADE BEFORE , 1998.
For additional information about the Separation, please contact Beacon Hill
Associates, Inc., our information agent, toll-free at 1-800- - .
147
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AND CERTAIN OTHER MATTERS
<PAGE>
STOCKHOLDER PROPOSALS
If the Separation is consummated, stockholder proposals intended for
inclusion in the 1999 Proxy Statement of MediaOne should be sent to the
Secretary of MediaOne at 188 Inverness Drive West, Englewood, CO 80112, and must
be received by , 1998, and stockholder proposals intended for
inclusion in the 1999 Proxy Statement of New U S WEST should be sent to the
Secretary of New U S WEST at 1801 California Street, Denver, Colorado 80202, and
must be received by , 1998. If the Separation is not consummated,
stockholder proposals intended for inclusion in the 1999 Proxy Statement of U S
WEST should be sent to the Secretary of U S WEST at 7800 East Orchard Road,
Englewood, CO 80111, and must be received by , 1998.
148
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AND CERTAIN OTHER MATTERS
<PAGE>
ANNEX A-1
CERTIFICATE OF AMENDMENT
TO
RESTATED CERTIFICATE OF INCORPORATION
OF
U S WEST, INC.
Pursuant to Section 242 of the
Delaware General Corporation Law
The undersigned, of U S WEST, Inc., a Delaware corporation (the
"Corporation"), does hereby certify that the stockholders of the Corporation
duly approved the following amendment to the Corporation's Certificate of
Incorporation, as heretofore amended, in accordance with the provisions of
Section 242 of the Delaware General Corporation Law:
1. RESOLVED, that Subsection 2.1.2 of the Restated Certificate is hereby
amended and restated in its entirety as follows:
"SECTION 2.1.2. LIMITATION ON DIVIDENDS ON MEDIA STOCK. Dividends on
Media Stock may be declared and paid only out of the lesser of (i) the
funds of the Corporation legally available therefor and (ii) the Media
Group Available Dividend Amount; PROVIDED, HOWEVER, that the Corporation
may declare and pay the dividend on Media Stock contemplated by
Subsection 2.4.3(C) upon compliance with clause (i) of this Subsection
2.1.2. only and without regard to clause (ii)."
2. RESOLVED, that Subsection 2.4.3 of the Restated Certificate is hereby
amended by adding to the end of such Subsection the following paragraph (C):
"(C) Notwithstanding the provisions of paragraphs (A) and (B) of
subsection 2.4.3., the Board of Directors may, provided that there are
funds of the Corporation legally available therefor (but without regard
to the Communications Group Available Dividend Amount or the Media Group
Available Dividend Amount), (i) redeem each of the issued and outstanding
shares of Communications Stock for one share of common stock of a
wholly-owned Subsidiary of the Corporation which holds, directly or
indirectly, all of the assets and liabilities attributed to the
Communications Group and certain other assets and liabilities including,
without limitation, all of the outstanding capital stock of U S WEST Dex,
Inc. ("New U S WEST") (which shares, in the aggregate together with such
shares of common stock of New U S WEST as shall be issued to the holders
of Media Stock in the transaction described in clause (ii) below will
represent all of the outstanding shares of common stock of New U S WEST
immediately following such redemption), and (ii) declare and pay a
dividend upon each outstanding share of Media Stock payable in shares of
common stock of New U S WEST (the transactions described in clauses (i)
and (ii) being referred to collectively as the "Separation"), in each
case in accordance with and on the terms and subject to the conditions of
that certain Separation Agreement dated as of , 1998 between the
Corporation and USW-C, Inc. Notice of the Separation having been provided
pursuant to the Corporation's Proxy Statement dated , 1998, the
provisions of paragraphs (F) and (J) of subsection 2.4.5 shall not be
applicable to the transactions contemplated by this paragraph (C) of
subsection 2.4.3."
3. RESOLVED, that Clauses (F) and (J) of Subsection 2.4.5 of the Restated
Certificate (Notice and Other Provisions) are hereby amended by adding to the
end of each such clause the following:
"The provisions of this subsection shall not apply to the transactions
contemplated by clause (C) of subsection 2.4.3."
A-1-1
<PAGE>
IN WITNESS WHEREOF, the undersigned does hereby make this certificate,
hereby declaring and certifying that this is the act and deed of the Corporation
and the facts herein stated are true and, accordingly, has executed this
certificate as of this th day of , 1998.
U S WEST, INC.
By:
----------------------------------------------------------------------
Name:
Title:
A-1-2
<PAGE>
ANNEX A-2
RESTATED CERTIFICATE OF INCORPORATION
OF
MEDIAONE GROUP, INC.
(Originally Incorporated May 12, 1995
Under the Name U S WEST, Inc.)
ARTICLE I
NAME
The name of the corporation is MediaOne Group, Inc. (the "Corporation").
ARTICLE II
ADDRESS OF REGISTERED OFFICE;
NAME OF REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of New Castle, 19801. The name of its registered agent at
that address is The Corporation Trust Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the Delaware General Corporation
Law (the "Corporation Law").
ARTICLE IV
POWERS
The Corporation shall have all powers that may now or hereafter be lawful
for a corporation to exercise under the Corporation law.
ARTICLE V
CAPITAL STOCK
SECTION 1. AUTHORIZATION. Upon the filing of this Restated Certificate of
Incorporation, each share of U S WEST Media Group Common Stock, par value $0.01
per share (the "U S WEST Media Group Common Stock"), shall be and hereby is
recharacterized as one share of Common Stock (as defined below). The aggregate
number of shares of stock which the Corporation shall have authority to issue is
two billion two hundred million (2,200,000,000) shares, of which two billion
(2,000,000,000) shares shall be shares of common stock having a par value of
$0.01 per share (the "Common Stock") and two hundred million (200,000,000)
shares shall be shares of a class of preferred stock having a par value of $1.00
per share (the "Preferred Stock") and issuable in one or more series as
hereinafter provided. For purposes of this Article V, references to "Common
Stock" shall include the U S WEST Media Group Common Stock, the "Board of
Directors" shall refer to the Board of Directors of the Corporation, as
established in accordance with Article VI of the certificate of incorporation of
the Corporation and references to "the Certificate of Incorporation of the
Corporation" shall refer to this Restated Certificate of Incorporation as the
same may be amended from time to time.
A-2-1
<PAGE>
SECTION 2. COMMON STOCK. The voting powers, preferences and relative,
participating, optional or other special rights of the Common Stock, and the
qualifications and restrictions thereon, shall be as follows in this Section 2.
2.1. DIVIDENDS. Subject to any preferences and relative, participating,
optional or special rights of any outstanding series of Preferred Stock and any
qualifications or restrictions on the Common Stock created thereby, dividends
may be declared and paid upon the Common Stock as the Board of Directors may
determine.
2.2. VOTING POWERS. The shares of Common Stock of the Corporation shall be
of one and the same class. The holders of Common Stock shall have one vote per
share of Common Stock on all matters on which holders of Common Stock are
entitled to vote. Except as otherwise provided by law or by the terms of any
outstanding series of Preferred Stock or any provision of the Certificate of
Incorporation of the Corporation restricting the power to vote on a specified
matter to other stockholders, the entire voting power of the stockholders of the
Corporation shall be vested in the holders of Common Stock of the Corporation,
who shall be entitled to vote on any matter on which the holders of stock of the
Corporation shall, by law or by the provisions of the Certificate of
Incorporation or bylaws of the Corporation, be entitled to vote.
2.3. LIQUIDATION RIGHTS. In the event of the voluntary or involuntary
dissolution of the Corporation or the liquidation and winding up of the
Corporation, after payment or provision for payment of the debts and other
liabilities of the Corporation and the full preferential amounts (including any
accumulated and unpaid dividends) to which the holders of Preferred Stock are
entitled, unless otherwise provided in respect of a series of preferred stock by
the resolution of the Board of Directors fixing the liquidation rights and
preferences of such series of preferred stock, the holders of the outstanding
shares of Common Stock shall be entitled to receive the remaining assets of the
Corporation. Neither the merger nor consolidation of the Corporation into or
with any other company, nor the merger or consolidation of any other company
into or with the Corporation, nor a sale, transfer or lease of all or any part
of the assets of the Corporation, shall, alone, be deemed a liquidation or
winding up of the Corporation, or cause the dissolution of the Corporation, for
purposes of this subsection 2.3.
SECTION 3. PREFERRED STOCK. The Preferred Stock may be issued from time to
time in one or more series. Except as provided by subsection 3.1 with respect to
the Series A Preferred Stock (as hereinafter defined), by subsection 3.2 with
respect to the Series C Preferred Stock (as hereinafter defined) and by
subsection 3.4 with respect to the Series D Stock (as defined in Exhibit A
hereto) and the Series E Stock (as defined in Exhibit B hereto), the Board of
Directors is authorized, by resolution adopted and filed in accordance with law,
to fix the number of shares in each series, the designation thereof, the voting
powers, preferences and relative, participating, optional or other special
rights thereof, and the qualifications or restrictions thereon, of each series
and the variations in such voting powers and preferences and rights as between
series. Any shares of any class or series of Preferred Stock purchased,
exchanged, converted or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and cancelled promptly after the acquisition
thereof. All such shares shall upon their cancellation become authorized but
unissued shares of Preferred Stock, without designation as to series, and may be
reissued as part of any series of Preferred Stock created by resolution or
resolutions of the Board of Directors, subject to the conditions and
restrictions on issuance set forth in this Certificate of Incorporation or in
such resolution or resolutions.
3.1. SERIES A JUNIOR PARTICIPATING CUMULATIVE PREFERRED STOCK. There is
hereby created a series of Preferred Stock, designated Series A Junior
Participating Cumulative Preferred Stock, par value $1.00 per share (the "Series
A Preferred Stock"), of 10,000,000 shares having the following voting powers,
preferences and rights, and qualifications and restrictions thereon provided by
this subsection 3.1:
A-2-2
<PAGE>
3.1.1. DIVIDENDS AND DISTRIBUTIONS.
(A) The holders of shares of Series A Preferred Stock, in preference to the
holders of shares of Common Stock and any other junior stock of the Corporation
that may be outstanding, shall be entitled to receive, when, as and if declared
by the Board of Directors out of funds legally available for the purpose,
quarterly dividends payable in cash on the tenth day of January, April, July and
October in each year (each such date being referred to in this subsection 3.1 as
a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of a share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (i) $25 per share ($100 per annum), or (ii) subject to
the provision for adjustment hereinafter set forth in this paragraph (A), the
product of 100 multiplied by the aggregate per share amount of all cash
dividends and all non-cash dividends or other distributions, other than a
dividend payable in shares of Common Stock or a subdivision of the outstanding
shares of Common Stock (by reclassification or otherwise), declared on the
Common Stock since the immediately preceding Quarterly Dividend Payment Date or,
with respect to the first Quarterly Dividend Payment Date, since the first
issuance of any share or fraction of a share of Series A Preferred Stock.
(B) The Corporation shall declare a dividend or distribution on the Series A
Preferred Stock as provided in paragraph (A) of this subsection 3.1.1
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock); PROVIDED, HOWEVER,
that, in the event no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date, a dividend of $25 per share
($100 per annum) on the Series A Preferred Stock shall nevertheless be payable
on such subsequent Quarterly Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding shares
of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
(i) the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or (ii) the date of issue
of such shares is after the record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive a quarterly dividend and
on or prior to the next succeeding Quarterly Dividend Payment Date, in which
case such dividends shall begin to accrue and be cumulative from such Quarterly
Dividend Payment Date. Accrued but unpaid dividends shall cumulate but shall not
bear interest. Dividends paid on the shares of Series A Preferred Stock in an
amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall be not more than 60 days prior to the date
fixed for the payment thereof.
3.1.2. VOTING RIGHTS. The holders of shares of Series A Preferred Stock
shall have the following voting rights:
(A) Each holder of Series A Preferred Stock shall be entitled to a number of
votes equal to the product of (i) 100 multiplied by (ii) the maximum number of
votes per share of Common Stock at such time with respect to such matter.
(B) Except as otherwise provided in the Certificate of Incorporation of the
Corporation or by law, the holders of shares of Series A Preferred Stock and the
holders of shares of Common Stock shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) (1) If and whenever at any time or times dividends payable on shares of
Series A Preferred Stock shall have been in arrears and unpaid in an aggregate
amount equal to or exceeding the amount
A-2-3
<PAGE>
of dividends payable thereon for six quarterly dividend periods, then the number
of directors constituting the Board of Directors shall be automatically
increased by two and the holders of shares of Series A Preferred Stock, together
with the holders of any shares of any shares of stock ranking on a parity
(either as to dividends or to distributions upon liquidation or dissolution and
winding-up of the Corporation) as to which in each case dividends are in arrears
and unpaid in an aggregate amount equal to or exceeding the amount of dividends
payable thereon for six quarterly dividend periods, shall have the exclusive
right, voting separately as a class with such other series, to elect two
directors of the Corporation.
(2) Such voting right may be exercised initially either by written
consent or at a special meeting of the holders of the Preferred Stock having
such voting right, called as hereinafter provided, or at any annual meeting
of stockholders held for the purpose of electing directors, and thereafter
at each such annual meeting until such time as all dividends in arrears on
the shares of this Series shall have been paid in full and all dividends
payable on the shares of Series A Preferred Stock on four subsequent
consecutive Quarterly Dividend Payment Dates shall have been paid in full on
such dates or funds shall have been set aside for the payment thereof, at
which time such voting right and the term of the directors elected pursuant
to Section 3.1.2.(C)(1) shall terminate.
(3) At any time when such voting right shall have vested in holders of
shares of such series of Preferred Stock described in Section 3.1.2.(C)(2),
and if such right shall not already have been exercised by written consent,
a proper officer of the Corporation may call, and, upon the written request,
addressed to the Secretary of the Corporation, of the record holders of
either (i) shares representing twenty-five percent (25%) of the voting power
of the shares then outstanding of the Series D Preferred Stock or (ii)
shares representing twenty-five percent (25%) of the voting power of shares
of all series of Preferred Stock having such voting right, shall call, a
special meeting of the holders of Preferred Stock having such voting right.
Such meeting shall be held at the earliest practicable date upon the notice
required for annual meetings of stockholders at the place for holding annual
meetings of stockholders of the Corporation, or, if none, at a place
designated by the Board of Directors. Notwithstanding the provisions of this
Section 3.1.2.(C)(3), no such special meeting shall be called during a
period within 60 days immediately preceding the date fixed for the next
annual meeting of stockholders.
(4) At any meeting held for the purpose of electing directors at which
the holders of such Preferred Stock shall have the right to elect directors
as provided herein, the presence in person or by proxy of the holders of
shares representing more than fifty percent (50%) in voting power of the
then outstanding shares of such Preferred Stock having such right shall be
required and shall be sufficient to constitute a quorum of such class for
the election of directors by such class.
(5) Any director elected by holders of Preferred Stock pursuant to the
voting right created under this Section 3.1.2. shall hold office until the
next annual meeting of stockholders (unless such term has previously
terminated pursuant to Section 3.1.2.(C)(2) and any vacancy in respect of
any such director shall be filled only by vote of the remaining director so
elected, or if there be no such remaining director, by the holders of such
Preferred Stock entitled to elect such director or directors by written
consent or at a special meeting called in accordance with the procedures set
forth in Section 3.1.2.(C)(3), or, if no special meeting is called or
written consent executed, at the next annual meeting of stockholders.
(D) Nothing contained in this subsection 3.1 shall prevent the Board of
Directors or stockholders from taking any action to increase the number of
authorized shares of Series A Preferred Stock, or increasing the number of
authorized shares of Preferred Stock of the same class as the Series A Preferred
Stock or the number of authorized shares of Common Stock or changing the par
value of the
A-2-4
<PAGE>
Common Stock or Preferred Stock, or issuing options, warrants or rights to any
class of stock of the Corporation, as may be authorized by the Certificate of
Incorporation of the Corporation.
(E) Except as set forth herein, holders of shares of Series A Preferred
Stock shall have no special voting rights and their consent shall not be
required (except to the extent they are entitled to vote as set forth in the
Certificate of Incorporation of the Corporation or by law) for the taking of any
corporate action.
3.1.3. CERTAIN RESTRICTIONS.
(A) Whenever any dividends or other distributions payable on the Series A
Preferred Stock as provided in subsection 3.1.1 hereof are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not, and shall cause its subsidiaries
not to, directly or indirectly:
(1) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking junior (either as to dividends or to
distributions upon liquidation or dissolution and winding-up of the Corporation)
to the Series A Preferred Stock;
(2) declare or pay dividends on, or make any other distributions with
respect to, any shares of stock ranking on a parity (either as to dividends or
to distributions upon liquidation or dissolution and winding-up of the
Corporation) with the Series A Preferred Stock, except dividends paid ratably on
shares of the Series A Preferred Stock and all such parity stock on which
dividends are payable or in arrears, in proportion to the total amounts of such
dividends to which the holders of all such shares are then entitled;
(3) redeem or purchase or otherwise acquire for consideration shares of any
stock ranking junior (either as to dividends or to distributions upon
liquidation or dissolution and winding-up of the Corporation) with the Series A
Preferred Stock, provided that the Corporation may at any time redeem, purchase
or otherwise acquire shares of any such junior stock in exchange for shares of
any stock of the Corporation ranking junior (either as to dividends or to
distributions upon dissolution or liquidation and winding-up of the Corporation)
to the Series A Preferred Stock; or
(4) purchase or otherwise acquire for consideration any shares of Series A
Preferred Stock, or any shares of stock ranking on a parity with the Series A
Preferred Stock, except in accordance with a purchase offer made in writing or
by publication (as determined by the Board of Directors) to all holders of such
shares upon such terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation to
purchase or otherwise acquire for consideration any shares of stock of the
Corporation unless the Corporation could, under paragraph (A) of this subsection
3.1.3, purchase or otherwise acquire such shares at such time and in such
manner.
3.1.4. REACQUIRED SHARES. Any shares of Series A Preferred Stock purchased
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall, upon their cancellation, become authorized but unissued shares of
Preferred Stock, without designation as to series, and may be reissued as part
of any series of Preferred Stock created by resolution or resolutions of the
Board of Directors (including additional shares of Series A Preferred Stock),
subject to the conditions and restrictions on issuance set forth in the
Certificate of Incorporation of the Corporation.
A-2-5
<PAGE>
3.1.5. LIQUIDATION OR DISSOLUTION AND WINDING-UP. Upon any liquidation or
dissolution and winding-up of the Corporation, no distribution shall be made to:
(A) the holders of shares of stock ranking junior (either as to dividends or
to distributions upon liquidation or dissolution and winding-up of the
Corporation) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received the greater of (i)
$100 per share ($1.00 per one-hundredth of a share), plus an amount equal to all
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment, or (ii) an aggregate amount per share equal to the
product of (x) 100 multiplied by (y) the aggregate amount to be distributed in
connection with such liquidation or dissolution and winding-up per share to
holders of shares of Common Stock; or
(B) the holders of shares of stock ranking on a parity (either as to
dividends or upon liquidation or dissolution and winding-up of the Corporation)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such other parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation or dissolution and winding-up.
3.1.6. CONSOLIDATION, MERGER, ETC. In the event that the Corporation shall
enter into any consolidation, merger, combination or other transaction in which
the shares of Common Stock are exchanged for or changed into other stock or
securities, cash and/or any other property, or otherwise changed, then, and in
each such event, the shares of Series A Preferred Stock shall at the same time
be similarly exchanged for an amount per share equal to the product of (i) 100
multiplied by (ii) the aggregate amount of stock, securities, cash or any other
property (payable in kind), as the case may be, into which or for which each
share of Common Stock is changed or exchanged.
3.1.7. NO REDEMPTION. The shares of Series A Preferred Stock shall not be
redeemable. Notwithstanding the foregoing, the Corporation may acquire shares of
Series A Preferred Stock in any other manner permitted by law or the Certificate
of Incorporation of the Corporation.
3.1.8. RANK. Unless otherwise provided in the Certificate of Incorporation
of the Corporation or a Certificate of Designations relating to a series of
preferred stock of the Corporation established after the issuance of any shares
of Series A Preferred Stock or any right, warrant, or option providing for the
issuance thereof, the Series A Preferred Stock shall rank, as to the payment of
dividends and the distribution of assets on liquidation or dissolution and
winding-up of the Corporation, PARI PASSU to the Series C Cumulative Redeemable
Preferred Stock, par value $1.00 per share, of the Corporation, junior to all
other series of the Corporation's Preferred Stock and senior to the Common
Stock.
3.1.9. AMENDMENT. The Certificate of Incorporation of the Corporation
shall not be amended in any manner that would materially and adversely alter or
change the powers, preferences or special rights of the Series A Preferred Stock
without the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Preferred Stock, voting together as a single
series.
3.1.10. FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share (in one one-hundredths (1/100) of a share and integral
multiples thereof) that shall entitle the holder thereof, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of shares of Series A Preferred Stock.
3.2. [INTENTIONALLY OMITTED]
3.3. SERIES C CUMULATIVE REDEEMABLE PREFERRED STOCK. There is hereby
created a series of Preferred Stock designated as Series C Cumulative Redeemable
Preferred Stock, par value $1.00 per share (the "Series C Preferred Stock"), of
fifty thousand (50,000) shares having the following voting powers, preferences
and rights, and qualifications and restrictions thereon:
A-2-6
<PAGE>
3.3.1. DIVIDENDS.
(A) The holders of shares of the Series C Preferred Stock shall be entitled
to receive, when, as and if declared by the Board of Directors out of funds of
the Corporation legally available therefor, cumulative cash dividends on the
shares of the Series C Preferred Stock at the rate of $70.00 per annum per
share, and no more, payable in equal quarterly installments on the first
business day of November, February, May and August, in each year, commencing on
the first business day of November, 1995. Such dividends shall accrue and be
cumulative from the date of original issue of each share of the Series C
Preferred Stock, whether or not declared and whether or not there shall be funds
legally available for the payment thereof. Each such dividend shall be paid to
the holders of record of the shares of the Series C Preferred Stock as they
appear on the share register of the Corporation on such record date, not more
than 30 days nor less than 10 days preceding the dividend payment date thereof,
as shall be fixed by the Board of Directors or a duly authorized committee
thereof. Dividends in arrears may be declared and paid at any time without
reference to any regular dividend payment date.
(B) If dividends are not paid in full, or declared in full and sums set
apart for the full payment thereof, upon the shares of the Series C Preferred
Stock and shares of any other preferred stock ranking on a parity as to
dividends with the Series C Preferred Stock, all dividends declared upon shares
of the Series C Preferred Stock and of any other preferred stock ranking on a
parity as to dividends with the Series C Preferred Stock shall be paid or
declared PRO RATA so that in all cases the amount of dividends paid or declared
per share on the Series C Preferred Stock and on such other shares of preferred
stock shall bear to each other the same ratio that accumulated dividends per
share, including dividends accrued or dividends in arrears, if any, on the
shares of the Series C Preferred Stock and such other shares of preferred stock
bear to each other. Except as provided in the preceding sentence, unless full
cumulative dividends on the shares of the Series C Preferred Stock have been
paid or declared in full and sums set aside exclusively for the payment thereof,
(i) no dividends (other than dividends in shares of the Common Stock or in
shares of any other capital stock of the Corporation ranking junior to the
Series C Preferred Stock as to dividends) shall be paid or declared or set aside
for payment or other distribution made upon the Common Stock or any other
capital stock of the Corporation ranking junior to or on a parity with the
Series C Preferred Stock as to dividends, (ii) nor shall any shares of the
Common Stock or shares of any other capital stock of the Corporation ranking
junior to or on a parity with the Series C Preferred Stock as to dividends, or
any warrants, rights, calls or options exercisable for or convertible into
Common Stock or any such capital stock, be redeemed, purchased or otherwise
acquired for any consideration (or any payment made to or available for a
sinking fund or any similar fund for the redemption of any such shares) by the
Corporation or any, direct or indirect, subsidiary of the Corporation (except in
the case of clause (ii) by conversion into or exchange for shares of capital
stock of the Corporation ranking junior to the Series C Preferred Stock as to
dividends, or any warrants, rights, calls or options exercisable for or
convertible into Common Stock or any such capital stock). Holders of shares of
the Series C Preferred Stock shall not be entitled to any dividends, whether
payable in cash, property or shares of capital stock, in excess of full accrued
and cumulative dividends as herein provided. No interest or sum of money in lieu
of interest shall be payable in respect of any dividend payment or payments on
the shares of the Series C Preferred Stock that may be in arrears.
The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used herein with reference to shares of preferred stock shall
be deemed to mean an amount that shall be equal to dividends thereon at the
annual dividend rates per share for the respective series from the date or dates
on which such dividends commence to accrue to the end of the then current
quarterly dividend period for such preferred stock (or, in the case of
redemption, to the date of redemption), less the amount of all dividends paid,
or declared in full and sums set aside for the payment thereof, upon such shares
of preferred stock.
A-2-7
<PAGE>
(C) Dividends payable on the shares of the Series C Preferred Stock for any
period less than a full quarterly dividend period shall be computed on the basis
of a 360-day year of twelve 30-day months and the actual number of days elapsed
in the period for which payable.
3.3.2. REDEMPTION.
(A) MANDATORY REDEMPTION. On September 2, 2004, to the extent (i) the
Corporation shall have funds legally available therefor and (ii) the Corporation
shall not have been rendered insolvent pursuant to the U.S. Bankruptcy Code, the
Corporation shall redeem all remaining outstanding shares of Series C Preferred
Stock, at a redemption price of $1,000.00 per share, together with accrued and
unpaid dividends thereon to the redemption date, in cash without interest. If,
for any reason, the Corporation shall fail to discharge its mandatory redemption
obligations pursuant to this paragraph (A) of subsection 3.3.2, such mandatory
redemption obligations shall be discharged as soon as the Corporation is able to
discharge such obligations. If and so long as any mandatory redemption
obligations with respect to the shares of Series C Preferred Stock shall not be
fully discharged, (i) no dividends (other than dividends in shares of the Common
Stock) shall be paid or declared or set aside for payment or other distribution
made upon the Common Stock or any other capital stock of the Corporation ranking
junior to or on a parity with the Series C Preferred Stock as to dividends, or
any warrants, rights, calls or options exercisable for or convertible into
Common Stock or any such capital stock, (ii) nor shall any shares of the
Communications Stock or Media Stock or shares of any other capital stock of the
Corporation ranking junior to or on a parity with the Series C Preferred Stock
as to dividends, or any warrants, rights, calls or options exercisable for or
convertible into Common Stock or any such capital stock, be redeemed, purchased
or otherwise acquired for any consideration (or any payment made to or available
for a sinking or other similar fund for the redemption of any such shares) by
the Corporation or any direct or indirect subsidiary of the Corporation (except,
in the case of clause (ii), by conversion into or exchange for shares of capital
stock of the Corporation ranking junior to the Series C Preferred Stock as to
dividends).
(B) OPTIONAL REDEMPTION BEGINNING SEPTEMBER 2, 1999. (i) Subject to
subparagraph (B)(ii) of this subsection 3.3.2, the shares of the Series C
Preferred Stock shall be redeemable at the option of the Corporation, in whole
or from time to time in part, at any time on or after September 2, 1999, subject
to the limitations set forth below, at the following redemption prices per share
plus, in each case, all dividends accrued and unpaid on the shares of the Series
C Preferred Stock up to the date fixed for redemption, upon giving notice as
provided in paragraph (D) of this subsection 3.3.2:
<TABLE>
<CAPTION>
IF REDEEMED DURING THE TWELVE-MONTH PERIOD BEGINNING SEPTEMBER 2, PRICE
- ------------------------------------------------------------------------------------------- ----------
<S> <C>
1999....................................................................................... $ 1,035.00
2000....................................................................................... $ 1,028.00
2001....................................................................................... $ 1,021.00
2002....................................................................................... $ 1,014.00
2003....................................................................................... $ 1,007.00
</TABLE>
The excess amount of the price per share over $1,000 (other than accrued but
unpaid dividends) is referred to herein as the "Redemption Premium".
(ii) From and after the time of any exercise of any Ten-Year Options (as
hereinafter defined), upon giving notice as provided in paragraph (D) of
this subsection 3.3.2 below, the Corporation shall have the right to redeem,
without the payment of the Redemption Premium thereon, a number of shares of
Series C Preferred Stock equal to 50,000 multiplied by a fraction the
numerator of which shall be the number of Ten-Year Options so exercised at
such time and the denominator of which shall be the aggregate number of
Ten-Year Options initially issued. The number of shares of Series C
Preferred Stock which may be redeemed without the applicable Redemption
Premium shall be cumulative with each such exercise of the Ten-Year Options
but shall be reduced
A-2-8
<PAGE>
upon any redemption of Series C Preferred Stock without the payment of the
Redemption Premium by the number of shares so redeemed. The adjustment to
the Redemption Premium in this subparagraph (B)(ii) of subsection 3.3.2
shall take into account any Ten-Year Options exercised prior to the time the
shares of Series C Preferred Stock are redeemed on the Redemption Date
regardless of whether notice of the redemption of such shares was given
prior to the exercise of such Ten-Year Options. "Ten-Year Options" means the
1,893,940 Options initially issued by U S WEST Capital Corporation ("USWCC")
to Fund American Enterprises Holdings, Inc. ("FFC") pursuant to the
Securities Purchase Agreement dated April 10, 1994, among FFC, the
Corporation, USWCC and Financial Security Assurance Holdings Ltd. and
referred to in such agreement as the "Ten-Year Options".
(C) SPECIAL PROCEDURE FOR PARTIAL REDEMPTION. If less than all of the
outstanding shares of the Series C Preferred Stock are to be redeemed, the
shares to be redeemed shall be determined PRO RATA.
(D) GENERAL PROCEDURES FOR REDEMPTION. At least 30 days but not more than
60 days prior to the date fixed for the redemption of shares of the Series C
Preferred Stock, a written notice shall be given to each holder of record of
shares of the Series C Preferred Stock to be redeemed by certified or registered
mail in a postage prepaid envelope or by a nationally recognized overnight
courier (appropriately marked for overnight delivery) addressed to such holder
at its post office address as shown on the records of the Corporation (and shall
be deemed given only upon the earlier of (i) the date when received by the
holder or (ii) three days after the Corporation has sent such notice), notifying
such holder of the election of the Corporation to redeem such shares, stating
the date fixed for redemption thereof (the "Redemption Date"), that the shares
shall be deemed to be redeemed at 5:00 p.m., New York time, on such date and the
redemption price (including a calculation of all accrued dividends up to and
including the Redemption Date, but subject to reduction as a result of any
exercises of the Ten-Year Options), and calling upon such holder to surrender to
the Corporation on the Redemption Date at the place designated in such notice
its certificate or certificates representing the number of shares specified in
such notice of redemption. Each notice of redemption shall be irrevocable. On or
after the Redemption Date, upon surrender by each holder of its certificate or
certificates for shares of the Series C Preferred Stock to be redeemed at the
place designated in such notice, the redemption price of such shares (together
with all accrued and unpaid dividends thereon up to and including the Redemption
Date) shall be paid in immediately available funds to or on the order of the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be cancelled. In case less than
all the shares represented by any such certificate are redeemed, a new
certificate shall be issued representing the unredeemed shares, without cost to
the holder thereof. From and after the Redemption Date (unless notice of
redemption is not received by each holder of shares as aforesaid, or default
shall be made by the Corporation in payment of the redemption price or accrued
and unpaid dividends up to and including the Redemption Date), all dividends on
the shares of the Series C Preferred Stock designated for redemption in such
notice shall cease to accrue, and all rights of the holders thereof as
stockholders of the Corporation, except the right to receive the redemption
price of such shares (including all accrued and unpaid dividends up to the
Redemption Date) upon the surrender of certificates representing the same, shall
cease and terminate, and such shares shall not be deemed to be outstanding for
any purpose whatsoever. At its election, if notice of redemption is received by
each holder of shares as aforesaid, the Corporation prior to the Redemption Date
may deposit the redemption price (including all accrued and unpaid dividends up
to the Redemption Date) of shares of the Series C Preferred Stock so called for
redemption in trust for the account of holders thereof with a bank or trust
company (having a capital surplus and undivided profits aggregating not less
than $100,000,000) in the Borough of Manhattan, City and State of New York, or
the City of Denver, State of Colorado, in which case the aforesaid notice to
holders of shares of the Series C Preferred Stock to be redeemed shall state the
date of such deposit, shall specify the office of such bank or trust company as
the place of payment of the redemption price, and shall call upon such holders
to surrender the certificates representing such shares at such place on or after
the date fixed in
A-2-9
<PAGE>
such redemption notice (which shall not be later than the Redemption Date)
against payment of the redemption price (including all accrued and unpaid
dividends up to the Redemption Date). Any interest accrued on such funds shall
be paid to the Corporation from time to time. Any moneys so deposited that shall
remain unclaimed by the holders of such shares of the Series C Preferred Stock
at the end of two years after the Redemption Date shall be returned by such bank
or trust company to the Corporation, and thereafter the holder of any such
shares shall look to the Corporation for the payment of the redemption price
(and any accrued and unpaid dividends).
(E) SHARES REDEEMED OR REPURCHASED. Shares of the Series C Preferred Stock
redeemed, repurchased or retired by the Corporation pursuant to the provisions
of this subsection 3.3.2, shall thereupon be retired and may not be reissued as
shares of the Series C Preferred Stock but shall thereafter have the status of
authorized but unissued shares of the Preferred Stock, without designation as to
series until such shares are once more designated as part of a particular series
of the Preferred Stock.
3.3.3. VOTING RIGHTS.
Except as otherwise provided in subsection 3.3.5 or as required by law, the
holders of shares of the Series C Preferred Stock shall not be entitled to vote
on any matter on which the holders of any voting securities of the Corporation
shall be entitled to vote.
3.3.4. LIQUIDATION RIGHTS.
(A) In the event of any liquidation or dissolution and winding-up of the
affairs of the Corporation, whether voluntary or otherwise, the holders of
shares of the Series C Preferred Stock shall be entitled to receive, in cash,
out of the assets of the Corporation available for distribution to stockholders,
the amount of One Thousand Dollars ($1,000.00) for each share of the Series C
Preferred Stock, plus an amount equal to all dividends accrued and unpaid on
each such share up to and including the date fixed for distribution, before any
distribution shall be made to the holders of shares of the Common Stock or any
other capital stock of the Corporation ranking (as to any such distribution)
junior to the Series C Preferred Stock. If upon any liquidation or dissolution
and winding up of the Corporation, the assets distributable among the holders of
shares of the Series C Preferred Stock and all other classes and series of
preferred stock ranking (as to any such distribution) on a parity with the
Series C Preferred Stock are insufficient to permit the payment in full to the
holders of all such shares of all preferential amounts payable to all such
holders, then the entire assets of the Corporation thus distributable shall be
distributed ratably among the holders of the shares of the Series C Preferred
Stock and such other classes and series of preferred stock ranking (as to any
such distribution) on a parity with the Series C Preferred Stock in proportion
to the respective amounts that would be payable per share if such assets were
sufficient to permit payment in full.
(B) For purposes of this subsection 3.3.4, a distribution of assets in any
liquidation or dissolution and winding-up shall not include (i) any
consolidation or merger of the Corporation with or into any other corporation,
(ii) any liquidation or dissolution and winding-up or reorganization of the
Corporation immediately followed by reincorporation of another corporation or
(iii) a sale or other disposition of all or substantially all of the
Corporation's assets to another corporation; PROVIDED, HOWEVER, that, in each
case, effective provision is made in the Certificate of Incorporation of the
resulting and surviving corporation or otherwise for the protection of the
rights of the holders of shares of the Series C Preferred Stock.
(C) After the payment of the full preferential amounts provided for herein
to the holders of shares of the Series C Preferred Stock or funds necessary for
such payment have been set aside in trust for the holders thereof in the manner
provided in paragraph (D) of subsection 3.3.2, such holders shall be entitled to
no other or further participation in the distribution of the assets of the
Corporation.
A-2-10
<PAGE>
3.3.5. LIMITATIONS. In addition to any other rights provided by applicable
law, so long as any shares of the Series C Preferred Stock are outstanding, the
Corporation shall not, without the affirmative vote, or the written consent as
provided by law, of the holders of at least two-thirds ( 2/3) of the outstanding
shares of the Series C Preferred Stock, voting separately, modify, amend or
rescind the preferences, rights or powers with respect to the Series C Preferred
Stock so as to affect the Series C Preferred Stock adversely; but (except as
otherwise required by applicable law) nothing herein contained shall require
such a vote or consent (i) in connection with any increase in the total number
of authorized shares of the Common Stock, or (ii) in connection with the
authorization or increase of any class or series of shares of preferred stock.
The provisions of this subsection 3.3.5 shall not in any way limit the right and
power of the Corporation to issue its currently authorized but unissued shares
or bonds, notes, mortgages, debentures, and other obligations, and to incur
indebtedness to banks and to other lenders.
3.3.6. NO PREEMPTIVE RIGHTS. No holder of shares of the Series C Preferred
Stock shall possess any preemptive rights to subscribe for or acquire any
unissued shares of capital stock of the Corporation (whether now or hereafter
authorized) or securities of the Corporation convertible into or carrying a
right to subscribe to or acquire shares of capital stock of the Corporation.
3.3.7. RANK. Unless otherwise provided in the Certificate of Incorporation
of the Corporation or a Certificate of Designations relating to a series of
preferred stock of the Corporation established after the issuance of any shares
of Series C Preferred Stock or any right, warrant or option providing for the
issuance thereof, the Series C Preferred Stock shall rank, as to the payment of
dividends and the distribution of assets on liquidation or dissolution and
winding-up, whether voluntary or involuntary, of the Corporation, on a parity
with the Series A Junior Participating Cumulative Preferred Stock, par value
$1.00 per share, and the Series B Junior Participating Cumulative Preferred
Stock, par value $1.00 per share, of the Corporation, junior to all other series
of the Corporation's Preferred Stock, and senior to the Common Stock.
3.4 SERIES D PREFERRED STOCK AND SERIES E PREFERRED STOCK. Pursuant to the
authority conferred by this Article V, the following series of Preferred Stock
have been designated, each such series consisting of such number of shares, with
such voting powers and with such designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof as are stated and expressed in the exhibit with respect
to such series attached hereto as specified below and incorporated herein by
reference:
<TABLE>
<S> <C>
Series D Convertible Preferred
Exhibit A.............. Stock
Series E Convertible Preferred
Exhibit B.............. Stock
</TABLE>
ARTICLE VI
BOARD OF DIRECTORS
SECTION 1. NUMBER OF DIRECTORS. The number of Directors shall be fixed by
the Bylaws of the Corporation, but shall not be less than six nor more than
seventeen.
SECTION 2. POWERS OF THE BOARD OF DIRECTORS. The business and affairs of
the Corporation shall be managed by or under the direction of the Board of
Directors selected as provided by law and the Certificate of Incorporation and
the Bylaws of the Corporation. In furtherance, and not in limitation, of the
powers conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized to:
(A) adopt, amend, alter, change or repeal Bylaws of the Corporation;
PROVIDED, HOWEVER, that no Bylaw hereafter adopted shall invalidate any
prior act of the Corporation that would have been valid if such new Bylaws
had not been adopted;
A-2-11
<PAGE>
(B) subject to the Bylaws as from time to time in effect, determine the
rules and procedures for the conduct of the business of the Board of
Directors and the management and direction by the Board of Directors of the
business and affairs of the Corporation, including the power to designate
and empower committees of the Board of Directors, to elect, or authorize the
appointment of, and empower officers and other agents of the Corporation,
and to determine the time and place of, the notice requirements for, and the
manner of conducting, Board meetings, as well as other notice requirements
for, and the manner of taking, Board action; and
(C) exercise all such powers and do all such acts as may be exercised or
done by the Corporation, subject to the provisions of the Corporation Law
and the Certificate of Incorporation and Bylaws of the Corporation.
SECTION 3. CLASSIFIED BOARD OF DIRECTORS. The directors, other than those
who may be elected solely by the holders of shares of any class or series of
stock having a preference over the Common Stock of the Corporation as to
dividends or to distributions upon liquidation or dissolution and winding-up of
the Corporation pursuant to the terms of Article V of the Certificate of
Incorporation of the Corporation, shall be classified, with respect to the time
for which they severally hold office, into three classes, with each class to
hold office until its successors are elected and qualified. Subject to the
rights of the holders of any class or series of stock having a preference over
the Common Stock of the Corporation as to dividends or to distributions upon
liquidation or dissolution and winding-up of the Corporation, at each annual
meeting of the stockholders, the successors of the class of directors whose term
expires at that meeting shall be elected to hold office for a term expiring at
the annual meeting of stockholders held in the third year following the year of
their election.
SECTION 4. VACANCIES. Except as otherwise required by law, any vacancy in
the Board of Directors for any reason and any newly created directorship
resulting by reason of any increase in the number of directors may be filled
only by the Board of Directors (and not by the stockholders), by resolution
adopted by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum (or by a sole remaining director);
PROVIDED, HOWEVER, that if not so filled, any such vacancy shall be filled by
the stockholders at the next annual meeting or at a special meeting called for
that purpose. Any director so appointed shall hold office until the next meeting
of stockholders at which directors of the class for which such director has been
chosen are to be elected and until his or her successor is elected and
qualified.
SECTION 5. REMOVAL OF DIRECTORS. Except as may be provided in respect of
any series of Preferred Stock pursuant to Article V with respect to any
directors elected solely by the holders of such series of Preferred Stock, any
director (including all members of the Board of Directors) may be removed from
office at any time, but only for cause and only by the affirmative vote of the
holders of at least 80% of the voting power of all of the shares of capital
stock of the Corporation then entitled to vote generally in the election of
directors, voting together as a single class. For the purposes of this Section
5, "cause" shall mean the wilful and continuous failure of a director to
substantially perform such director's duties to the Corporation (other than any
such failure resulting from incapacity due to physical or mental illness) or the
wilful engaging by a director in gross misconduct materially and demonstrably
injurious to the Corporation.
ARTICLE VII
STOCKHOLDER ACTIONS AND MEETINGS OF STOCKHOLDERS
Subject to the rights of the holders of any series of Preferred Stock, any
action required or permitted to be taken by the stockholders of the Corporation
must be effected at a duly called annual or special meeting of such holders and
may not be effected by written consent in lieu of a meeting of such holders.
Subject to the rights of the holders of any series of Preferred Stock, special
meetings of stockholders of the Corporation may be called only by the Chairman
of the Board of Directors of the
A-2-12
<PAGE>
Corporation or the Board of Directors pursuant to a resolution adopted by a
majority of the members of the Board of Directors then in office. Elections of
directors need not be by written ballot, unless otherwise provided in the
Bylaws. For purposes of all meetings of stockholders, a quorum shall consist of
a majority of the shares entitled to vote at such meeting of stockholders,
unless otherwise required by law or, in respect of a meeting of the holders of
any series of Preferred Stock, by the provisions of Section 3 of Article V.
ARTICLE VIII
LIMITATION ON LIABILITY OF DIRECTORS
No person shall be personally liable to the Corporation or its stockholders
for monetary damages for breach of fiduciary duty as a director, including
without limitation for serving on a committee of the Board of Directors;
PROVIDED, HOWEVER, that the foregoing shall not eliminate or limit the liability
of a director (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii)
arising under Section 174 of the Corporation Law, or (iv) for any transaction
from which the director derived an improper personal benefit. Any amendment,
repeal or modification of this Article VII shall not adversely affect any right
or protection of a director of the Corporation existing hereunder with respect
to any act or omission occurring prior to such amendment, repeal or
modification.
ARTICLE IX
CERTAIN BUSINESS COMBINATIONS
SECTION 1. VOTE REQUIRED FOR CERTAIN BUSINESS COMBINATIONS. Except as
otherwise expressly provided in Section 2 of this Article, in addition to any
affirmative vote required by law or by any other provision of the Certificate of
Incorporation of the Corporation, the affirmative vote of the holders of not
less than 80% of the outstanding shares of "Voting Stock" (as hereinafter
defined) of the Corporation voting together as a single class shall be required
for the approval or authorization of any "Business Combination" (as hereinafter
defined) of the Corporation with any "Related Person" (as hereinafter defined).
For the purpose of this Article:
(A) The term "Business Combination" shall mean (1) any merger or
consolidation of the Corporation or a Subsidiary (as hereinafter defined) of
the Corporation with or into a Related Person or of a Related Person with or
into the Corporation or a Subsidiary of the Corporation; (2) any sale,
lease, exchange, transfer, or other disposition, including, without
limitation, a mortgage or any other hypothecation or transfer as collateral,
of all or any "Substantial Part" (as hereinafter defined) of the assets
either of the Corporation (including, without limitation, any voting
securities of a Subsidiary) or of a Subsidiary of the Corporation to a
Related Person; (3) the issuance of any securities (other than by way of a
distribution to stockholders made pro rata to all holders of the class of
stock to receive the distribution) of the Corporation or a Subsidiary of the
Corporation to a Related Person; (4) the acquisition by the Corporation or a
Subsidiary of the Corporation of any securities of a Related Person; (5) any
recapitalization that would have the effect, directly or indirectly, of
increasing the voting power of a Related Person; (6) any merger of the
Corporation into a Subsidiary of the Corporation; or (7) any agreement,
contract, or other arrangement providing for any of the transactions
described in this definition of "Business Combination."
(B) The term "Continuing Director" shall mean any member of the Board of
Directors who is neither Affiliated (as defined below) or Associated (as
defined below) with the Related Person and who was a member of the Board of
Directors prior to the time that the Related Person became a Related Person,
and any successor of a Continuing Director who is recommended to
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succeed a Continuing Director by a majority of Continuing Directors then
members of the Board of Directors.
(C) The term "Related Person" shall mean and include any individual,
corporation, partnership, or other person or entity which, together with its
"Affiliates" and "Associates," "Beneficially Owns" (as hereinafter defined),
in the aggregate ten percent (10%) or more of the outstanding Voting Stock
of the Corporation, and any Affiliate or Associate of any such individual,
corporation, partnership, or other person or entity.
(D) The term "Substantial Part" shall mean more than 80% of the book
value of the total consolidated assets of the Corporation as reported in the
consolidated financial statements of the Corporation and its subsidiaries as
of the end of its most recent fiscal year ending prior to the time as of
which a "Substantial Part" is to be determined.
(E) The term "Voting Stock" shall mean all outstanding shares of capital
stock of the Corporation entitled to vote generally in the election of
directors of the Corporation and each reference to a percentage of shares of
Voting Stock shall refer to such percentage of the votes entitled to be cast
by such shares.
(F) The terms "Affiliate" and "Associate" shall have the meanings set
forth in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect
on the Effective Date (as defined in subsection 2.6).
(G) The term "Beneficially Owns" shall have the meaning set forth in Rule
13d-3 under the Securities Exchange Act of 1934, as in effect on the
Effective Date (as defined in subsection 2.6), PROVIDED, HOWEVER, that, any
shares of Voting Stock of the Corporation that any Related Person has the
right to acquire pursuant to any agreement, or upon exercise of conversion
rights, warrants or options, or otherwise, shall be deemed Beneficially
Owned by the Related Person whether immediately exercisable or exercisable
within ten years of the date as of which Beneficial Ownership is to be
determined.
(H) The term "Subsidiary" with respect to the Corporation shall mean any
corporation, partnership, limited liability company, business trust or
similar entity of which a majority of any class of any equity security is
owned directly or indirectly by the Corporation.
SECTION 2. WHEN HIGHER VOTE IS NOT REQUIRED. The provisions of Section 1
of this Article shall not be applicable to any particular Business Combination
and such Business Combination shall require only such affirmative vote as may be
required by law or by any other provision of the Certificate of Incorporation of
the Corporation, if all of the conditions specified in either of the following
paragraphs (A) or (B) are met:
(A) the Business Combination shall have been approved by a vote of not
less than a majority of the Continuing Directors, or
(B) all of the following conditions shall have been met:
(1) the aggregate amount of cash and the Fair Market Value (as
hereinafter defined) as of the date of the consummation of the Business
Combination of the consideration, other than cash, to be received per
share by holders of Common Stock in such Business Combination shall be at
least equal to the highest of the following:
(a) if applicable, the highest price per share (including any
brokerage commissions, transfer taxes, and soliciting dealers' fees)
paid by the Related Person for any shares of Common Stock acquired by
it (i) within the two year period immediately prior to the first
public announcement of the proposal of the Business Combination (the
"Announcement Date") or (ii) in the transaction in which it became a
Related Person; or
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(b) the Fair Market Value per share of Common Stock on the
Announcement Date or on the date on which the Related Person became a
Related Person (such latter date is referred to in this Article as
the "Determination Date"), whichever is higher; and
(2) The aggregate amount of the cash and the Fair Market Value as of
the date of the consummation of the Business Combination of the
consideration, other than cash, to be
received per share by holders of shares of any class or series of
outstanding Voting Stock, other than Common Stock, shall be at
least equal to the highest of the following (it being intended
that the requirements of this subparagraph (B)(2) shall be
required to be met with respect to every class or series of
outstanding capital stock of the Corporation other than Common
Stock, whether or not the Related Person has previously acquired
any shares of such class or series of Voting Stock):
(a) if applicable, the highest per share price (including any
brokerage commission, transfer taxes, and soliciting dealers' fees)
paid by the Related Person for any shares of such class or series of
Voting Stock acquired by it (i) within the two year period
immediately prior to the Announcement Date or (ii) in the transaction
in which it became a Related Person, whichever is higher; or
(b) if applicable, the Redemption Price (as hereinafter defined)
of the shares of such class or series, or if such shares have no
Redemption Price, the highest amount per share which such class or
series would be entitled to receive upon liquidation of the
Corporation on the Announcement Date or the Determination Date,
whichever is higher; or
(c) the Fair Market Value per share of such class or series of
Voting Stock on the Announcement Date or on the Determination Date,
whichever is higher; and
(3) the consideration to be received in such Business Combination by
holders of each class or series of outstanding Voting Stock (including
Common Stock) shall be in cash or in the same form as the Related Person
has previously paid for shares of such class or series of Voting Stock;
PROVIDED, HOWEVER, that if the Related Person has paid for shares of any
class or series of Voting Stock with varying forms of consideration, the
form of consideration for such class or series of Voting Stock shall be
either cash or the form used to acquire the largest number of shares of
such class or series of Voting Stock previously acquired by it; and
(4) a proxy statement responsive to the requirements of the
Securities Exchange Act of 1934, as amended, shall have been mailed to
public stockholders of the Corporation for the purpose of soliciting
stockholder approval of the Business Combination and shall have contained
at the front thereof, in a prominent place, any recommendations as to the
advisability (or inadvisability) of the Business Combination that the
Continuing Directors, or any of them, may choose to state and, if deemed
advisable by a majority of the Continuing Directors, an opinion of a
reputable investment banking firm as to the fairness (or not) of the
terms of the Business Combination, from the point of view of the
remaining public stockholders of the Corporation (such investment banking
firm to be selected by a majority of the Continuing Directors and to be
paid a reasonable fee for their services by the Corporation upon receipt
of the opinion).
SECTION 3. CERTAIN DEFINITIONS AND ADDITIONAL PROVISIONS. For the purposes
of this Article:
(A) "Fair Market Value" shall mean:
(1) in the case of stock, the highest closing sale price during the
30-day period immediately preceding the date in question of a share of
such stock on the Composite Tape for New York Stock Exchange Listed
Stocks, or, if such stock is not quoted on the Composite Tape, on the New
York Stock Exchange, or, if such stock is not listed on such Exchange, on
the
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principal United States securities exchange registered under the
Securities Exchange Act of 1934, as amended, on which such stock is
listed, or, if such stock is not listed on any such exchange, the highest
closing bid quotation with respect to a share of such stock during the
30-day period preceding the date in question on the NASDAQ National
Market or any quotations system then generally in use, or, if no such
quotations are available, the Fair Market Value on the date in question
of a share of such stock as determined by the Continuing Directors in
good faith, which determination shall be final; and
(2) in the case of property other than cash or stock, the Fair
Market Value of such property on the date in question as determined by
the Continuing Directors in good faith, which determination shall be
final.
(B) The Board of Directors, with the approval of a majority of the total
number of Continuing Directors, shall have the power and duty to determine,
on the basis of information known to it after reasonable inquiry, all facts
necessary to determine compliance with this Article, including, without
limitation, (i) whether a person is a Related Person, (ii) the number of
shares of Voting Stock Beneficially Owned by any person, (iii) whether a
person is an Affiliate or Associate of another person, (iv) whether the
applicable conditions set forth in paragraph (B) of Section 2 have been met
with respect to any Business Combination, and (v) whether the proposed
transaction is a Business Combination. Any such determinations shall be
final.
SECTION 4. AMENDMENT OF THIS ARTICLE. This Article may be amended,
altered, changed, or repealed only by the affirmative vote of the holders of at
least 80% of the outstanding shares of Voting Stock voting together as a single
class unless the proposed amendment, alteration, change, or repeal has been
recommended to the stockholders by the Board of Directors with the approval of
at least two-thirds of the Continuing Directors, in which event the proposed
amendment, alteration, change, or repeal shall require for approval the
affirmative vote of the holders of at least 66 2/3% of the outstanding shares of
Voting Stock, voting as a single class.
ARTICLE X
BYLAWS
The Board of Directors shall have the power to adopt, amend, alter, change
or repeal Bylaws of and for the Corporation by the affirmative vote of 66 2/3%
of the members then in office. The affirmative vote of the holders of at least
80% of the voting power of all of the shares of capital stock of the Corporation
then entitled to vote generally in the election of directors, voting together as
a single class shall be required to adopt, amend, alter, change or repeal Bylaws
of the Corporation (notwithstanding the fact that approval by a lesser
percentage may be permitted by the Corporation Law).
ARTICLE XI
AMENDMENT OF CERTIFICATE OF INCORPORATION
The Corporation hereby reserves the right from time to time to amend, alter,
change or repeal any provision contained in the Certificate of Incorporation of
the Corporation in any manner permitted by the Corporation Law and all rights
and powers conferred upon stockholders, directors and officers herein are
granted subject to this reservation. In addition to any vote otherwise required
by law, and except as may otherwise be provided in Article V or IX hereof, any
such amendment, alteration, change or repeal shall require approval of both (i)
the Board of Directors by the affirmative vote of a majority of the members then
in office and (ii) the holders of a majority of the voting power of all of the
shares of capital stock of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, except that any
proposal to amend, alter, change or repeal the provisions of Section 3 of
Article VI, Section 5 of Article VI, Article VII, Article X and this Article XI
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shall require the affirmative vote of the holders of 80% of the voting power of
all of the shares of capital stock of the Corporation entitled to vote generally
in the election of directors, voting together as a single class.
IN WITNESS WHEREOF, this Restated Certificate of Incorporation which
restates, integrates and amends the provisions of the certificate of
incorporation of the Corporation, and which has been duly adopted by the
stockholders of the Corporation in accordance with the provisions of Sections
242 and 245 of the Delaware General Corporation Law, has been executed by
, its , this day of ,
1998.
U S WEST, INC.
By:
--------------------------------------
Name:
Title:
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EXHIBIT A
SERIES D CONVERTIBLE PREFERRED STOCK
The series of Preferred Stock hereby established shall consist of 20,000,000
shares designated as Series D Convertible Preferred Stock. The rights,
preferences and limitations of such series shall be as follows:
1. DEFINITIONS. Unless otherwise defined herein, terms used herein shall
have the meanings assigned to them in Section 2.6 of Article V of the Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and the following terms shall have the indicated meanings:
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.2 "Capital Stock" shall mean any and all shares of corporate stock of a
Person (however designated and whether representing rights to vote, rights to
participate in dividends or distributions upon liquidation or otherwise with
respect to the Corporation, or any division or subsidiary thereof, or any joint
venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the certificate of the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, originally
filed by the Corporation with respect to the Series D Stock with the Secretary
of State of the State of Delaware pursuant to Section 151 of the General
Corporation Law of the State of Delaware.
1.4 "Closing Price" shall mean the last reported sale price of the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible), regular way, as shown on the Composite Tape of the
NYSE, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices on the NYSE, or, if the Media Stock (or such other
class or series of common stock) is not listed or admitted to trading on the
NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading on
any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported by Nasdaq.
1.5 "Communications Stock" shall mean the class of U S WEST Communications
Group Common Stock, par value $.01 per share, of the Corporation or any other
class of stock resulting from (x) successive changes or reclassifications of
such stock consisting solely of changes in par value, or from par value to no
par value or (y) a subdivision or combination, and in any such case including
any shares thereof authorized after the date of the Certificate, together with
any associated rights to purchase other securities of the Corporation which are
at the time represented by the certificates representing such shares.
1.6 "Conversion Date" shall have the meaning set forth in Section 3.5.
1.7 "Conversion Price" shall have the meaning set forth in Section 3.1
hereof.
1.8 "Conversion Rate" shall have the meaning set forth in Section 3.1
hereof.
1.9 "Converting Holder" shall have the meaning set forth in Section 3.5
hereof.
1.10 "Current Market Price" on any applicable record date, Conversion Date or
Redemption Date referred to in Section 3 or Section 4 shall mean the average of
the daily Closing Prices per share of
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Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) for the ten (10) consecutive Trading Days
ending on the third Trading Day immediately preceding such record date,
Conversion Date or Redemption Date.
1.11 "Dividend Payment Date" shall have the meaning set forth in Section 2.1
hereof.
1.12 "Effective Time" shall mean the effective time of the Merger.
1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
1.14 "Exchange Rate" for each share of this Series called for exchange shall
be a number of shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) equal to the
quotient of (x) the sum of (I) the Liquidation Value plus (II) the amount of
accrued and unpaid dividends on such share of Series D Stock to the Redemption
Date divided by (y) the product of (I) .95 multiplied by (II) the Current Market
Price on the Redemption Date.
1.15 "Extraordinary Cash Distributions" shall mean, with respect to any
consecutive 12-month period, all cash dividends and cash distributions on the
outstanding shares of Media Stock during such period (other than cash dividends
or cash distributions for which a prior adjustment to the Conversion Rate was
previously made) to the extent such cash dividends and cash distributions
exceed, on a per share of Media Stock basis, 10% of the average daily Closing
Price of the Media Stock over such period.
1.16 "Junior Stock" shall mean the Media Stock, the Communications Stock and
the shares of any other class or series of stock of the Corporation which, by
the terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall be junior to the Series D Stock in respect of the right to
receive dividends or to participate in any distribution of assets other than by
way of dividends.
1.17 "Liquidation Value" shall have the meaning set forth in Section 6.2
hereof.
1.18 "Media Group Disposition Redemption" shall have the meaning set forth in
Section 4.1 hereof.
1.19 "Media Group Disposition Dividend" shall have the meaning set forth in
Section 4.1 hereof.
1.20 "Media Group Special Dividend" shall have the meaning set forth in
Section 4.1 hereof.
1.21 "Media Group Special Events" shall have the meaning set forth in Section
4.1 hereof.
1.22 "Media Group Subsidiary Redemption" shall have the meaning set forth in
Section 4.1 hereof.
1.23 "Media Stock" shall mean the class of U S WEST Media Group Common Stock,
par value $.01 per share, of the Corporation (or, following the
recharaterization described in Section 1 of Article V of the Certificate of
Incorporation, the class of Common Stock, par value $.01 per share, of the
Corporation) or any other class of stock resulting from (x) successive changes
or reclassifications of such stock consisting solely of changes in par value, or
from par value to no par value or (y) a subdivision or combination, and in any
such case including any shares thereof authorized after the date of the
Certificate, together with any associated rights to purchase other securities of
the Corporation which are at the time represented by the certificates
representing such shares.
1.24 "Media Group Tender or Exchange Offer" shall have the meaning set forth
in Section 4.1 hereof.
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1.25 "Merger" shall mean either (i) the merger of Continental Cablevision,
Inc., a Delaware corporation, with and into Continental Cablevision, Inc. or
(ii) the merger of Continental Merger Corporation, a Delaware corporation, with
and into the Corporation, pursuant to the terms of the Merger Agreement.
1.26 "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as
of February 27, 1996, as amended and restated as of June 27, 1996 and as further
amended as of October 7, 1996, among the Corporation, Continental Merger
Corporation, a Delaware corporation, and Continental Cablevision, Inc., a
Delaware corporation.
1.27 "Nasdaq" shall mean the Nasdaq National Market.
1.28 "NYSE" shall mean the New York Stock Exchange, Inc.
1.29 "Parity Stock" shall mean the Series A Stock, the Series B Stock, the
Series C Stock and the shares of any other class or series of stock of the
Corporation (other than Junior Stock) which, by the terms of the Certificate of
Incorporation or of the instrument by which the Board of Directors, acting
pursuant to authority granted in the Certificate of Incorporation, shall fix the
relative rights, preferences and limitations thereof, shall, in the event that
the stated dividends thereon are not paid in full, be entitled to share ratably
with the Series D Stock in the payment of dividends, including accumulations, if
any, in accordance with the sums which would be payable on such shares if all
dividends were declared and paid in full, or shall, in the event that the
amounts payable thereon on liquidation are not paid in full, be entitled to
share ratably with the Series D Stock in any distribution of assets other than
by way of dividends in accordance with the sums which would be payable in such
distribution if all sums payable were discharged in full; PROVIDED, HOWEVER,
that the term "Parity Stock" shall be deemed to refer (i) in Section 6 hereof,
to any stock which is Parity Stock in respect of the distribution of assets; and
(ii) in Sections 5.1 and 5.2 hereof, to any stock which is Parity Stock in
respect of either dividend rights or the distribution of assets and which,
pursuant to the Certificate of Incorporation or any instrument in which the
Board of Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall so designate, is entitled to vote with the holders of
Series D Stock.
1.30 "Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity.
1.31 "Preferred Stock" shall mean the class of Preferred Stock, par value
$1.00 per share, of the Corporation authorized at the date of the Certificate,
including any shares thereof authorized after the date of the Certificate.
1.32 "Record Date" shall have the meaning set forth in Section 2.1 hereof.
1.33 "Redemption Date" shall mean the date on which the Corporation shall
effect the redemption or exchange of all or any part of the outstanding shares
of this Series pursuant to Section 4.1.
1.34 "Redemption Price" for each share of this Series called for redemption
shall be equal to the sum of (x) the Liquidation Value plus (y) an amount equal
to the accrued and unpaid dividends on such share of Series D Stock to the
Redemption Date.
1.35 "Redemption Rescission Event" shall mean the occurrence of (a) any
general suspension of trading in, or limitation on prices for, securities on the
principal national securities exchange on which shares of Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) are registered and listed for trading (or, if shares of Media Stock
(or such other class or series of common stock) are not registered and listed
for trading on any such exchange, in the over-the-counter market) for more than
six-and-one-half (6 1/2) consecutive trading hours, (b) any decline in either
the Dow Jones Industrial Average or the Standard & Poor's Index of 500
Industrial Companies (or any successor index published by Dow Jones & Company,
Inc. or Standard & Poor's Corporation) by either (i) an amount in excess of 10%,
measured from the close of business on any
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Trading Day to the close of business on the next succeeding Trading Day during
the period commencing on the Trading Day preceding the day notice of any
redemption or exchange of shares of this Series is given (or, if such notice is
given after the close of business on a Trading Day, commencing on such Trading
Day) and ending at the Redemption Date or (ii) an amount in excess of 15% (or,
if the time and date fixed for redemption or exchange is more than 15 days
following the date on which notice of redemption or exchange is given, 20%),
measured from the close of business on the Trading Day preceding the day notice
of such redemption or exchange is given (or, if such notice is given after the
close of business on a Trading Day, from such Trading Day) to the close of
business on any Trading Day on or prior to the Redemption Date, (c) a
declaration of a banking moratorium or any suspension of payments in respect of
banks by Federal or state authorities in the United States or (d) the
commencement of a war or armed hostilities or other national or international
calamity directly or indirectly involving the United States which in the
reasonable judgment of the Corporation could have a material adverse effect on
the market for the Media Stock (or such other class or series of common stock
into which shares of this Series are then convertible).
1.36 "Rescission Date" shall have the meaning set forth in Section 4.5
hereof.
1.37 "Senior Stock" shall mean the shares of any class or series of stock of
the Corporation which, by the terms of the Certificate of Incorporation or of
the instrument by which the Board of Directors, acting pursuant to authority
granted in the Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be senior to the Series D Stock in
respect of the right to receive dividends or to participate in any distribution
of assets other than by way of dividends.
1.38 "Series A Stock" shall mean the series of Preferred Stock authorized and
designated as Series A Junior Participating Cumulative Preferred Stock at the
date of the Certificate, including any shares thereof authorized and designated
after the date of the Certificate.
1.39 "Series B Stock" shall mean the series of Preferred Stock authorized and
designated as Series B Junior Participating Cumulative Preferred Stock at the
date of the Certificate, including any shares thereof authorized and designated
after the date of the Certificate.
1.40 "Series C Stock" shall mean the series of Preferred Stock authorized and
designated as Series C Cumulative Redeemable Preferred Stock at the date of the
Certificate, including any shares thereof authorized and designated after the
date of the Certificate.
1.41 "Series D Stock" and "this Series" shall mean the series of Preferred
Stock authorized and designated as the Series D Convertible Preferred Stock,
including any shares thereof authorized and designated after the date of the
Certificate.
1.42 "Surrendered Shares" shall have the meaning set forth in Section 3.5
hereof.
1.43 "Trading Day" shall mean, so long as the Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) is listed or admitted to trading on the NYSE, a day on which the
NYSE is open for the transaction of business, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, a day on which the principal national securities exchange on which the
Media Stock (or such other class or series of common stock) is listed is open
for the transaction of business, or, if the Media Stock (or such other class or
series of common stock) is not so listed or admitted for trading on any national
securities exchange, a day on which Nasdaq is open for the transaction of
business.
2. DIVIDENDS.
2.1 The holders of the outstanding Series D Stock shall be entitled to
receive dividends, as and when declared by the Board of Directors out of funds
legally available therefor, and any dividends declared by the Board of Directors
out of funds legally available therefor in accordance with Section 3.6(d). Each
dividend shall be at the annual rate equal to 4.500% per share of Series D Stock
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(which is equivalent to $0.56 quarterly and $2.25 annually per share). All
dividends shall be payable in cash on or about the first day of February, May,
August and November in each year, beginning on the first such date that is more
than 15 days after the Effective Time, as fixed by the Board of Directors, or
such other dates as are fixed by the Board of Directors (each a "Dividend
Payment Date"), to the holders of record of Series D Stock at the close of
business on or about the 15th day of the month next preceding such first day of
February, May, August and November, as the case may be, as fixed by the Board of
Directors, or such other dates as are fixed by the Board of Directors (each a
"Record Date"). Such dividends shall accrue on each share cumulatively on a
daily basis, whether or not there are unrestricted funds legally available for
the payment of such dividends and whether or not earned or declared, from and
after the day immediately succeeding the Effective Time and any such dividends
that become payable for any partial dividend period shall be computed on the
basis of the actual days elapsed in such period. All dividends that accrue in
accordance with the foregoing provisions shall be cumulative from and after the
day immediately succeeding the Effective Time. The per share dividend amount
payable to each holder of record of Series D Stock on any Dividend Payment Date
shall be rounded to the nearest cent. The dividend rate per share of this Series
shall be appropriately adjusted from time to time to reflect any split or
combination of the shares of this Series.
2.2 Except as hereinafter provided in this Section 2.2 and except for
redemptions by the Corporation pursuant to Sections 4.1(b), 4.1(c) or 4.1(d),
unless all dividends on the outstanding shares of Series D Stock and any Parity
Stock that shall have accrued through any prior Dividend Payment Date shall have
been paid, or declared and funds set apart for payment thereof, no dividend or
other distribution (payable other than in shares of Junior Stock) shall be paid
to the holders of Junior Stock or Parity Stock, and no shares of Series D Stock,
Parity Stock or Junior Stock shall be purchased, redeemed or otherwise acquired
by the Corporation or any of its subsidiaries (except by conversion into or
exchange for Junior Stock), nor shall any monies be paid or made available for a
purchase, redemption or sinking fund for the purchase or redemption of any
Series D Stock, Junior Stock or Parity Stock. When dividends are not paid in
full upon the shares of this Series and any Parity Stock, all dividends declared
upon shares of this Series and all Parity Stock shall be declared pro rata so
that the amount of dividends declared per share on this Series and all such
Parity Stock shall in all cases bear to each other the same ratio that accrued
dividends per share on the shares of this Series and all such Parity Stock bear
to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on this Series which may
be in arrears.
3. CONVERSION RIGHTS.
3.1 (a) Subject to Section 3.1(b), each holder of a share of this Series
shall have the right at any time to convert such share into a number of shares
of Media Stock equal to 1.905 shares of Media Stock for each share of this
Series, subject to adjustment as provided in this Section 3 (such rate, as so
adjusted from time to time, is herein called the "Conversion Rate"; and the
"Conversion Price" at any time shall mean the Liquidation Value per share
divided by the Conversion Rate in effect at such time (rounded to the nearest
one hundredth of a cent)). As a result of the consummation of the transactions
contemplated by the Separation Agreement, dated as of , 1998, between
the Corporation and USW-C, Inc., the Conversion Rate was adjusted pursuant to
the provisions of Section 3.6(c) hereof to .
(b) The right of a holder of a share of this Series called for redemption
or exchange pursuant to Sections 4.1(a) or 4.1(c) to convert such share into
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) pursuant to Section 3.1(a) shall terminate at
the close of business on the Redemption Date unless the Corporation defaults in
the payment of the Redemption Price or Exchange Rate or, in the case of a
redemption or exchange pursuant to Section 4.1(a), the Corporation exercises its
right to rescind such redemption or exchange pursuant to Section 4.5, in which
case such right of conversion shall not terminate at the close of business on
such date. The right of a holder of a share of this Series called for redemption
pursuant to
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<PAGE>
Section 4.1(b): (i) in connection with a Media Group Subsidiary Redemption, a
Media Group Tender or Exchange Offer or a Media Group Disposition Redemption
involving a Disposition of all (not merely substantially all) of the properties
and assets attributed to the Media Group, to convert such share into Media Stock
pursuant to Section 3.1(a) shall terminate at the close of business on the
Redemption Date; (ii) in connection with a Media Group Disposition Dividend or
Media Group Special Dividend, to convert such share into Media Stock pursuant to
Section 3.1(a) shall terminate at the close of business on the record date for
determining holders entitled to receive such dividend; and (iii) in connection
with a Media Group Disposition Redemption involving a Disposition of
substantially all (but not all) of the properties and assets attributed to the
Media Group, to convert such share into Media Stock shall terminate at the close
of business on the date on which shares of Media Stock are selected to be
redeemed in such Media Group Disposition Redemption, unless, in any of the
foregoing cases, the Corporation defaults in the payment of the Redemption Price
or the conditions to such redemption set forth in the last sentence of Section
4.1(b) shall not have been satisfied, in which event such right of conversion
shall not terminate at the close of business on such date. In the event the
Corporation converts all of the outstanding shares of Media Stock into shares of
Communications Stock (or, if the Communications Stock is not Publicly Traded at
such time and shares of any other class or series of common stock of the
Corporation (other than Media Stock) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization), the
right of a holder of a share of this Series called for redemption pursuant to
Section 4.1(d) in connection with an event substantially similar to a Media
Group Special Event to convert such share into Communications Stock (or such
other class or series of common stock) shall terminate on a date comparable to
the date specified in the preceding sentence with respect to a Media Group
Special Event substantially similar to such event.
3.2 If any shares of this Series are surrendered for conversion subsequent
to the Record Date preceding a Dividend Payment Date but on or prior to such
Dividend Payment Date (except shares called for redemption or exchange on a
Redemption Date between such Record Date and Dividend Payment Date and with
respect to which such redemption or exchange has not been rescinded), the
registered holder of such shares at the close of business on such Record Date
shall be entitled to receive the dividend, if any, payable on such shares on
such Dividend Payment Date notwithstanding the conversion thereof. Except as
provided in this Section 3.2, no adjustments in respect of payments of dividends
on shares surrendered for conversion or any dividend on the Media Stock issued
upon conversion shall be made upon the conversion of any shares of this Series.
3.3 The Corporation may, but shall not be required to, in connection with
any conversion of shares of this Series, issue a fraction of a share of Media
Stock, and if the Corporation shall determine not to issue any such fraction,
the Corporation shall, subject to Section 3.6(g), make a cash payment (rounded
to the nearest cent) equal to such fraction multiplied by the Closing Price of
the Media Stock on the last Trading Day prior to the date of conversion.
3.4 Any holder of shares of this Series electing to convert such shares into
Media Stock shall surrender the certificate or certificates for such shares at
the office of the transfer agent or agents therefor (or at such other place in
the United States as the Corporation may designate by notice to the holders of
shares of this Series) during regular business hours, duly endorsed to the
Corporation or in blank, or accompanied by instruments of transfer to the
Corporation or in blank, or in form satisfactory to the Corporation, and shall
give written notice to the Corporation at such office that such holder elects to
convert such shares of this Series. The Corporation shall, as soon as
practicable and in any event within five Trading Days (subject to Section
3.6(g)) after such surrender of certificates for shares of this Series,
accompanied by the written notice above prescribed issue and deliver at such
office to the holder for whose account such shares were surrendered, or to his
nominee, (i) certificates representing the number of shares of Media Stock to
which such holder is entitled upon such conversion and (ii) if less than the
full number of shares of this Series represented by such certificate or
certificates is being converted, a new certificate of like tenor representing
the shares of this Series not converted.
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3.5 Conversion shall be deemed to have been made immediately prior to the
close of business as of the date that certificates for the shares of this Series
to be converted, and the written notice prescribed in Section 3.4, are received
by the transfer agent or agents for this Series (such date being referred to
herein as the "Conversion Date"). The Person entitled to receive the Media Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such Media Stock as of the close of business on the Conversion Date
and such conversion shall be at the Conversion Rate in effect on such date.
Notwithstanding anything to the contrary contained herein, in the event the
Corporation shall have rescinded a redemption or exchange of shares of this
Series pursuant to Section 4.5, any holder of shares of this Series that shall
have surrendered shares of this Series for conversion following the day on which
notice of the redemption or exchange shall have been given but prior to the
later of (a) the close of business on the Trading Day next succeeding the date
on which public announcement of the rescission of such redemption or exchange
shall have been made and (b) the date which is three Trading Days following the
mailing of the notice of rescission required by Section 4.5 (a "Converting
Holder") may rescind the conversion of such shares surrendered for conversion by
(i) properly completing a form prescribed by the Corporation and mailed to
holders of shares of this Series (including Converting Holders) with the
Corporation's notice of rescission, which form shall provide for the
certification by any Converting Holder rescinding a conversion on behalf of any
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
shares of this Series that the beneficial ownership (within the meaning of such
Rule) of such shares shall not have changed from the date on which such shares
were surrendered for conversion to the date of such certification and (ii)
delivering such form to the Corporation no later than the close of business on
that date which is fifteen (15) Trading Days following the date of the mailing
of the Corporation's notice of rescission. The delivery of such form by a
Converting Holder shall be accompanied by (x) any certificates representing
shares of Media Stock issued to such Converting Holder upon a conversion of
shares of this Series that shall be rescinded by the proper delivery of such
form (the "Surrendered Shares"), (y) any securities, evidences of indebtedness
or assets (other than cash) distributed by the Corporation to such Converting
Holder by reason of such Converting Holder's being a record holder of the
Surrendered Shares and (z) payment in New York Clearing House funds or other
funds acceptable to the Corporation of an amount equal to the sum of (I) any
cash such Converting Holder may have received in lieu of the issuance of
fractional shares upon conversion and (II) any cash paid or payable by the
Corporation to such Converting Holder by reason of such Converting Holder being
a record holder of the Surrendered Shares. Upon receipt by the Corporation of
any such form properly completed by a Converting Holder and any certificates,
securities, evidences of indebtedness, assets or cash payments required to be
returned or made by such Converting Holder to the Corporation as set forth
above, the Corporation shall instruct the transfer agent or agents for shares of
Media Stock and shares of this Series to cancel any certificates representing
the Surrendered Shares (which Surrendered Shares shall be deposited in the
treasury of the Corporation) and reissue certificates representing shares of
this Series to such Converting Holder (which shares of this Series shall,
notwithstanding their surrender for conversion, be deemed to have been
outstanding at all times). The Corporation shall, as promptly as practicable,
and in no event more than five (5) Trading Days, following the receipt of any
such properly completed form and any such certificates, securities, evidences of
indebtedness, assets or cash payments required to be so returned or made, pay to
the Converting Holder or as otherwise directed by such Converting Holder any
dividend or other payment made on such shares of this Series during the period
from the time such shares shall have been surrendered for conversion to the
rescission of such conversion. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any form submitted to
the Corporation to rescind the conversion of shares of this Series, including
questions as to the proper completion or execution of any such form or any
certification contained therein, shall be resolved by the Corporation, whose
good faith determination shall be final and binding. The Corporation shall not
be required to deliver certificates for shares of Media Stock while the stock
transfer books for such stock or for this Series are duly closed for any purpose
(but not for a period in excess of two Trading Days) or during any period
commencing at a Redemption Rescission Event and
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<PAGE>
ending at either (i) the time and date at which the Corporation's right of
rescission shall expire pursuant to Section 4.5 if the Corporation shall not
have exercised such right or (ii) the close of business on that day which is
fifteen (15) Trading Days following the date of the mailing of a notice of
rescission pursuant to Section 4.5 if the Corporation shall have exercised such
right of rescission, but certificates for shares of Media Stock shall be
delivered as soon as practicable after the opening of such books or the
expiration of such period.
3.6 The Conversion Rate shall be adjusted from time to time as follows for
events occurring after the Effective Time:
(a) In case the Corporation shall, at any time or from time to time, (i)
pay a dividend or make a distribution in shares of Media Stock, (ii) combine
the outstanding shares of Media Stock into a smaller number of shares, or
(iii) subdivide or reclassify the outstanding shares of Media Stock, then
the Conversion Rate in effect immediately before such action shall be
adjusted so that immediately following such event the holders of the Series
D Stock shall be entitled to receive upon conversion thereof the kind and
amount of shares of capital stock of the Corporation which they would have
owned or been entitled to receive upon or by reason of such event if such
shares of Series D Stock had been converted immediately before the record
date (or, if no record date, the effective date) for such event. An
adjustment made pursuant to this Section 3.6(a) shall become effective
immediately after the opening of business on the day next following the
record date in the case of a dividend or distribution and shall become
effective immediately after the opening of business on the day next
following the effective date in the case of a subdivision, combination or
reclassification. For the purposes of this Section 3.6(a), if holders of
Media Stock are entitled to elect the kind or amount of securities
receivable upon the payment of any such divided, subdivision, combination or
reclassification, each holder of Series D Stock shall be deemed to have
failed to exercise any such right of election (provided that if the kind or
amount of securities receivable upon such dividend, distribution,
subdivision, combination or reclassification is not the same for each
nonelecting share, then the kind and amount of securities receivable upon
such dividend, distribution, subdivision, combination or reclassification
for each nonelecting share shall be deemed to be the kind and amount so
receivable per share by a plurality of the nonelecting shares).
(b) If the Corporation shall issue rights, warrants or options to all
holders of Media Stock entitling them (for a period not exceeding 45 days
from the record date referred to below) to subscribe for or purchase shares
of Media Stock at a price per share less than the Current Market Price
(determined as of the record date for the determination of stockholders
entitled to receive such rights, warrants or options), then, in any such
event, the Conversion Rate shall be adjusted by multiplying the Conversion
Rate in effect immediately prior to the opening of business on such record
date by a fraction, the numerator of which shall be the number of shares of
Media Stock outstanding on such record date plus the maximum number of
additional shares of Media Stock offered for subscription pursuant to such
rights, warrants or options, and the denominator of which shall be the
number of shares of Media Stock outstanding on such record date plus the
maximum number of additional shares of Media Stock which the aggregate
offering price of the maximum number of shares of Media Stock so offered for
subscription or purchase pursuant to such rights, warrants or options would
purchase at such Current Market Price (determined by multiplying such
maximum number of shares by the exercise price of such rights, warrants or
options (plus any other consideration received by the Corporation upon the
issuance or exercise of such rights, warrants or options) and dividing the
product so obtained by such Current Market Price). Such adjustment shall
become effective at the opening of business on the day next following the
record date for the determination of stockholders entitled to receive such
rights, warrants or options. To the extent that shares of Media Stock are
not delivered after the expiration of such rights, warrants or options, the
Conversion Rate shall be readjusted to the Conversion Rate which would then
be in effect had the adjustments made upon the record date for the
determination of stockholders
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<PAGE>
entitled to receive such rights, warrants or options been made upon the
basis of delivery of only the number of shares of Media Stock actually
delivered and the amount actually paid therefor. In determining whether any
rights, warrants or options entitle the holders to subscribe for or purchase
shares of Media Stock at a price per share less than such Current Market
Price, there shall be taken into account any consideration received by the
Corporation upon issuance and upon exercise of such rights, warrants or
options. The value of such consideration, if other than cash, shall be
determined by the good faith business judgment of the Board of Directors,
whose determination shall be conclusive.
(c) If the Corporation shall pay a dividend or make a distribution to
all holders of outstanding shares of Media Stock, of capital stock, cash,
evidences of its indebtedness or other assets of the Corporation (but
excluding (x) any cash dividends or distributions (other than Extraordinary
Cash Distributions) and (y) dividends or distributions referred to in
Section 3.6(a)), then the Conversion Rate shall be adjusted by multiplying
the Conversion Rate in effect immediately prior to the opening of business
on the record date for the determination of stockholders entitled to receive
such dividend or distribution by a fraction, the numerator of which shall be
the Current Market Price (determined as of such record date), and the
denominator of which shall be such Current Market Price less either (A) the
fair market value (as determined by the good faith business judgment of the
Board of Directors, whose determination shall be conclusive), as of such
record date, of the portion of the capital stock, assets or evidences of
indebtedness to be so distributed applicable to one share of Media Stock or
(B), if applicable, the amount of the Extraordinary Cash Distribution to be
distributed per share of Media Stock. The adjustment pursuant to the
foregoing provisions of this Section 3.6(c) shall become effective at the
opening of business on the day next following the record date for the
determination of stockholders entitled to receive such dividend or
distribution.
(d) In lieu of making an adjustment to the Conversion Rate pursuant to
Sections 3.6(a), 3.6(b) or 3.6(c) above for a dividend or distribution or an
issue of rights, warrants or options, the Corporation may distribute out of
funds legally available therefor to the holders of shares of this Series, or
reserve for distribution out of funds legally available therefor with each
share of Media Stock delivered to a person converting a share of this Series
pursuant to this Section 3, such dividend or distribution or such rights,
warrants or options; PROVIDED, HOWEVER, that in the case of such a
reservation, on the date, if any, on which a person converting a share of
this Series would no longer be entitled to receive such dividend or
distribution or receive or exercise such rights, warrants or options, such
dividend or distribution shall be deemed to have occurred, or such rights,
warrants or options shall be deemed to have issued, and the Conversion Rate
shall be adjusted as provided in Section 3.6(a), 3.6(b) or 3.6(c), as the
case may be (with such termination date being the relevant date of
determination for purposes of determining the Current Market Price).
(e) The Corporation shall be entitled to make such additional increases
in the Conversion Rate, in addition to the adjustments required by
subsections 3.6(a) through 3.6(c), as shall be determined by the Board of
Directors to be necessary in order that any dividend or distribution in
Media Stock, any subdivision, reclassification or combination of shares of
Media Stock or any issuance of rights or warrants referred to above, shall
not be taxable to the holders of Media Stock for United States Federal
income tax purposes.
(f) To the extent permitted by applicable law, the Corporation may from
time to time increase the Conversion Rate by any amount for any period of
time if the period is at least 20 Trading Days, the increase is irrevocable
during such period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the
Corporation, which determination shall be conclusive.
(g) In any case in which this Section 3.6 shall require that any
adjustment be made effective as of or immediately following a record date,
the Corporation may elect to defer (but only for five
A-2-26
<PAGE>
(5) Trading Days following the occurrence of the event which necessitates
the filing of the statement referred to in Section 3.9(a)) issuing to the
holder of any shares of this Series converted after such record date (i) the
shares of Media Stock and other capital stock of the Corporation issuable
upon such conversion over and above the shares of Media Stock and other
capital stock of the Corporation issuable upon such conversion on the basis
of the Conversion Rate prior to adjustment and (ii) paying to such holder
any amount in cash in lieu of any fraction thereof pursuant to Section 3.3;
PROVIDED, HOWEVER, that the Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring
such adjustment.
(h) All calculations under this Section 3 shall be made to the nearest
cent, one-hundredth of a share or, in the case of the Conversion Rate, one
hundred-thousandth. Notwithstanding any other provision of this Section 3,
the Corporation shall not be required to make any adjustment of the
Conversion Rate unless such adjustment would require an increase or decrease
of at least 1.00000% of such Conversion Rate. Any lesser adjustment shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment which, together with any adjustment or adjustments so
carried forward, shall amount to an increase or decrease of at least
1.00000% in such rate. Any adjustments under this Section 3 shall be made
successively whenever an event requiring such an adjustment occurs.
(i) If the Corporation shall take a record of the holders of Media Stock
for the purpose of entitling them to receive a dividend or other
distribution, and shall thereafter and before the distribution to
stockholders thereof legally abandon its plan to pay or deliver such
dividend or distribution, then thereafter no adjustment in the Conversion
Rate then in effect shall be required by reason of the taking of such
record.
(j) Subject to Section 3.6(e) hereof, no adjustment shall be made
pursuant to this Section 3.6 with respect to any share of Series D Stock
that is converted prior to the time such adjustment otherwise would be made.
3.7 In case of (a) any consolidation or merger to which the Corporation is a
party, other than a merger or consolidation in which the Corporation is the
surviving or continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) or (b) any sale or conveyance of all or substantially all of the
property and assets of the Corporation, then lawful provision shall be made as
part of the terms of such transaction whereby the holder of each share of Series
D Stock which is not converted into the right to receive stock or other
securities and property in connection with such transaction shall have the right
thereafter, during the period such share shall be convertible, to convert such
share into the kind and amount of shares of stock or other securities and
property receivable upon such consolidation, merger, sale or conveyance by a
holder of the number of shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) into which
such shares of this Series could have been converted immediately prior to such
consolidation, merger, sale or conveyance, subject to adjustment which shall be
as nearly equivalent as may be practicable to the adjustments provided for in
this Section 3. If holders of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) are entitled
to elect the kind or amount of securities or other property receivable upon such
consolidation, merger, sale or conveyance, all adjustments made pursuant to this
Section 3.7 shall be based upon (i) the election, if any, made in writing to the
Secretary of the Corporation by the record holder of the largest number of
shares of Series D Stock prior to the earlier of (x) the last date on which a
holder of Media Stock (or such other class or series of common stock) may make
such an election and (y) the date which is five (5) Trading Days prior to the
record date for determining the holders of Media Stock (or such other class or
series of common stock) entitled to participate in the transaction (or if no
such record date is established, the
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<PAGE>
effective date of such transaction) or (ii) if no such election is timely made,
an assumption that each holder of Shares of this Series failed to exercise such
rights of election (provided that if the kind or amount of securities or other
property receivable upon such consolidation, merger, sale or conveyance is not
the same for each nonelecting share, then the kind and amount of securities or
other property receivable upon such consolidation, merger, sale or conveyance
for each nonelecting share shall be deemed to be the kind and amount so
receivable per share by a plurality of the nonelecting shares). Concurrently
with the mailing to holders of Media Stock (or such other class or series of
common stock) of any document pursuant to which such holders may make an
election regarding the kind or amount of securities or other property that will
be receivable by such holder in any transaction described in clause (a) or (b)
of the first sentence of this Section 3.7, the Corporation shall mail a copy
thereof to the holders of shares of the Series D Stock. The Corporation shall
not enter into any of the transactions referred to in clauses (a) or (b) of the
first sentence of this Section 3.7 unless, prior to the consummation thereof,
effective provision shall be made in a certificate or articles of incorporation
or other constituent document or written instrument of the Corporation or the
entity surviving the consolidation or merger, if other than the Corporation, or
the entity acquiring the Corporation's assets, unless, in either case, such
entity is a direct or indirect subsidiary of another entity, in which case such
provision shall be made in the certificate or articles of incorporation or other
constituent document or written instrument of such other entity (any such entity
or other entity being the "Surviving Entity") so as to assume the obligation to
deliver to each holder of shares of Series D Stock such stock or other
securities and property and otherwise give effect to the provisions set forth in
this Section 3.7. The provisions of this Section 3.7 shall apply similarly to
successive consolidations, mergers, sales or conveyances.
3.8 After the date, if any, on which all outstanding shares of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) are converted into or exchanged for shares of another
class or series of common stock of the Corporation, each share of this Series
shall thereafter be convertible into or exchangeable for the number of shares of
such other class or series of common stock receivable upon such conversion or
exchange by a holder of that number of shares or fraction thereof of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) into which one share of this Series was convertible
immediately prior to such conversion or exchange. From and after any such
conversion or exchange, Conversion Rate adjustments as nearly equivalent as may
be practicable to the adjustments pursuant to Sections 3.6 and 3.7 which, prior
to such exchange, were made in respect of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
shall instead be made pursuant to such Sections 3.6 and 3.7 in respect of shares
of such other class or series of common stock.
3.9 (a) Whenever the Conversion Rate is adjusted as provided in this Section
3, the Corporation (or, in the case of Section 3.7, the Corporation or the
Surviving Entity, as the case may be), shall forthwith place on file with its
transfer agent or agents for this Series a statement signed by a duly authorized
officer of the Corporation or the Surviving Entity, as the case may be, stating
the adjusted Conversion Rate determined as provided herein. Such statements
shall set forth in reasonable detail such facts as shall be necessary to show
the reason for and the manner of computing such adjustment. Promptly after the
adjustment of the Conversion Rate, the Corporation or the Surviving Entity, as
the case may be, shall mail a notice thereof to each holder of shares of this
Series. Whenever the Conversion Rate is increased pursuant to Section 3.6(f),
such notice shall be mailed to each holder of shares of this Series as promptly
as possible after the Corporation shall have determined to effect such increase
and, in any event, at least 15 Trading Days prior to the date such increased
Conversion Rate takes effect, and such notice shall state such increased
Conversion Rate and the period during which it will be in effect. Where
appropriate, the notice required by this Section 3.9(a) may be given in advance
and included as part of the notice required pursuant to Section 3.9(b) or
3.9(c).
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(b) Subject to the provisions of Section 3.9(c), if: (i) the Corporation
takes any action that would require an adjustment of the Conversion Rate
pursuant to Sections 3.6 through 3.8; (ii) there shall be any consolidation or
merger to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation; or (iii) there shall occur
the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, then the Corporation shall, as promptly as possible, but at least
10 Trading Days prior to the record date or other date set for definitive action
if there shall be no record date, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of outstanding
shares of this Series stating the action or event for which such notice is being
given and the record date for and the anticipated effective date of such action
or event. Failure to give or receive such notice or any defect therein shall not
affect the legality or validity of the related transaction.
(c) If the Corporation intends to convert all of the outstanding shares of
Media Stock into shares of Communications Stock (or, if the Communications Stock
is not Publicly Traded at such time and shares of any other class or series of
common stock of the Corporation (other than Media Stock) are then Publicly
Traded, of such other class or series of common stock as has the largest Market
Capitalization) (as provided in Section 2.4 of Article V of the Certificate of
Incorporation), then the Corporation shall, not later than the 35th Trading Day
and not earlier than the 45th Trading Day prior to the date of such conversion,
cause notice to be filed with the transfer agent or agents for this Series and
given to each record holder of shares of this Series, setting forth: (1) a
statement that all outstanding shares of Media Stock shall be converted; (2) the
date of such conversion; (3) the per share number of shares of Communications
Stock (or such other class or series of common stock) to be received with
respect to each share of Media Stock, including details as to the calculation
thereof; (4) the place or places where certificates for shares of Media Stock,
properly endorsed or assigned for transfer (unless the Corporation shall waive
such requirement), are to be surrendered for delivery of certificates for shares
of Communications Stock (or such other class or series of common stock); (5) the
number of shares of Media Stock outstanding and the number of shares of Media
Stock into or for which outstanding Convertible Securities are then convertible,
exchangeable or exercisable and the conversion, exchange or exercise price
thereof, including the number of outstanding shares of this Series and the
Conversion Price; (6) a statement to the effect that, subject to Section
2.4.5(I) of Article V of the Certificate of Incorporation, dividends on shares
of such Media Stock shall cease to be paid as of the date of such conversion;
(7) that a holder of shares of this Series shall be entitled to receive shares
of Communications Stock (or such other class or series of common stock) pursuant
to such conversion if such holder converts shares of this Series on or prior to
the date of such conversion; and (8) a statement as to what such holder will be
entitled to receive pursuant to the terms of Section 3.8 if such holder
thereafter properly converts shares of this Series. In addition, from and after
any conversion of Media Stock effected in accordance with Section 2.4 of Article
V of the Certificate of Incorporation, if (x) a class or series of common stock
of the Corporation exists in addition to the class or series of common stock
into which the Media Stock was converted and (y) the Corporation intends to
convert the class or series of common stock into which the Media Stock was
converted into another such class or series of common stock of the Corporation,
then the Corporation shall give notice comparable to the notice described in the
preceding sentence of its intention to effect such a conversion. In the event of
any conflict between the notice provisions of this Section 3.9(c) and Section
3.9(b), the notice provisions of this Section 3.9(c) shall govern.
3.10 There shall be no adjustment of the Conversion Rate in case of the
issuance of any stock of the Corporation in a reorganization, acquisition or
other similar transaction except as specifically set forth in this Section 3. If
any action or transaction would require adjustment of any Conversion Rate
established hereunder pursuant to more than one paragraph of this Section 3,
only the adjustment which would result in the largest increase of such
Conversion Rate shall be made.
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3.11 The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued stock, for the purpose of
effecting the conversion of the shares of this Series, such number of its duly
authorized shares of Media Stock (or, if applicable, any other shares of Capital
Stock of the Corporation) as shall from time to time be sufficient to effect the
conversion of all outstanding shares of this Series into such Media Stock (or
such other shares of Capital Stock) at any time; PROVIDED, HOWEVER, that nothing
contained herein shall preclude the Corporation from satisfying its obligations
in respect of the conversion of the shares by delivery of purchased shares of
Media Stock (or such other shares of Capital Stock) that are held in the
treasury of the Corporation. All shares of Media Stock (or such other shares of
Capital Stock of the Corporation) which shall be deliverable upon conversion of
the shares of this Series shall be duly and validly issued, fully paid and
nonassessable. For purposes of this Section 3, the number of shares of Media
Stock or any other class or series of common stock of the Corporation at any
time outstanding shall not include any shares of Media Stock or such other class
or series of common stock then owned or held by or for the account of
Corporation or any subsidiary of the Corporation.
3.12 If any shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) which would be
issuable upon conversion of shares of this Series hereunder require registration
with or approval of any governmental authority before such shares may be issued
upon conversion, the Corporation will in good faith and as expeditiously as
possible cause such shares to be duly registered or approved, as the case may
be. The Corporation will endeavor to list the shares of (or depositary shares
representing fractional interests in) Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) required
to be delivered upon conversion of shares of this Series prior to such delivery
upon the principal national securities exchange upon which the outstanding Media
Stock (or such other class or series of common stock) is listed at the time of
such delivery.
3.13 The Corporation shall pay any and all issue, stamp, documentation,
transfer or other taxes that may be payable in respect of any issue or delivery
of shares of Media Stock (or such other class or series of common stock into
which shares of this Series are then convertible) on conversion of shares of
this Series pursuant hereto. The Corporation shall not, however, be required to
pay any tax which is payable in respect of any transfer involved in the issue or
delivery of Media Stock (or such other class or series of common stock) in a
name other than that in which the shares of this Series so converted were
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to the Corporation the amount of such tax,
or has established, to the satisfaction of the Corporation, that such tax has
been paid.
4. REDEMPTION OR EXCHANGE.
4.1 (a) Except as provided in Section 4.1(b), the shares of this Series
shall not be redeemable by the Corporation prior to the third anniversary of the
Effective Time. The Corporation may, at its sole option, subject to Section 2.2
hereof, from time to time on and after the third anniversary of the Effective
Time and prior to the fifth anniversary of the Effective Time, exchange shares
of Media Stock (or such other class or series of common stock into which shares
of this Series are then convertible) for all or any part of the outstanding
shares of this Series at the Exchange Rate; PROVIDED, HOWEVER, that such an
exchange may only be effected if the Closing Price shall be greater than the
product of (x) the Conversion Price multiplied by (y) 1.35, on 20 of the 30
Trading Days immediately prior to the date of the notice delivered by the
Corporation pursuant to Section 4.3(a) to holders of shares of this Series to be
exchanged. The Corporation may, at its sole option, subject to Section 2.2
hereof, from time to time on and after the fifth anniversary of the Effective
Time, at its election either: (i) redeem, out of funds legally available
therefor, all or any part of the outstanding shares of this Series at the
Redemption Price; (ii) exchange shares of Media Stock (or such other class or
series of common stock into which shares of this Series are then convertible)
for all or any part of the outstanding shares of this Series at the Exchange
Rate; or (iii) effect a combination of the options described in the foregoing
clauses
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(i) and (ii) (in which event each holder of shares of this Series which are
selected for redemption and exchange pursuant to Section 4.2 shall receive the
same proportion of cash and shares of Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) (except
for cash paid in lieu of fractional shares) paid to other holders of shares of
this Series selected for redemption and exchange).
(b) The Corporation shall redeem, out of funds legally available therefor,
all of the outstanding shares of this Series, at the Redemption Price, if any of
the following events with respect to the Media Group occur (such events being
collectively referred to herein as the "Media Group Special Events"):
(i) (A) the Corporation redeems all of the outstanding shares of Media Stock
in exchange for shares of common stock of the Media Group Subsidiaries as
provided in Section 2.4.3 of Article V of the Certificate of Incorporation (the
"Media Group Subsidiary Redemption") or (B) following a Disposition of all or
substantially all of the properties and assets attributed to the Media Group,
the Corporation either (1) pays a dividend on the Media Stock in an amount equal
to the product of the Outstanding Media Fraction multiplied by the Fair Value of
the Net Proceeds of such Disposition as provided in Section 2.4.1(A)(1)(a) of
Article V of the Certificate of Incorporation (the "Media Group Disposition
Dividend"), or (2) redeems shares of Media Stock for an amount equal to the
product of the Outstanding Media Fraction multiplied by the Fair Value of the
Net Proceeds of such Disposition as provided in Section 2.4.1(A)(1)(b) of
Article V of the Certificate of Incorporation (the "Media Group Disposition
Redemption"); or
(ii) the Corporation pays a dividend on, or the Corporation or any of its
subsidiaries consummates a tender offer or exchange offer for, shares of Media
Stock and the aggregate amount of such dividend or the consideration paid in
such tender offer or exchange offer is an amount equal to the Fair Value of all
or substantially all of the properties and assets attributed to the Media Group
(the "Media Group Special Dividend" or the "Media Group Tender or Exchange
Offer", respectively); PROVIDED, HOWEVER, that the calculation of the Fair Value
of all or substantially all of the properties and assets attributed to the Media
Group shall be made without giving effect to any money borrowed by the
Corporation or any of its subsidiaries in connection with such dividend or
tender offer or exchange offer, as the case may be.
The Redemption Date for shares of this Series to be redeemed by the
Corporation pursuant to this Section 4.1(b) shall be, if the applicable Media
Group Special Event is (I) the Media Group Subsidiary Redemption, the date of
such exchange, (II) the Media Group Disposition Dividend or the Media Group
Special Dividend, the date of payment of such dividend, (III) the Media Group
Disposition Redemption, the date of such redemption or (IV) the Media Group
Tender or Exchange Offer, the date such tender offer or exchange offer is
consummated. Notwithstanding anything to the contrary contained in this Section
4.1(b), any redemption pursuant to this Section 4.1(b) shall be conditioned upon
the actual redemption of Media Stock for shares of common stock of the Media
Group Subsidiaries, payment of the Media Group Disposition Dividend or the
amount due as a result of the Media Group Disposition Redemption (in each case
in the required kind of capital stock, cash, securities and/or other property),
payment of the Media Group Special Dividend or the consummation of the Media
Group Tender or Exchange Offer, as the case may be.
(c) The Corporation shall, on the twentieth anniversary of the Effective
Time, at its election either: (i) redeem, out of funds legally available
therefor, all of the outstanding shares of this Series at the Redemption Price;
(ii) exchange shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) for all of the
outstanding shares of this Series at the Exchange Rate; or (iii) effect a
combination of the options described in the foregoing clauses (i) and (ii) (in
which event each holder of shares of this Series shall receive the same
proportion of cash and shares of Media Stock (or such other class or series of
common stock into which
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shares of this Series are then convertible) (except for cash paid in lieu of
fractional shares) paid to other holders of shares of this Series).
(d) The Corporation shall redeem, out of funds legally available therefore,
all of the outstanding shares of this Series at the Redemption Price, if (i) the
Corporation converts all of the outstanding shares of Media Stock into shares of
Communications Stock (or, if the Communications Stock is not Publicly Traded at
such time and shares of any other class or series of common stock of the
Corporation (other than Media Stock) are then Publicly Traded, of such other
class or series of common stock as has the largest Market Capitalization) as
provided in Section 2.4 of Article V of the Certificate of Incorporation and
(ii) at any time following such conversion (A) an event substantially similar to
any Media Group Special Event occurs in respect to the Communications Stock (or
such other class or series of common stock) and (B) at the time of such event
shares of another class or series of common stock of the Corporation (other then
Communications Stock or such other class or series of common stock) are then
Publicly Traded. The Redemption Date for, and the conditions to, any such
redemption shall be determined in a manner consistent with the Redemption Date
and conditions set forth in Section 4.1(b) for a redemption resulting from a
substantially similar Media Group Special Event.
(e) The Corporation shall be entitled to effect an exchange of shares of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible) for shares of Series D Stock pursuant to
Section 4.1(a) or 4.1(c) only to the extent Media Stock (or such other class or
series of common stock) shall be available for issuance (including delivery of
previously issued shares of Media Stock (or such other class or series) held in
the Corporation's treasury on the Redemption Date). The Corporation may, but
shall not be required to, in connection with any exchange of shares of this
Series pursuant to Section 4.1(a) or 4.1(c), issue a fraction of a share of
Media Stock (or such other class or series of common stock into which shares of
this Series are then convertible), and if the Corporation shall determine not to
issue any such fraction, the Corporation shall make a cash payment (rounded to
the nearest cent) equal to such fraction multiplied by the Closing Price of the
Media Stock (or such other class or series of common stock) on the last Trading
Day prior to the Redemption Date.
4.2 In the event that fewer than all of the outstanding shares of this
Series are to be redeemed and/or exchanged pursuant to Section 4.1(a), subject
to clause (iii) of the third sentence of Section 4.1(a), the aggregate number of
shares of this Series held by each holder which will be redeemed and/or
exchanged shall be determined by the Corporation by lot or pro rata or by any
other method as may be determined by the Board of Directors in its sole
discretion to be equitable, and the certificate of the Corporation's Secretary
or an Assistant Secretary filed with the transfer agent or transfer agents for
this Series in respect of such determination by the Board of Directors shall be
conclusive.
4.3 (a) If the Corporation determines to redeem and/or exchange shares of
this Series pursuant to Section 4.1(a) or 4.1(c), the Corporation shall, not
later than the 15th Trading Day nor earlier than the 60th Trading Day prior to
the Redemption Date, cause notice to be filed with the transfer agent or agents
for this Series and to be given to each record holder of the shares to be
redeemed and/or exchanged, setting forth: (1) the Redemption Date; (2) in the
case of a redemption or exchange pursuant to Section 4.1(c), that all shares of
this Series outstanding on the Redemption Date shall be redeemed and/or
exchanged by the Corporation; (3) in the case of a redemption or exchange
pursuant to Section 4.1(a), the total number of shares of this Series to be
redeemed and/or exchanged and, if fewer than all the shares held by such holder
are to be redeemed and/or exchanged, the aggregate number of such shares which
will be redeemed and/or exchanged; (4) the Redemption Price and/or the manner in
which the Exchange Rate will be calculated prior to the Redemption Date; (5)
that, if applicable, the Corporation shall determine on or prior to the second
Trading Day preceding the Redemption Date the percentage of such holder's shares
to be redeemed and the percentage of such holder's shares to be exchanged; (6)
that shares of this Series called for redemption or exchange may be converted at
any time prior to the Redemption Date (unless the Corporation (i) shall, in the
case of
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a redemption, default in payment of the Redemption Price or, in the case of an
exchange, fail to exchange the shares of this Series for the applicable number
of shares of Media Stock or (ii) shall, in the case of a redemption pursuant to
Section 4.1(a), exercise its right to rescind such redemption or exchange
pursuant to Section 4.5, in which case such right of conversion shall not
terminate at such time and date); (7) the applicable Conversion Price; (8) the
place or places where certificates for such shares are to be surrendered for
payment of the Redemption Price and/or the Exchange Rate, as the case may be;
and (9) that dividends on the shares to be redeemed and/or exchanged will cease
to accrue on the Redemption Date. Promptly, following the Redemption Date, the
Corporation shall cause notice to be filed with the transfer agent or agents for
this Series and to be given to each record holder of the shares to be redeemed
and/or exchanged setting forth the percentage of such holder's shares which the
Corporation has elected to redeem and the percentage of such holder's shares
which the Corporation has elected to exchange.
(b) If the Corporation determines to effect a Media Group Subsidiary
Redemption, the Corporation shall, not later than the 30th Trading Day and not
earlier than the 45th Trading Day prior to the Redemption Date, cause notice to
be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (1) the Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (8) below); (2) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(3) the Redemption Price; (4) that the redemption of the shares of this Series
shall be conditioned upon the consummation of the Media Group Subsidiary
Redemption; (5) the place or places where certificates for shares of this
Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (7) a statement that all shares of Media Stock outstanding
on the date of the Media Group Subsidiary Redemption shall be redeemed in
exchange for shares of common stock of the Media Group Subsidiaries; (8) the
date of such Media Group Subsidiary Redemption; (9) the Outstanding Media
Fraction on the date of such notice; (10) the place or places where certificates
for shares of Media Stock, properly endorsed or assigned for transfer (unless
the Corporation shall waive such requirement), are to be surrendered for
delivery of certificates for shares of the Media Group Subsidiaries; (11) a
statement to the effect that, subject to Section 2.4.5(I) of Article V of the
Certificate of Incorporation, dividends on the Media Stock shall cease to be
paid as of the Redemption Date; (12) the number of shares of Media Stock
outstanding and the number of shares of Media Stock into or for which
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price; and
(13) that a holder of shares of this Series shall be entitled to receive shares
of common stock of the Media Group Subsidiaries upon the Media Group Subsidiary
Redemption in lieu of the Redemption Price only if such holder converts such
shares of this Series on or prior to the Redemption Date.
(c) If the Corporation determines to effect a Media Group Disposition
Dividend, the Corporation shall, not later than the 30th Trading Day following
the consummation of the Disposition by the Corporation of all or substantially
all of the properties and assets attributed to the Media Group, cause notice to
be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (1) the anticipated
Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (8) below); (2) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (3) the Redemption Price; (4) that the redemption of the shares
of this Series shall be conditioned upon the payment of the Media Group
Disposition Dividend; (5) the place or places where certificates for shares of
this Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the
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shares to be redeemed will cease to accrue on the Redemption Date; (7) the
record date for determining holders of Media Stock entitled to receive the Media
Group Disposition Dividend, which shall be not earlier than the 40th Trading Day
and not later than the 50th Trading Day following the consummation of such
Disposition; (8) the anticipated date of payment of the Media Group Disposition
Dividend (which shall not be more than 85 Trading Days following the
consummation of such Disposition); (9) the type of property to be paid as such
dividend in respect of the outstanding shares of Media Stock; (10) the Net
Proceeds of such Disposition; (11) the Outstanding Media Fraction on the date of
such notice; (12) the number of outstanding shares of Media Stock and the number
of shares of Media Stock into or for which outstanding Convertible Securities
are then convertible, exchangeable or exercisable and the conversion, exchange
or exercise price thereof, including the number of outstanding shares of this
Series and the Conversion Price in effect at such time; and (13) that a holder
of shares of this Series shall be entitled to receive such dividend in lieu of
the Redemption Price only if such holder properly converts such shares on or
prior to the record date referred to in clause (7) of this sentence and that
shares of this Series shall not be convertible after such record date.
(d) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of all (not merely substantially all) of the
properties and assets attributed to the Media Group (in accordance with Section
2.4.1(A)(1)(b)(i) of Article V of the Certificate of Incorporation), the
Corporation shall, not later than the 35th Trading Day and not earlier than the
45th Trading Day prior to the Redemption Date, cause notice to be filed with the
transfer agent or agents for this Series and given to each record holder of
shares of this Series, setting forth: (1) the Redemption Date (which, pursuant
to the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (8) below); (2) that all shares of this Series outstanding
on the Redemption Date shall be redeemed by the Corporation; (3) the Redemption
Price; (4) that the redemption of shares of this Series shall be conditioned
upon the consummation of the Media Group Disposition Redemption; (5) the place
or places where certificates for shares of this Series, properly endorsed or
assigned for transfer (unless the Corporation waives such requirement), are to
be surrendered for payment of the Redemption Price; (6) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (7) that all
shares of Media Stock outstanding on the date of such Media Group Disposition
Redemption shall be redeemed; (8) the date of such Media Group Disposition
Redemption (which shall not be more than 85 Trading Days following the
consummation of such Disposition); (9) the type of property in which the
redemption price for the shares of Media Stock to be redeemed is to be paid;
(10) the Net Proceeds of such Disposition; (11) the Outstanding Media Fraction
on the date of such notice; (12) the place or places where certificates for
shares of Media Stock, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for delivery of cash
and/or securities or other property; (13) the number of outstanding shares of
Media Stock and the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; (14) that a holder of shares of this Series shall be
entitled to participate in the Media Group Disposition Redemption in lieu of
participating in the redemption of the shares of this Series only if such holder
properly converts such shares of this Series on or prior to the Redemption Date;
and (15) that, except as otherwise provided by Section 2.4.5(I) of Article V of
the Certificate of Incorporation, dividends on shares of Media Stock shall cease
to be paid as of the Redemption Date.
(e) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of substantially all (but not all) of the
properties and assets attributed to the Media Group (in accordance with Section
2.4.1(A)(1)(b)(ii) of Article V of the Certificate of Incorporation), the
Corporation shall, not later than the 30th Trading Day following the
consummation of such Disposition, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of shares of
this Series, setting forth: (1) the anticipated Redemption Date (which, pursuant
to the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (8) below);
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(2) that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (3) the Redemption Price; (4) that the redemption
of shares of this Series shall be conditioned upon the consummation of the Media
Group Disposition Redemption; (5) the place or places where certificates for
shares of this Series, properly endorsed or assigned for transfer (unless the
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (6) that dividends on the shares to be redeemed will cease to
accrue on the Redemption Date; (7) a date not earlier than the 40th Trading Day
and not later than the 50th Trading Day following the consummation of such
Disposition on which shares of Media Stock shall be selected for redemption
pursuant to such Media Group Disposition Redemption; (8) the anticipated date of
such Media Group Disposition Redemption (which shall not be more than 85 Trading
Days following the consummation of such Disposition); (9) the type of property
in which the redemption price for the shares of Media Stock to be redeemed is to
be paid; (10) the Net Proceeds of such Disposition; (11) the Outstanding Media
Fraction; (12) the number of shares of Media Stock outstanding and the number of
shares of Media Stock into or for which outstanding Convertible Securities are
then convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, including the number of outstanding shares of this
Series and the Conversion Price in effect at such time; (13) that a holder of
shares of this Series shall be eligible to participate in such selection for
redemption pursuant to such Media Group Disposition Redemption in lieu of
participating in the redemption of shares of this Series only if such holder
properly converts such shares of this Series on or prior to the date referred to
in clause (7) of this sentence and that shares of this Series shall not be
convertible after such date; and (14) a statement that the Corporation will not
be required to register a transfer of any shares of Media Stock for a period of
15 Trading Days next preceding the date referred to in clause (7) of this
sentence.
(f) If the Corporation determines to effect a Media Group Special Dividend,
the Corporation shall, not later than the 45th Trading Day and not earlier than
the 60th Trading day prior to the date of payment of such dividend, cause notice
to be filed with transfer agent or agent for this Series and given to each
record holder of shares of this Series, setting forth: (1) the anticipated
Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (8) below); (2) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (3) the Redemption Price; (4) that the redemption of the shares
of this Series shall be conditioned upon the payment of the Media Group Special
Dividend; (5) the place or places where certificates for shares of this Series,
properly endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (6)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (7) the record date for determining holders of Media Stock
entitled to receive the Media Group Special Dividend, which shall be not earlier
than the 20th Trading Day prior to the date of payment of such dividend; (8) the
anticipated date of payment of the Media Group Special Dividend; (9) the type of
property to be paid as such dividend in respect of the outstanding shares of
Media Stock; (10) the Outstanding Media Fraction on the date of such notice;
(11) the number of outstanding shares of Media Stock and the number of shares of
Media Stock into or for which outstanding Convertible Securities are then
convertible, exchangeable or exercisable and the conversion, exchange or
exercise price thereof, including the number of outstanding shares of this
Series and the Conversion Price in effect at such time; and (12) that a holder
of shares of this Series shall be entitled to receive such dividend in lieu of
the Redemption Price only if such holder properly converts such shares on or
prior to the record date referred to in clause (7) of this sentence and that
shares of this Series shall not be convertible after such record date.
(g) If the Corporation or any of its subsidiaries determines to effect a
Media Group Tender or Exchange Offer, the Corporation shall, on the date of the
public announcement of such tender offer or exchange offer by the Corporation or
any of its subsidiaries but in any event not later than the 35th Trading Day
prior to such redemption, cause notice to be filed with the transfer agent or
agent for this Series and given to each record holder of shares of this Series,
setting forth: (1) the anticipated
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Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (7) below); (2) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (3) the Redemption Price; (4) that the redemption of shares of
this Series shall be conditioned upon the consummation of the Media Group Tender
or Exchange Offer; (5) the place or places where certificates for shares of this
Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (6) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (7) the anticipated date of consummation of such Media
Group Tender or Exchange Offer; (8) the type of consideration to be paid by the
Corporation or its subsidiary in such Media Group Tender Offer or Exchange Offer
for shares of Media Stock; (9) the date on which such Media Group Tender or
Exchange Offer commenced, the date on which such Media Group Tender or Exchange
Offer is scheduled to expire unless extended and any other material terms
thereof (or the material terms of any amendment thereto); (10) the Outstanding
Media Fraction on the date of such notice; (11) the number of outstanding shares
of Media Stock and the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and the Conversion Price in
effect at such time; and (12) that a holder of shares of this Series shall be
entitled to participate in the Media Group Tender or Exchange Offer in lieu of
participating in the redemption of the shares of this Series only if such holder
properly converts such shares of this Series on or prior to the Redemption Date
and then complies with the terms and conditions of the Media Group Tender or
Exchange Offer and that such holder shall be permitted to tender or exchange
shares of Media Stock upon conversion of shares of this Series by notice of
guaranteed delivery so long as physical certificates are tendered as soon as
practicable after physical receipt thereof.
(h) In the event the Corporation shall redeem shares of this Series pursuant
to Section 4.1(d), notice of such redemption shall be given by the Corporation
at a time, and such notice shall contain information, comparable to the time or
information, as the case may be, specified in Sections 4.3(b) through (g) with
respect to a notice of a redemption pursuant to Section 4.1(b) resulting from a
substantially similar Media Group Special Event.
4.4 If notice of redemption or exchange shall have been given by the
Corporation as provided in Section 4.3, from and after the Redemption Date,
dividends on the shares of this Series so called for redemption or exchange
shall cease to accrue, such shares shall no longer be deemed to be outstanding,
and all rights of the holders thereof as stockholders of the Corporation with
respect to shares so called for redemption or exchange (except, in the case of a
redemption, the right to receive from the Corporation the Redemption Price
without interest and, in the case of an exchange, the right to receive from the
Corporation the Exchange Rate without interest) shall cease (including any right
to receive dividends otherwise payable on any Dividend Payment Date that would
have occurred after the Redemption Date), unless (a) the Corporation, in the
case of a redemption, defaults in the payment of the Redemption Price and, in
the case of an exchange, the Corporation fails to exchange the shares of this
Series for the applicable number of shares of Media Stock, (b) in the case of a
redemption or exchange pursuant to Section 4.1(a), the Corporation exercises its
right to rescind such redemption or exchange pursuant to Section 4.5 or (c) in
the case of a redemption pursuant to Section 4.1(b) or 4.1(d), the conditions to
such redemption shall not have been satisfied, in which case such rights shall
not terminate at the close of business on such date. On or before the Redemption
Date, the Corporation shall deposit with a bank or trust company doing business
in New York, as paying agent, in the case of a redemption, money sufficient to
pay the Redemption Price on the Redemption Date, and in the case of an exchange,
certificates representing the shares of Media Stock to be exchanged on the
Redemption Date, in trust, with irrevocable instructions that such money or
shares be applied to the redemption or exchange of shares of this Series so
called for redemption or exchange. Any money or certificates so deposited with
any such paying agent which shall not be required for such redemption or
exchange because of the exercise of any right of conversion, rescission or
otherwise (including if the
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conditions to a redemption pursuant to Section 4.1(b) or 4.1(d) are not
satisfied) shall be returned to the Corporation forthwith. Upon surrender (in
accordance with the notice of redemption or exchange) of the certificate or
certificates for any shares of this Series to be so redeemed or exchanged
(properly endorsed or assigned for transfer, if the Corporation shall so require
and the notice of redemption or exchange shall so state), such shares shall be
redeemed by the Corporation at the Redemption Price or exchanged by the
Corporation at the Exchange Rate, as applicable (unless, in the case of a
redemption or exchange pursuant to Section 4.1(a), the Corporation shall have
exercised its right to rescind such redemption or exchange pursuant to Section
4.5 or, in the case of a redemption pursuant to Section 4.1(b) or 4.1(d), the
conditions to such redemption shall not have been satisfied). In case fewer than
all the shares represented by any such certificate are to be redeemed or
exchanged, a new certificate shall be issued representing the unredeemed and
unexchanged shares (or fractions thereof as provided in Section 7.4), without
cost to the holder thereof. Subject to applicable escheat laws, any moneys or
shares so set aside by the Corporation and unclaimed at the end of two years
from the Redemption Date shall revert to the general funds of the Corporation,
after which reversion the holders of such shares so called for redemption or
exchange shall look only to the Corporation for the payment of the Redemption
Price or the Exchange Rate, as the case may be, without interest. Any interest
accrued on any funds so deposited shall be paid to the Corporation from time to
time.
4.5 If notice of redemption or exchange pursuant to Section 4.1(a) shall
have been given by the Corporation pursuant to Section 4.3(a), in the event that
a Redemption Rescission Event shall occur following the date of such notice but
at or prior to the Redemption Date, the Corporation may, at its sole option, at
any time prior to the earlier of (i) the close of business on that day which is
five (5) Trading Days following such Redemption Rescission Event and (ii) the
Redemption Date, rescind such redemption or exchange by making a public
announcement of such rescission (the date on which such public announcement
shall have been made being hereinafter referred to as the "Rescission Date").
The Corporation shall be deemed to have made such announcement if it shall issue
a release to the Dow Jones News Service and Reuters Information Services or any
successor news wire service. From and after the making of such announcement, the
Corporation shall have no obligation to effect such redemption or exchange or to
pay the Redemption Price or Exchange Rate therefor and all rights of holders of
shares of this Series shall be restored as if notice of redemption or exchange
had not been given. The Corporation shall give notice of any such rescission by
first-class mail, postage prepaid, mailed as promptly as practicable, but in no
event later than the close of business on that date which is five (5) Trading
Days following the Rescission Date to each record holder of shares of this
Series at the close of business on the Rescission Date and to any other Person
or entity that was a record holder of shares of this Series and that shall have
surrendered shares of this Series for conversion following the giving of notice
of the subsequently rescinded redemption or exchange. Each notice of rescission
shall (w) state that such redemption or exchange has been rescinded, (x) state
that any Converting Holder shall be entitled to rescind the conversion of shares
of this Series surrendered for conversion following the day on which notice of
such redemption or exchange was given but on or prior to the later of (I) the
close of business on the Trading Day next succeeding the date on which public
announcement of the rescission of such redemption or exchange shall have been
made and (II) the date which is three Trading Days following the mailing of the
Corporation's notice of rescission, (y) be accompanied by a form prescribed by
the Corporation to be used by any Converting Holder rescinding the conversion of
shares so surrendered for conversion (and instructions for the completion and
delivery of such form, including instructions with respect to payments that may
be required to accompany such delivery in accordance with Section 3.5) and (z)
state that such form must be properly completed and received by the Corporation
no later than the close of business on a date that shall be fifteen (15) Trading
Days following the date of the mailing of such notice of rescission.
5. VOTING. The shares of this Series shall have no voting rights except as
required by law or as set forth below.
5.1 (a) So long as any shares of this Series remain outstanding, unless a
greater percentage shall then be required by law, the Corporation shall not,
without the affirmative vote at a meeting or the
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written consent with or without a meeting of the holders of shares of this
Series representing at least a majority of the shares of this Series then
outstanding (i) authorize any Senior Stock or reclassify any Junior Stock or
Parity Stock as Senior Stock, or (ii) amend, alter or repeal any of the
provisions of this Exhibit or the Certificate of Incorporation, so as in any
such case to materially and adversely affect the voting powers, designations,
preferences and relative, participating, optional or other special rights, and
qualifications, limitations or restrictions of the shares of this Series;
PROVIDED, HOWEVER, that an amendment which effects a split of this Series or
which effects a combination of the shares of this Series into a fewer number of
Shares shall not be deemed to have any such material adverse effect.
(a) No vote or consent of holders of shares of this Series shall be required
for (i) the creation of any indebtedness of any kind of the Corporation, (ii)
the authorization or issuance of any class of Junior Stock (including any class
or series of common stock of the Corporation) or Parity Stock, (iii) the
authorization, designation or issuance of additional shares of Series D Stock or
(iv) subject to Section 5.1(a), the authorization or issuance of any other
shares of Preferred Stock.
5.2 (a) If and whenever at any time or times dividends payable on shares of
this Series shall have been in arrears and unpaid in an aggregate amount equal
to or exceeding the amount of dividends payable thereon for six quarterly
dividend periods, then the number of directors constituting the Board of
Directors shall be automatically increased by two and the holders of shares of
this Series, together with the holders of any shares of any Parity Stock as to
which in each case dividends are in arrears and unpaid in an aggregate amount
equal to or exceeding the amount of dividends payable thereon for six quarterly
dividend periods, shall have the exclusive right, voting separately as a class
with such other series, to elect two directors of the Corporation.
(b) Such voting right may be exercised initially either by written consent or
at a special meeting of the holders of the Preferred Stock having such voting
right, called as hereinafter provided, or at any annual meeting of stockholders
held for the purpose of electing directors, and thereafter at each such annual
meeting until such time as all dividends in arrears on the shares of this Series
shall have been paid in full and all dividends payable on the shares of this
Series on four subsequent consecutive Dividend Payment Dates shall have been
paid in full on such dates or funds shall have been set aside for the payment
thereof, at which time such voting right and the term of the directors elected
pursuant to Section 5.2(a) shall terminate.
(c) At any time when such voting right shall have vested in holders of shares
of such series of Preferred Stock described in Section 5.2(b), and if such right
shall not already have been exercised by written consent, a proper officer of
the Corporation may call, and, upon the written request, addressed to the
Secretary of the Corporation, of the record holders of either (i) shares
representing twenty-five percent (25%) of the voting power of the shares then
outstanding of the Series D Stock or (ii) shares representing twenty-five
percent (25%) of the voting power of shares of all series of Preferred Stock
having such voting right, shall call, a special meeting of the holders of
Preferred Stock having such voting right. Such meeting shall be held at the
earliest practicable date upon the notice required for annual meetings of
stockholders at the place for holding annual meetings of stockholders of the
Corporation, or, if none, at a place designated by the Board of Directors.
Notwithstanding the provisions of this Section 5.2(c), no such special meeting
shall be called during a period within 60 days immediately preceding the date
fixed for the next annual meeting of stockholders.
(d) At any meeting held for the purpose of electing directors at which the
holders of such Preferred Stock shall have the right to elect directors as
provided herein, the presence in person or by proxy of the holders of shares
representing more than fifty percent (50%) in voting power of the then
outstanding shares of such Preferred Stock having such right shall be required
and shall be sufficient to constitute a quorum of such class for the election of
directors by such class.
(e) Any director elected by holders of Preferred Stock pursuant to the voting
right created under this Section 5.2 shall hold office until the next annual
meeting of stockholders (unless such term has previously terminated pursuant to
Section 5.2(b)) and any vacancy in respect of any such director shall
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be filled only by vote of the remaining director so elected, or if there be no
such remaining director, by the holders of such Preferred Stock entitled to
elect such director or directors by written consent or at a special meeting
called in accordance with the procedures set forth in Section 5.2(c), or, if no
special meeting is called or written consent executed, at the next annual
meeting of stockholders.
(f) In exercising the voting rights set forth in this Section 5.2, each share
of this Series shall have a number of votes equal to its Liquidation Value.
6. LIQUIDATION RIGHTS.
6.1 Upon the dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, the holders of the shares of this Series shall
be entitled to receive out of the assets of the Corporation available for
distribution to stockholders, in preference to the holders of, and before any
payment of distribution shall be made on, Junior Stock, the Liquidation Value in
effect at such time, plus an amount equal to all accrued and unpaid dividends to
the date of final distribution.
6.2 The Liquidation Value shall initially be equal to $50 per share of Series
D Stock. The Liquidation Value shall be subject to adjustment from time to time
to appropriately give effect to any split or combination of the shares of this
Series.
6.3 Neither the sale, exchange or other conveyance (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property and assets of the Corporation nor the merger or consolidation of the
Corporation into or with any other corporation, or the merger or consolidation
of any other corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, for the
purposes of this Section 6.
6.4 After the payment to the holders of the shares of this Series of full
preferential amounts provided for in this Section 6, the holders of this Series
as such shall have no right or claim to any of the remaining assets of the
Corporation.
6.5 In the event the assets of the Corporation available for distribution to
the holders of shares of this Series upon any dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant to Section 6.1, no such distribution shall be made on account of any
shares of any Parity Stock upon such dissolution, liquidation or winding up
unless proportionate distributive amounts shall be paid on account of the shares
of this Series, ratably, in proportion to the full distributable amounts for
which holders of all Parity Stock are entitled upon such dissolution,
liquidation or winding up.
7. OTHER PROVISIONS.
7.1 All notices from the Corporation to the holders shall be given by first
class mail, postage prepaid, to the holders of shares of this Series at their
last address as it shall appear on the stock register. With respect to any
notice to a holder of Shares of this Series required to be provided hereunder,
neither failure to mail such notice, nor any defect therein or in the mailing
thereof, shall affect the sufficiency of the notice or the validity of the
proceedings referred to in such notice or affect the legality or validity of any
distribution, right, warrant, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any such action. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given whether or not the holder
receives the notice.
7.2 All notices and other communications from a holder of shares of this
Series shall be deemed given if delivered personally or sent by overnight
courier (providing proof of delivery) to the Corporation at the following
address (or at such other address as the Corporation shall specify in a notice
pursuant to Section 7.1): MediaOne Group, Inc., 188 Inverness Drive West,
Englewood, Colorado 80112, Attention: General Counsel.
7.3 Any shares of this Series which have been converted, redeemed, exchanged
or otherwise acquired by the Corporation shall, after such conversion,
redemption, exchange or acquisition, as the case may be, be retired and promptly
cancelled and the Corporation shall take all appropriate action to
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cause such shares to obtain the status of authorized but unissued shares of
Preferred Stock, without designation as to series, until such shares are once
more designated as part of a particular series by the Board of Directors. The
Corporation may cause a certificate setting forth a resolution adopted by the
Board of Directors that none of the authorized shares of this Series are
outstanding to be filed with the Secretary of State of the State of Delaware.
When such certificate becomes effective, all references to Series D Stock shall
be eliminated from the Certificate of Incorporation and the shares of Preferred
Stock designated hereby as Series D Stock shall have the status of authorized
and unissued shares of Preferred Stock and may be reissued as part of any new
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
7.4 The shares of this Series shall be issuable in whole shares or in any
fraction of a whole share or any integral multiple of such fraction.
7.5 The Corporation shall, to the fullest extent permitted by law, be
entitled to recognize the exclusive right of a Person registered on its records
as the holder of shares of this Series, and such record holder shall be deemed
the holder of such shares for all purposes.
7.6 All notice periods referred to in this Exhibit shall commence on the date
of the mailing of the applicable notice.
7.7 Subject to applicable law, any determinations made in the exercise of the
good faith business judgment of the Board of Directors under any provision of
this Exhibit shall be final and binding on all stockholders of the Corporation,
including the holders of shares of this Series.
7.8 Certificates for shares of this Series shall bear such legends as the
Corporation shall from time to time deem appropriate.
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EXHIBIT B
SERIES E CONVERTIBLE PREFERRED STOCK
The series of Preferred Stock hereby established shall consist of 1 million
shares designated as Series E Convertible Preferred Stock. The rights,
preferences and limitations of such series shall be as follows:
1. DEFINITIONS. Unless otherwise defined herein, terms used herein shall
have the meanings assigned to them in Section 2.6 of Article V of the Restated
Certificate of Incorporation of the Corporation (the "Certificate of
Incorporation") and the following terms shall have the indicated meanings:
1.1 "Board of Directors" shall mean the Board of Directors of the
Corporation or, with respect to any action to be taken by the Board of
Directors, any committee of the Board of Directors duly authorized to take such
action.
1.2 "Capital Stock" shall mean any and all shares of corporate stock of a
Person (however designated and whether representing rights to vote, rights to
participate in dividends or distributions upon liquidation or otherwise with
respect to the Corporation, or any division or subsidiary thereof, or any joint
venture, partnership, corporation or other entity).
1.3 "Certificate" shall mean the certificate of the voting powers,
designations, preferences and relative, participating, optional or other special
rights, and qualifications, limitations or restrictions thereof, originally
filed by the Corporation with respect to the Series E Stock with the Secretary
of State of the State of Delaware pursuant to Section 151 of the General
Corporation Law of the State of Delaware.
1.4 "Closing Price" shall mean the last reported sale price of the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible), regular way, as shown on the Composite Tape of the
NYSE, or, in case no such sale takes place on such day, the average of the
closing bid and asked prices on the NYSE, or, if the Media Stock (or such other
class or series of common stock) is not listed or admitted to trading on the
NYSE, on the principal national securities exchange on which such stock is
listed or admitted to trading, or, if it is not listed or admitted to trading on
any national securities exchange, the last reported sale price of the Media
Stock (or such other class or series of common stock), or, in case no such sale
takes place on such day, the average of the closing bid and asked prices, in
either case as reported by Nasdaq.
1.5 "Communications Stock" shall mean the class of U S WEST Communications
Group Common Stock, par value $.01 per share, of the Corporation or any other
class of stock resulting from (a) successive changes or reclassifications of
such stock consisting solely of changes in par value, or from par value to no
par value or (b) a subdivision or combination, and in any such case including
any shares thereof authorized after the date of the Certificate, together with
any associated rights to purchase other securities of the Corporation which are
at the time represented by the certificates representing such shares.
1.6 "Conversion Date" shall have the meaning set forth in Section 3.5.
1.7 "Conversion Price" shall have the meaning set forth in Section 3.1
hereof.
1.8 "Conversion Rate" shall have the meaning set forth in Section 3.1
hereof.
1.9 "Converting Holder" shall have the meaning set forth in Section 3.5
hereof.
1.10 "Current Market Price" on any applicable record date or Redemption Date
referred to in Section 3 or Section 4 shall mean the average of the daily
Closing Prices per share of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) for the
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ten (10) consecutive Trading Days ending on the third (3rd) Trading Day
immediately preceding such record date, Conversion Date or Redemption Date.
1.11 "Dividend Payment Date" shall have the meaning set forth in Section 2.1
hereof.
1.12 "Effective Time" shall mean the effective time of the Merger.
1.13 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
1.14 "Junior Stock" shall mean the Media Stock, the Communications Stock and
the shares of any other class or series of stock of the Corporation which, by
the terms of the Certificate of Incorporation or of the instrument by which the
Board of Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix the relative rights, preferences and limitations
thereof, shall be junior to the Series E Stock in respect of the right to
receive dividends or to participate in any distribution of assets other than by
way of dividends.
1.15 "Liquidation Value" shall have the meaning set forth in Section 6.2
hereof.
1.16 "Media Group Disposition Redemption" shall have the meaning set forth in
Section 4.1 hereof.
1.17 "Media Group Disposition Dividend" shall have the meaning set forth in
Section 4.1 hereof.
1.18 "Media Group Special Dividend" shall have the meaning set forth in
Section 4.1 hereof.
1.19 "Media Group Special Events" shall have the meaning set forth in Section
4.1 hereof.
1.20 "Media Group Subsidiary Redemption" shall have the meaning set forth in
Section 4.1 hereof.
1.21 "Media Stock" shall mean the class of U S WEST Media Group Common Stock,
par value $.01 per share, of the Corporation (or, following the
recharacterization described in Section 1 of Article V of the Certificate of
Incorporation, the class of Common Stock, par value $.01 per share, of the
Corporation) or any other class of stock resulting from (a) successive changes
or reclassifications of such stock consisting solely of changes in par value, or
from par value to no par value or (b) a subdivision or combination, and in any
such case including any shares thereof authorized after the date of the
Certificate, together with any associated rights to purchase other securities of
the Corporation which are at the time represented by the certificates
representing such shares.
1.22 "Media Group Tender or Exchange Offer" shall have the meaning set forth
in Section 4.1 hereof.
1.23 "Merger" shall mean the merger of Booth Communications of SE Michigan,
Inc., a Michigan corporation, Booth Communications of Mid-Michigan, Inc., a
Michigan corporation, and Booth Communications of Mid-Michigan Assets, Inc., a
Michigan corporation, with and into MediaOne of Michigan, Inc., a Delaware
corporation, pursuant to the terms of the Merger Agreement.
1.24 "Merger Agreement" shall mean the Agreement and Plan of Merger, dated as
of December 3, 1996, among the Corporation, MediaOne of Michigan, Inc., a
Delaware corporation, Booth Communications of SE Michigan, Inc., a Michigan
corporation, Booth Communications of Mid-Michigan, Inc., a Michigan corporation,
and Booth Communications of Mid-Michigan Assets, Inc., a Michigan corporation.
1.25 "Nasdaq" shall mean the Nasdaq National Market.
1.26 "NYSE" shall mean the New York Stock Exchange, Inc.
1.27 "Parity Stock" shall mean the Series A Stock, the Series B Stock, the
Series C Stock, the Series D Stock and the shares of any other class or series
of stock of the Corporation (other than Junior Stock) which, by the terms of the
Certificate of Incorporation or of the instrument by which the Board of
Directors, acting pursuant to authority granted in the Certificate of
Incorporation, shall fix
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the relative rights, preferences and limitations thereof, shall, in the event
that the stated dividends thereon are not paid in full, be entitled to share
ratably with the Series E Stock in the payment of dividends, including
accumulations, if any, in accordance with the sums which would be payable on
such shares if all dividends were declared and paid in full, or shall, in the
event that the amounts payable thereon on liquidation are not paid in full, be
entitled to share ratably with the Series E Stock in any distribution of assets
other than by way of dividends in accordance with the sums which would be
payable in such distribution if all sums payable were discharged in full;
PROVIDED, HOWEVER, that the term "Parity Stock" shall be deemed to refer (a) in
Section 6 hereof, to any stock which is Parity Stock in respect of the
distribution of assets; and (b) in Sections 5.1 and 5.2 hereof, to any stock
which is Parity Stock in respect of either dividend rights or the distribution
of assets and which, pursuant to the Certificate of Incorporation or any
instrument in which the Board of Directors, acting pursuant to authority granted
in the Certificate of Incorporation, shall so designate, is entitled to vote
with the holders of Series E Stock.
1.28 "Person" shall mean an individual, corporation, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity.
1.29 "Preferred Stock" shall mean the class of Preferred Stock, par value
$1.00 per share, of the Corporation authorized at the date of the Certificate,
including any shares thereof authorized after the date of the Certificate.
1.30 "Record Date" shall have the meaning set forth in Section 2.1 hereof.
1.31 "Redemption Date" shall mean the date on which the Corporation shall
effect the redemption of all or any part of the outstanding shares of Series E
Stock pursuant to Section 4.1.
1.32 "Redemption Price" for each share of Series E Stock called for
redemption shall be equal to the sum of (a) the Liquidation Value plus (b) an
amount equal to the accrued and unpaid dividends on such share of Series E Stock
to the Redemption Date.
1.33 "Redemption Rescission Event" shall mean the occurrence of (a) any
general suspension of trading in, or limitation on prices for, securities on the
principal national securities exchange on which shares of Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) are registered and listed for trading (or, if shares of Media Stock
(or such other class or series of common stock) are not registered and listed
for trading on any such exchange, in the over-the-counter market) for more than
six-and-one-half (61/2) consecutive trading hours, (b) any decline in either the
Dow Jones Industrial Average or the Standard & Poor's Index of 500 Industrial
Companies (or any successor index published by Dow Jones & Company, Inc. or
Standard & Poor's Corporation) by either (i) an amount in excess of 10%,
measured from the close of business on any Trading Day to the close of business
on the next succeeding Trading Day during the period commencing on the Trading
Day preceding the day notice of any redemption of shares of this Series is given
(or, if such notice is given after the close of business on a Trading Day,
commencing on such Trading Day) and ending at the Redemption Date or (ii) an
amount in excess of 15% (or, if the time and date fixed for redemption is more
than 15 days following the date on which notice of redemption is given, 20%),
measured from the close of business on the Trading Day preceding the day notice
of such redemption is given (or, if such notice is given after the close of
business on a Trading Day, from such Trading Day) to the close of business on
any Trading Day on or prior to the Redemption Date, (c) a declaration of a
banking moratorium or any suspension of payments in respect of banks by Federal
or state authorities in the United States or (d) the commencement of a war or
armed hostilities or other national or international calamity directly or
indirectly involving the United States which in the reasonable judgment of the
Corporation could have a material adverse effect on the market for the Media
Stock (or such other class or series of common stock into which shares of this
Series are then convertible).
1.34 "Rescission Date" shall have the meaning set forth in Section 4.5
hereof.
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1.35 "Senior Stock" shall mean the shares of any class or series of stock of
the Corporation which, by the terms of the Certificate of Incorporation or of
the instrument by which the Board of Directors, acting pursuant to authority
granted in the Certificate of Incorporation, shall fix the relative rights,
preferences and limitations thereof, shall be senior to the Series E Stock in
respect of the right to receive dividends or to participate in any distribution
of assets other than by way of dividends.
1.36 "Series A Stock" shall mean the series of Preferred Stock authorized and
designated as Series A Junior Participating Cumulative Preferred Stock at the
date of the Certificate, including any shares thereof authorized and designated
after the date of the Certificate.
1.37 "Series B Stock" shall mean the series of Preferred Stock authorized and
designated as Series B Junior Participating Cumulative Preferred Stock at the
date of the Certificate, including any shares thereof authorized and designated
after the date of the Certificate.
1.38 "Series C Stock" shall mean the series of Preferred Stock authorized and
designated as Series C Cumulative Redeemable Preferred Stock at the date of the
Certificate, including any shares thereof authorized and designated after the
date of the Certificate.
1.39 "Series D Stock" shall mean the series of Preferred Stock authorized and
designated as Series D Convertible Preferred Stock at the date of the
Certificate, including any shares thereof authorized and designated after the
date of the Certificate.
1.40 "Series E Stock" and "this Series" shall mean the series of Preferred
Stock authorized and designated as the Series E Convertible Preferred Stock,
including any shares thereof authorized and designated after the date of the
Certificate.
1.41 "Surrendered Shares" shall have the meaning set forth in Section 3.5
hereof.
1.42 "Trading Day" shall mean, so long as the Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) is listed or admitted to trading on the NYSE, a day on which the
NYSE is open for the transaction of business, or, if the Media Stock (or such
other class or series of common stock) is not listed or admitted to trading on
the NYSE, a day on which the principal national securities exchange on which the
Media Stock (or such other class or series of common stock) is listed is open
for the transaction of business, or, if the Media Stock (or such other class or
series of common stock) is not so listed or admitted for trading on any national
securities exchange, a day on which Nasdaq is open for the transaction of
business.
2. DIVIDENDS.
2.1 The holders of the outstanding shares of Series E Stock shall be
entitled to receive dividends, as and when declared by the Board of Directors
out of funds legally available therefor. Each dividend shall be at the annual
rate equal to 6.342% per share of Series E Stock (which is equivalent to $0.79
quarterly and $3.17 annually per share). All dividends shall be payable in cash
on or about the first day of February, May, August and November in each year,
beginning on the first such date that is more than 15 days after the Effective
Time, as fixed by the Board of Directors, or such other dates as are fixed by
the Board of Directors (each a "Dividend Payment Date"), to the holders of
record of Series E Stock at the close of business on or about the 15th day of
the month next preceding such first day of February, May, August and November,
as the case may be, as fixed by the Board of Directors, or such other dates as
are fixed by the Board of Directors (each a "Record Date"). Such dividends shall
accrue on each share cumulatively on a daily basis, whether or not there are
unrestricted funds legally available for the payment of such dividends and
whether or not earned or declared, from and after the day immediately succeeding
the Effective Time and any such dividends that become payable for any partial
dividend period shall be computed on the basis of the actual days elapsed in
such period. All dividends that accrue in accordance with the foregoing
provisions shall be cumulative from and after the day immediately succeeding the
Effective Time. The per share dividend amount payable to each holder of record
of Series E Stock on any Dividend Payment Date shall be rounded to the
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nearest cent. The dividend rate per share of this Series shall be appropriately
adjusted from time to time to reflect any split or combination of the shares of
this Series.
2.2 Except as hereinafter provided in this Section 2.2 and except for
redemptions by the Corporation pursuant to Sections 4.1(b), 4.1(c)(i),
4.1(c)(iii) or 4.1(d), unless all dividends on the outstanding shares of Series
E Stock and any Parity Stock that shall have accrued through any prior Dividend
Payment Date shall have been paid in full, or declared and funds set apart for
payment thereof, no dividend or other distribution (payable other than in shares
of Junior Stock) shall be paid to the holders of Junior Stock or Parity Stock,
and no shares of Series E Stock, Parity Stock or Junior Stock shall be
purchased, redeemed or otherwise acquired by the Corporation or any of its
subsidiaries (except by conversion into or exchange for Junior Stock), nor shall
any monies or any other properties be paid or made available for a purchase,
redemption or sinking fund for the purchase or redemption of any Series E Stock,
Junior Stock or Parity Stock. When dividends are not paid in full upon the
shares of this Series and any Parity Stock, all dividends declared upon shares
of this Series and all Parity Stock shall be declared pro rata so that the
amount of dividends declared per share on this Series and all such Parity Stock
shall in all cases bear to each other the same ratio that accrued dividends per
share on the shares of this Series and all such Parity Stock bear to each other.
No interest, or sum of money in lieu of interest, shall be payable in respect of
any dividend payment or payments on this Series which may be in arrears.
3. CONVERSION RIGHTS.
3.1 (a) Subject to Section 3.1(b), each holder of a share of this Series
shall have the right, at any time after receipt of a notice of redemption given
by the Corporation pursuant to (i) Section 4.3(a) with respect to a redemption
pursuant to Section 4.1(a), or (ii) Section 4.3(b) with respect to a redemption
in connection with a Media Group Subsidiary Redemption, or (iii) Section 4.3(c)
with respect to a redemption in connection with a Media Group Disposition
Dividend, or (iv) pursuant to Section 4.3(d) with respect to a redemption in
connection with a Media Group Disposition Redemption following a Disposition of
all (not merely substantially all) of the properties and assets attributed to
the Media Group, or (v) Section 4.3(e) with respect to a redemption in
connection with a Media Group Disposition Redemption following Disposition of
substantially all (but not all) of the properties and assets attributed to the
Media Group, or (vi) Section 4.3(f) with respect to a redemption in connection
with a Media Group Tender or Exchange Offer, to convert such share into a number
of shares of Media Stock (or such other class or series of common stock into
which shares of this Series are then convertible) equal to the quotient of (a)
the product of (i) the Liquidation Value per share of the Series E Stock
multiplied by (ii) 0.95, divided by (b) the Current Market Price, subject to
adjustment as provided in this Section 3 (such rate, as so adjusted from time to
time, is herein called the "Conversion Rate"; and the "Conversion Price" at any
time shall mean the Redemption Price per share divided by the Conversion Rate in
effect at such time (rounded to the nearest one hundredth of a cent)).
(b) The right of a holder of a share of this Series called for redemption
pursuant to Sections 4.1(a) to convert such share into Media Stock (or such
other class or series of common stock into which shares of this Series are then
convertible) pursuant to Section 3.1(a) shall terminate at the close of business
on the Redemption Date unless the Corporation defaults in the payment of the
Redemption Price or, in the case of a redemption pursuant to Section 4.1(a), the
Corporation exercises its right to rescind such redemption pursuant to Section
4.5, in which case such right of conversion shall not terminate at the close of
business on such date. The right of a holder of a share of this Series called
for redemption pursuant to Section 4.1(b): (i) in connection with a Media Group
Subsidiary Redemption, a Media Group Tender or Exchange Offer or a Media Group
Disposition Redemption involving a Disposition of all (not merely substantially
all) of the properties and assets attributed to the Media Group, to convert such
share into Media Stock pursuant to Section 3.1(a) shall terminate at the close
of business on the Redemption Date; (ii) in connection with a Media Group
Disposition Dividend or Media Group Special Dividend, to convert such share into
Media Stock pursuant to Section 3.1(a) shall
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terminate at the close of business on the record date for determining holders
entitled to receive such dividend; and (iii) in connection with a Media Group
Disposition Redemption involving a Disposition of substantially all (but not
all) of the properties and assets attributed to the Media Group, to convert such
share into Media Stock shall terminate at the close of business on the date on
which shares of Media Stock are selected to be redeemed in such Media Group
Disposition Redemption, unless, in any of the foregoing cases, the Corporation
defaults in the payment of the Redemption Price or the conditions to such
redemption set forth in the last sentence of Section 4.1(b) shall not have been
satisfied, in which event such right of conversion shall not terminate at the
close of business on such date. In the event the Corporation converts all of the
outstanding shares of Media Stock into shares of Communications Stock (or, if
the Communications Stock is not Publicly Traded at such time and shares of any
other class or series of common stock of the Corporation (other than Media
Stock) are then Publicly Traded, of such other class or series of common stock
as has the largest Market Capitalization), the right of a holder of a share of
this Series called for redemption pursuant to Section 4.1(d) in connection with
an event substantially similar to a Media Group Special Event to convert such
share into Communications Stock (or such other class or series of common stock)
shall terminate on a date comparable to the date specified in the preceding
sentence with respect to a Media Group Special Event substantially similar to
such event.
3.2 If any shares of this Series are surrendered for conversion subsequent
to the Record Date preceding a Dividend Payment Date but on or prior to such
Dividend Payment Date (except shares called for redemption on a Redemption Date
between such Record Date and Dividend Payment Date and with respect to which
such redemption has not been rescinded), the registered holder of such shares at
the close of business on such Record Date shall be entitled to receive the
dividend, if any, payable on such shares on such Dividend Payment Date
notwithstanding the conversion thereof. Except as provided in this Section 3.2,
no adjustments in respect of payments of dividends on shares surrendered for
conversion or any dividend on the Media Stock issued upon conversion shall be
made upon the conversion of any shares of this Series.
3.3 The Corporation may, but shall not be required to, in connection with
any conversion of shares of this Series, issue a fraction of a share of Media
Stock, and if the Corporation shall determine not to issue any such fraction,
the Corporation shall, subject to Section 3.6(c), make a cash payment (rounded
to the nearest cent) equal to such fraction multiplied by the Closing Price of
the Media Stock on the last Trading Day prior to the date of conversion.
3.4 Any holder of shares of this Series electing to convert such shares into
Media Stock shall surrender the certificate or certificates for such shares at
the office of the transfer agent or agents therefor (or at such other place in
the United States as the Corporation may designate by notice to the holders of
shares of this Series) during regular business hours, duly endorsed to the
Corporation or in blank, or accompanied by instruments of transfer to the
Corporation or in blank, or in form satisfactory to the Corporation, and shall
give written notice to the Corporation at such office that such holder elects to
convert such shares of this Series. The Corporation shall, as soon as
practicable and in any event within five Trading Days (subject to Section
3.6(c)) after such surrender of certificates for shares of this Series,
accompanied by the written notice above prescribed, issue and deliver at such
office to the holder for whose account such shares were surrendered, or to his
nominee, (a) certificates representing the number of shares of Media Stock to
which such holder is entitled upon such conversion and (b) if less than the full
number of shares of this Series represented by such certificate or certificates
is being converted, a new certificate of like tenor representing the shares of
this Series not converted.
3.5 Conversion shall be deemed to have been made immediately prior to the
close of business as of the date that certificates for the shares of this Series
to be converted, and the written notice prescribed in Section 3.4, are received
by the transfer agent or agents for this Series (such date being referred to
herein as the "Conversion Date"). The Person entitled to receive the Media Stock
issuable upon such conversion shall be treated for all purposes as the record
holder of such Media Stock as of
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the close of business on the Conversion Date and such conversion shall be at the
Conversion Rate in effect on such date. Notwithstanding anything to the contrary
contained herein, in the event the Corporation shall have rescinded a redemption
of shares of this Series pursuant to Section 4.5, any holder of shares of this
Series that shall have surrendered shares of this Series for conversion
following the day on which notice of the redemption shall have been given but
prior to the later of (a) the close of business on the Trading Day next
succeeding the date on which public announcement of the rescission of such
redemption shall have been made and (b) the date which is three Trading Days
following the mailing of the notice of rescission required by Section 4.5 (a
"Converting Holder") may rescind the conversion of such shares surrendered for
conversion by (i) properly completing a form prescribed by the Corporation and
mailed to holders of shares of this Series (including Converting Holders) with
the Corporation's notice of rescission, which form shall provide for the
certification by any Converting Holder rescinding a conversion on behalf of any
beneficial owner (within the meaning of Rule 13d-3 under the Exchange Act) of
shares of this Series that the beneficial ownership (within the meaning of such
Rule) of such shares shall not have changed from the date on which such shares
were surrendered for conversion to the date of such certification and (ii)
delivering such form to the Corporation no later than the close of business on
that date which is fifteen (15) Trading Days following the date of the mailing
of the Corporation's notice of rescission. The delivery of such form by a
Converting Holder shall be accompanied by (A) any certificates representing
shares of Media Stock issued to such Converting Holder upon a conversion of
shares of this Series that shall be rescinded by the proper delivery of such
form (the "Surrendered Shares"), (B) any securities, evidences of indebtedness
or assets (other than cash) distributed by the Corporation to such Converting
Holder by reason of such Converting Holder's being a record holder of the
Surrendered Shares and (C) payment in New York Clearing House funds or other
funds acceptable to the Corporation of an amount equal to the sum of (I) any
cash such Converting Holder may have received in lieu of the issuance of
fractional shares upon conversion and (II) any cash paid or payable by the
Corporation to such Converting Holder by reason of such Converting Holder being
a record holder of the Surrendered Shares. Upon receipt by the Corporation of
any such form properly completed by a Converting Holder and any certificates,
securities, evidences of indebtedness, assets or cash payments required to be
returned or made by such Converting Holder to the Corporation as set forth
above, the Corporation shall instruct the transfer agent or agents for shares of
Media Stock and shares of this Series to cancel any certificates representing
the Surrendered Shares (which Surrendered Shares shall be deposited in the
treasury of the Corporation) and reissue certificates representing shares of
this Series to such Converting Holder (which shares of this Series shall,
notwithstanding their surrender for conversion, be deemed to have been
outstanding at all times). The Corporation shall, as promptly as practicable,
and in no event more than five (5) Trading Days, following the receipt of any
such properly completed form and any such certificates, securities, evidences of
indebtedness, assets or cash payments required to be so returned or made, pay to
the Converting Holder or as otherwise directed by such Converting Holder any
dividend or other payment made on such shares of this Series Stock during the
period from the time such shares shall have been surrendered for conversion to
the rescission of such conversion. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any form submitted to
the Corporation to rescind the conversion of shares of this Series, including
questions as to the proper completion or execution of any such form or any
certification contained therein, shall be resolved by the Corporation, whose
good faith determination shall be final and binding. The Corporation shall not
be required to deliver certificates for shares of Media Stock while the stock
transfer books for such stock or for this Series are duly closed for any purpose
(but not for a period in excess of two Trading Days) or during any period
commencing at a Redemption Rescission Event and ending at either (1) the time
and date at which the Corporation's right of rescission shall expire pursuant to
Section 4.5 if the Corporation shall not have exercised such right or (2) the
close of business on that day which is fifteen (15) Trading Days following the
date of the mailing of a notice of rescission pursuant to Section 4.5 if the
Corporation shall have exercised such right of rescission, but certificates for
shares of Media Stock
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shall be delivered as soon as practicable after the opening of such books or the
expiration of such period.
3.6 The Conversion Rate shall be adjusted from time to time as follows for
events occurring after the Effective Time:
(a) The Corporation shall be entitled to make such increases in the
Conversion Rate as shall be determined by the Board of Directors to be
necessary in order that any dividend or distribution in Media Stock, any
subdivision, reclassification or combination of shares of Media Stock or any
issuance of rights or warrant to purchase shares of Media Stock, shall not
be taxable to the holders of Media Stock for United States Federal income
tax purposes.
(b) To the extent permitted by applicable law, the Corporation may from
time to time increase the Conversion Rate by any amount for any period of
time if the period is at least 20 Trading Days, the increase is irrevocable
during such period and the Board of Directors shall have made a
determination that such increase would be in the best interests of the
Corporation, which determination shall be conclusive.
(c) In any case in which an adjustment to the Conversion Rate pursuant
to this Section 3.6 is to be made effective as of or immediately following a
record date, the Corporation may elect to defer (but only for five (5)
Trading Days following the occurrence of the event which necessitates the
filing of the statement referred to in Section 3.9(a)) issuing to the holder
of any shares of this Series converted after such record date (i) the shares
of Media Stock and other capital stock of the Corporation issuable upon such
conversion over and above the shares of Media Stock and other capital stock
of the Corporation issuable upon such conversion on the basis of the
Conversion Rate prior to adjustment and (ii) paying to such holder any
amount in cash in lieu of any fraction thereof pursuant to Section 3.3;
PROVIDED, HOWEVER, that the Corporation shall deliver to such holder a due
bill or other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event requiring
such adjustment.
(d) Subject to Section 3.6(a) hereof, no adjustment shall be made
pursuant to this Section 3.6 with respect to any share of Series E Stock
that is converted prior to the time such adjustment otherwise would be made.
3.7 In case of (a) any consolidation or merger to which the Corporation is a
party, other than a merger or consolidation in which the Corporation is the
surviving or continuing corporation and which does not result in any
reclassification of, or change (other than a change in par value or from par
value to no par value or from no par value to par value, or as a result of a
subdivision or combination) in, outstanding shares of Media Stock (or such other
class or series of common stock into which shares of this Series are then
convertible) or (b) any sale or conveyance of all or substantially all of the
property and assets of the Corporation, then lawful provision shall be made as
part of the terms of such transaction whereby the holder of each share of Series
E Stock which is not converted into the right to receive stock or other
securities and property in connection with such transaction shall have the right
thereafter, during the period such share shall be convertible, to convert such
share into the kind and amount of shares of stock or other securities and
property receivable upon such consolidation, merger, sale or conveyance by a
holder of the number of shares of Media Stock (or such other class or series of
common stock into which shares of this Series are then convertible) into which
such shares of this Series could have been converted immediately prior to such
consolidation, merger, sale or conveyance (assuming that shares of this Series
were then convertible pursuant to Section 3.1), subject to adjustment which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Section 3. If holders of Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) are
entitled to elect the kind or amount of securities or other property receivable
upon such consolidation, merger, sale or conveyance, all adjustments made
pursuant to this Section 3.7 shall be based upon (i) the election, if any, made
in writing to the Secretary of
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the Corporation by the record holder of the largest number of shares of Series E
Stock prior to the earlier of (A) the last date on which a holder of Media Stock
(or such other class or series of common stock) may make such an election and
(B) the date which is five (5) Trading Days prior to the record date for
determining the holders of Media Stock (or such other class or series of common
stock) entitled to participate in the transaction (or if no such record date is
established, the effective date of such transaction) or (ii) if no such election
is timely made, an assumption that each holder of Shares of this Series failed
to exercise such rights of election (provided that if the kind or amount of
securities or other property receivable upon such consolidation, merger, sale or
conveyance is not the same for each nonelecting share, then the kind and amount
of securities or other property receivable upon such consolidation, merger, sale
or conveyance for each nonelecting share shall be deemed to be the kind and
amount so receivable per share by a plurality of the nonelecting shares).
Concurrently with the mailing to holders of Media Stock (or such other class or
series of common stock) of any document pursuant to which such holders may make
an election regarding the kind or amount of securities or other property that
will be receivable by such holder in any transaction described in clause (a) or
(b) of the first sentence of this Section 3.7, the Corporation shall mail a copy
thereof to the holders of shares of the Series E Stock. The Corporation shall
not enter into any of the transactions referred to in clauses (a) or (b) of the
first sentence of this Section 3.7 unless, prior to the consummation thereof,
effective provision shall be made in a certificate or articles of incorporation
or other constituent document or written instrument of the Corporation or the
entity surviving the consolidation or merger, if other than the Corporation, or
the entity acquiring the Corporation's assets, unless, in either case, such
entity is a direct or indirect subsidiary of another entity, in which case such
provision shall be made in the certificate or articles of incorporation or other
constituent document or written instrument of such other entity (any such entity
or other entity being the "Surviving Entity") so as to assume the obligation to
deliver to each holder of shares of Series E Stock such stock or other
securities and property and otherwise give effect to the provisions set forth in
this Section 3.7. The provisions of this Section 3.7 shall apply similarly to
successive consolidations, mergers, sales or conveyances.
3.8 After the date, if any, on which all outstanding shares of Media Stock
(or such other class or series of common stock into which shares of this Series
are then convertible) are converted into or exchanged for shares of another
class or series of common stock of the Corporation, each share of this Series
shall thereafter be convertible into or exchangeable for the number of shares of
such other class or series of common stock receivable upon such conversion or
exchange equal to the quotient of (a) $50 divided by (b) the product of (i) 0.95
multiplied by (ii) the Current Market Price for such other class or series of
common stock. From and after any such conversion or exchange, Conversion Rate
adjustments as nearly equivalent as may be practicable to the adjustments
pursuant to Sections 3.6 and 3.7 which, prior to such exchange, were made in
respect of Media Stock (or such other class or series of common stock into which
shares of this Series are then convertible) shall instead be made pursuant to
such Sections 3.6 and 3.7 in respect of shares of such other class or series of
common stock.
3.9 (a) Whenever the Conversion Rate is adjusted as provided in this Section
3, the Corporation (or, in the case of Section 3.7, the Corporation or the
Surviving Entity, as the case may be) shall forthwith place on file with its
transfer agent or agents for this Series a statement signed by a duly authorized
officer of the Corporation or the Surviving Entity, as the case may be, stating
the adjusted Conversion Rate determined as provided herein. Such statements
shall set forth in reasonable detail such facts as shall be necessary to show
the reason for and the manner of computing such adjustment. Promptly after the
adjustment of the Conversion Rate, the Corporation or the Surviving Entity, as
the case may be, shall mail a notice thereof to each holder of shares of this
Series. Whenever the Conversion Rate is increased pursuant to Section 3.6(b),
such notice shall be mailed to each holder of shares of this Series as promptly
as possible after the Corporation shall have determined to effect such increase
and, in any event, at least 15 Trading Days prior to the date such increased
Conversion Rate takes effect, and such notice shall state such increased
Conversion Rate and the period during which it
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will be in effect. Where appropriate, the notice required by this Section 3.9(a)
may be given in advance and included as part of the notice required pursuant to
Section 3.9(b) or 3.9(c).
(b) Subject to the provisions of Section 3.9(c), if: (i) the Corporation
takes any action that would require an adjustment of the Conversion Rate
pursuant to Sections 3.6 through 3.8;(ii) there shall be any consolidation or
merger to which the Corporation is a party and for which approval of any
stockholders of the Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation; or (iii) there shall occur
the voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, then the Corporation shall, as promptly as possible, but at least
10 Trading Days prior to the record date or other date set for definitive action
if there shall be no record date, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of outstanding
shares of this Series stating the action or event for which such notice is being
given and the record date for and the anticipated effective date of such action
or event. Failure to give or receive such notice or any defect therein shall not
affect the legality or validity of the related transaction.
(c) If the Corporation intends to convert all of the outstanding shares
of Media Stock into shares of Communications Stock (or, if the Communications
Stock is not Publicly Traded at such time and shares of any other class or
series of common stock of the Corporation (other than Media Stock) are then
Publicly Traded, of such other class or series of common stock as has the
largest Market Capitalization) (as provided in Section 2.4 of Article V of the
Certificate of Incorporation), then the Corporation shall, not later than the
35th Trading Day and not earlier than the 45th Trading Day prior to the date of
such conversion, cause notice to be filed with the transfer agent or agents for
this Series and given to each record holder of shares of this Series, setting
forth: (i) a statement that all outstanding shares of Media Stock shall be
converted; (ii) the date of such conversion; (iii) the per share number of
shares of Communications Stock (or such other class or series of common stock)
to be received with respect to each share of Media Stock, including details as
to the calculation thereof; (iv) a statement to the effect that, subject to
Section 2.4.5(I) of Article V of the Certificate of Incorporation, dividends on
shares of such Media Stock shall cease to be paid as of the date of such
conversion; and (v) a statement as to what such holder will be entitled to
receive pursuant to the terms of Section 3.8 if such holder thereafter properly
converts shares of this Series. In addition, from and after any conversion of
Media Stock effected in accordance with Section 2.4 of Article V of the
Certificate of Incorporation, if (A) a class or series of common stock of the
Corporation exists in addition to the class or series of common stock into which
the Media Stock was converted and (B) the Corporation intends to convert the
class or series of common stock into which the Media Stock was converted into
another such class or series of common stock of the Corporation, then the
Corporation shall give notice comparable to the notice described in the
preceding sentence of its intention to effect such a conversion. In the event of
any conflict between the notice provisions of this Section 3.9(c) and Section
3.9(b), the notice provisions of this Section 3.9(c) shall govern.
3.10 There shall be no adjustment of the Conversion Rate in case of the
issuance of any stock of the Corporation in a reorganization, acquisition or
other similar transaction except as specifically set forth in this Section 3. If
any action or transaction would require adjustment of any Conversion Rate
established hereunder pursuant to more than one paragraph of this Section 3,
only the adjustment which would result in the largest increase of such
Conversion Rate shall be made.
3.11 The Corporation shall at all times reserve and keep available, free from
preemptive rights, out of its authorized but unissued stock, for the purpose of
effecting the conversion of the shares of this Series, such number of its duly
authorized shares of Media Stock (or, if applicable, any other shares of Capital
Stock of the Corporation) as shall from time to time be sufficient to effect the
conversion of all outstanding shares of this Series into such Media Stock (or
such other shares of Capital Stock) at any time; PROVIDED, HOWEVER, that nothing
contained herein shall preclude the Corporation from satisfying its obligations
in respect of the conversion of the shares by delivery of purchased shares of
Media Stock
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(or such other shares of Capital Stock) that are held in the treasury of the
Corporation. All shares of Media Stock (or such other shares of Capital Stock of
the Corporation) which shall be deliverable upon conversion of the shares of
this Series shall be duly and validly issued, fully paid and nonassessable. For
purposes of this Section 3, the number of shares of Media Stock or any other
class or series of common stock of the Corporation at any time outstanding shall
not include any shares of Media Stock or such other class or series of common
stock then owned or held by or for the account of Corporation or any subsidiary
of the Corporation.
3.12 If any shares of Media Stock (or such other class or series of common
stock into which shares of this Series are then convertible) which would be
issuable upon conversion of shares of this Series hereunder require registration
with or approval of any governmental authority before such shares may be issued
upon conversion, the Corporation will in good faith and as expeditiously as
possible cause such shares to be duly registered or approved, as the case may
be. The Corporation will endeavor to list the shares of (or depositary shares
representing fractional interests in) Media Stock (or such other class or series
of common stock into which shares of this Series are then convertible) required
to be delivered upon conversion of shares of this Series prior to such delivery
upon the principal national securities exchange upon which the outstanding Media
Stock (or such other class or series of common stock) is listed at the time of
such delivery.
3.13 The Corporation shall pay any and all issue, stamp, documentation,
transfer or other taxes that may be payable in respect of any issue or delivery
of shares of Media Stock (or such other class or series of common stock into
which shares of this Series are then convertible) on conversion of shares of
this Series pursuant hereto. The Corporation shall not, however, be required to
pay any tax which is payable in respect of any transfer involved in the issue or
delivery of Media Stock (or such other class or series of common stock) in a
name other than that in which the shares of this Series so converted were
registered, and no such issue or delivery shall be made unless and until the
Person requesting such issue has paid to the Corporation the amount of such tax,
or has established, to the satisfaction of the Corporation, that such tax has
been paid.
4. REDEMPTION.
4.1 (a) The Corporation may, at its sole option, subject to Section 2.2
hereof, from time to time on and after the fifth (5th) anniversary of the
Effective Time, redeem, out of funds legally available therefor, all or any part
of the outstanding shares of this Series at the Redemption Price.
(b) The Corporation shall redeem at the Redemption Price, out of funds
legally available therefor, all of the outstanding shares of this Series, if any
of the following events with respect to the Media Group occur (such events being
collectively referred to herein as the "Media Group Special Events"):
(i) (A) the Corporation redeems all of the outstanding shares of Media
Stock in exchange for shares of common stock of the Media Group Subsidiaries
as provided in Section 2.4.3 of Article V of the Certificate of
Incorporation (the "Media Group Subsidiary Redemption") or (B) following a
Disposition of all or substantially all of the properties and assets
attributed to the Media Group, the Corporation either (I) pays a dividend on
the Media Stock in an amount equal to the product of the Outstanding Media
Fraction multiplied by the Fair Value of the Net Proceeds of such
Disposition as provided in Section 2.4.1(A)(1)(a) of Article V of the
Certificate of Incorporation (the "Media Group Disposition Dividend"), or
(II) redeems shares of Media Stock for an amount equal to the product of the
Outstanding Media Fraction multiplied by the Fair Value of the Net Proceeds
of such Disposition as provided in Section 2.4.1(A)(1)(b) of Article V of
the Certificate of Incorporation (the "Media Group Disposition Redemption");
or
(ii) the Corporation pays a dividend on, or the Corporation or any of
its subsidiaries consummates a tender offer or exchange offer for, shares of
Media Stock and the aggregate amount of such dividend or the consideration
paid in such tender offer or exchange offer is an amount equal
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to the Fair Value of all or substantially all of the properties and assets
attributed to the Media Group (the "Media Group Special Dividend" or the
"Media Group Tender or Exchange Offer", respectively); PROVIDED, HOWEVER,
that the calculation of the Fair Value of all or substantially all of the
properties and assets attributed to the Media Group shall be made without
giving effect to any money borrowed by the Corporation or any of its
subsidiaries in connection with such dividend or tender offer or exchange
offer, as the case may be.
The Redemption Date for shares of this Series to be redeemed by the Corporation
pursuant to this Section 4.1(b) shall be, if the applicable Media Group Special
Event is (1) the Media Group Subsidiary Redemption, the date of such exchange,
(2) the Media Group Disposition Dividend or the Media Group Special Dividend,
the date of payment of such dividend, (3) the Media Group Disposition
Redemption, the date of such redemption or (4) the Media Group Tender or
Exchange Offer, the date such tender offer or exchange offer is consummated.
Notwithstanding anything to the contrary contained in this Section 4.1(b), any
redemption pursuant to this Section 4.1(b) shall be conditioned upon the actual
redemption of Media Stock for shares of common stock of the Media Group
Subsidiaries, payment of the Media Group Disposition Dividend or the amount due
as a result of the Media Group Disposition Redemption (in each case in the
required kind of capital stock, cash, securities and/or other property), payment
of the Media Group Special Dividend or the consummation of the Media Group
Tender or Exchange Offer, as the case may be.
(c) (i) Commencing with the first Dividend Payment Date after the tenth
(10th) anniversary of the Effective Time and on each anniversary of such
Dividend Payment Date thereafter through the ninth (9th) anniversary of such
Dividend Payment Date, the Corporation shall redeem at the Redemption Price,
out of funds legally available therefor, 49,704 shares of the Series E Stock
or such lesser number of shares of Series E Stock as shall then remain
outstanding.
(ii) Commencing with the first Dividend Payment Date after the tenth
(10th) anniversary of the Effective Time and on each anniversary of such
Dividend Payment Date thereafter through the ninth (9th) anniversary of such
Dividend Payment Date, the Corporation may, at its sole option, subject to
Section 2.2 hereof, redeem at the Redemption Price, out of funds legally
available therefor, 49,704 shares of the Series E Stock or such lesser
number of shares of Series E Stock as shall then remain outstanding.
(iii) The Corporation shall, on the twentieth (20th) anniversary of
the Effective Time, redeem at the Redemption Price, out of funds legally
available therefor, all of the outstanding shares of the Series E Stock.
(d) The Corporation shall redeem, out of funds legally available
therefor, all of the outstanding shares of this Series at the Redemption Price,
if (i) the Corporation converts all of the outstanding shares of Media Stock
into shares of Communications Stock (or, if the Communications Stock is not
Publicly Traded at such time and shares of any other class or series of common
stock of the Corporation (other than Media Stock) are then Publicly Traded, of
such other class or series of common stock as has the largest Market
Capitalization) as provided in Section 2.4 of Article V of the Certificate of
Incorporation and (ii) at any time following such conversion (A) an event
substantially similar to any Media Group Special Event occurs in respect to the
Communications Stock (or such other class or series of common stock) and (B) at
the time of such event shares of another class or series of common stock of the
Corporation (other then Communications Stock or such other class or series of
common stock) are then Publicly Traded. The Redemption Date for, and the
conditions to, any such redemption shall be determined in a manner consistent
with the Redemption Date and conditions set forth in Section 4.1(b) for a
redemption resulting from a substantially similar Media Group Special Event.
4.2 In the event that fewer than all of the outstanding shares of this
Series are to be redeemed pursuant to Section 4.1(a) or 4.1(c), the aggregate
number of shares of this Series held by each holder which will be redeemed shall
be determined by the Corporation by lot or pro rata or by any other
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method as may be determined by the Board of Directors in its sole discretion to
be equitable, and the certificate of the Corporation's Secretary or an Assistant
Secretary filed with the transfer agent or transfer agents for this Series in
respect of such determination by the Board of Directors shall be conclusive.
4.3 (a) If the Corporation determines to redeem shares of this Series
pursuant to Section 4.1(a) or 4.1(c), the Corporation shall, not later than the
15th Trading Day nor earlier than the 60th Trading Day prior to the Redemption
Date, cause notice to be filed with the transfer agent or agents for this Series
and to be given to each record holder of the shares to be redeemed, setting
forth: (i) the Redemption Date; (ii) in the case of a redemption pursuant to
Section 4.1(c)(iii), that all shares of this Series outstanding on the
Redemption Date shall be redeemed by the Corporation; (iii) in the case of a
redemption pursuant to Section 4.1(a) or 4.1(c)(i) or 4.1(c)(ii), the total
number of shares of this Series to be redeemed and, if fewer than all the shares
held by such holder are to be redeemed, the aggregate number of such shares
which will be redeemed; (iv) the Redemption Price (v) in the case of a
redemption pursuant to Section 4.1(a), that shares of this Series called for
redemption may be converted at any time prior to the Redemption Date (unless the
Corporation (A) shall default in payment of the Redemption Price or (B) shall
exercise its right to rescind such redemption pursuant to Section 4.5, in which
case such right of conversion shall not terminate at such time and date); (vi)
in the case of a redemption pursuant to Section 4.1(a), a description of the
manner in which the Conversion Price will be determined in accordance with the
Certificate; (vii) the place or places where certificates for such shares are to
be surrendered for payment of the Redemption Price; and (viii) that dividends on
the shares to be redeemed will cease to accrue on the Redemption Date. Promptly,
following the Redemption Date, the Corporation shall cause notice to be filed
with the transfer agent or agents for this Series and to be given to each record
holder of the shares to be redeemed setting forth the percentage of such
holder's shares which the Corporation has elected to redeem.
(b) If the Corporation determines to effect a Media Group Subsidiary
Redemption, the Corporation shall, not later than the 30th Trading Day and not
earlier than the 45th Trading Day prior to the Redemption Date, cause notice to
be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (i) the Redemption Date
(which, pursuant to the penultimate sentence of Section 4.1(b), shall be the
same as the date specified in clause (viii) below); (ii) that all shares of this
Series outstanding on the Redemption Date shall be redeemed by the Corporation;
(iii) the Redemption Price; (iv) that the redemption of the shares of this
Series shall be conditioned upon the consummation of the Media Group Subsidiary
Redemption; (v) the place or places where certificates for shares of this
Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (vi) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (vii) a statement that all shares of Media Stock
outstanding on the date of the Media Group Subsidiary Redemption shall be
redeemed in exchange for shares of common stock of the Media Group Subsidiaries;
(viii) the date of such Media Group Subsidiary Redemption; (ix) the Outstanding
Media Fraction on the date of such notice; (x) the place or places where
certificates for shares of Media Stock, properly endorsed or assigned for
transfer (unless the Corporation shall waive such requirement), are to be
surrendered for delivery of certificates for shares of the Media Group
Subsidiaries; (xi) a statement to the effect that, subject to Section 2.4.5(I)
of Article V of the Certificate of Incorporation, dividends on the Media Stock
shall cease to be paid as of the Redemption Date; (xii) the number of shares of
Media Stock outstanding and, to the extent determinable on the 3rd Trading Date
prior to the date of such notice, the number of shares of Media Stock into or
for which outstanding Convertible Securities are then convertible, exchangeable
or exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and a description of the manner
in which the Conversion Price will be determined in accordance with the
certificate; and (xiii) that a holder of shares of this Series shall be entitled
to receive shares of common stock of the Media Group Subsidiaries upon the Media
Group Subsidiary Redemption in lieu of the
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<PAGE>
Redemption Price only if such holder converts such shares of this Series on or
prior to the Redemption Date.
(c) If the Corporation determines to effect a Media Group Disposition
Dividend, the Corporation shall, not later than the 30th Trading Day following
the consummation of the Disposition by the Corporation of all or substantially
all of the properties and assets attributed to the Media Group, cause notice to
be filed with the transfer agent or agents for this Series and given to each
record holder of shares of this Series, setting forth: (i) the anticipated
Redemption Date (which, pursuant to the penultimate sentence of Section 4.1(b),
shall be the same as the date specified in clause (viii) below); (ii) that all
shares of this Series outstanding on the Redemption Date shall be redeemed by
the Corporation; (iii) the Redemption Price; (iv) that the redemption of the
shares of this Series shall be conditioned upon the payment of the Media Group
Disposition Dividend; (v) the place or places where certificates for shares of
this Series, properly endorsed or assigned for transfer (unless the Corporation
waives such requirement), are to be surrendered for payment of the Redemption
Price; (vi) that dividends on the shares to be redeemed will cease to accrue on
the Redemption Date; (vii) the record date for determining holders of Media
Stock entitled to receive the Media Group Disposition Dividend, which shall be
not earlier than the 40th Trading Day and not later than the 50th Trading Day
following the consummation of such Disposition; (viii) the anticipated date of
payment of the Media Group Disposition Dividend (which shall not be more than 85
Trading Days following the consummation of such Disposition); (ix) the type of
property to be paid as such dividend in respect of the outstanding shares of
Media Stock; (x) the Net Proceeds of such Disposition; (xi) the Outstanding
Media Fraction on the date of such notice; (xii) the number of outstanding
shares of Media Stock and, to the extent determinable on the 3rd Trading Date
prior to the date of such notice, the number of shares of Media Stock into or
for which outstanding Convertible Securities are then convertible, exchangeable
or exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and a description of the manner
in which the Conversion Price will be determined in accordance with the
Certificate at such time; and (xiii) that a holder of shares of this Series
shall be entitled to receive such dividend in lieu of the Redemption Price only
if such holder properly converts such shares on or prior to the record date
referred to in clause (vii) of this sentence and that shares of this Series
shall not be convertible after such record date.
(d) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of all (not merely substantially all) of the
properties and assets attributed to the Media Group (in accordance with Section
2.4.1(A)(1)(b)(i) of Article V of the Certificate of Incorporation), the
Corporation shall, not later than the 35th Trading Day and not earlier than the
45th Trading Day prior to the Redemption Date, cause notice to be filed with the
transfer agent or agents for this Series and given to each record holder of
shares of this Series, setting forth: (i) the Redemption Date (which, pursuant
to the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (viii) below); (ii) that all shares of this Series
outstanding on the Redemption Date shall be redeemed by the Corporation; (iii)
the Redemption Price; (iv) that the redemption of shares of this Series shall be
conditioned upon the consummation of the Media Group Disposition Redemption; (v)
the place or places where certificates for shares of this Series, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (vi)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (vii) that all shares of Media Stock outstanding on the date of
such Media Group Disposition Redemption shall be redeemed; (viii) the date of
such Media Group Disposition Redemption (which shall not be more than 85 Trading
Days following the consummation of such Disposition); (ix) the type of property
in which the redemption price for the shares of Media Stock to be redeemed is to
be paid; (x) the Net Proceeds of such Disposition; (ix) the Outstanding Media
Fraction on the date of such notice; (xii) the place or places where
certificates for shares of Media Stock, properly endorsed or assigned for
transfer (unless the Corporation waives such requirement), are to be surrendered
for delivery of cash and/or securities or other property; (xii) the number of
outstanding shares of
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<PAGE>
Media Stock and, to the extent determinable on the 3rd Trading Date prior to the
date of such notice, the number of shares of Media Stock into or for which such
outstanding Convertible Securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price thereof, including
the number of outstanding shares of this Series and a description of the manner
in which the Conversion Price will be determined in accordance with the
Certificate; (xiv) that a holder of shares of this Series shall be entitled to
participate in the Media Group Disposition Redemption in lieu of participating
in the redemption of the shares of this Series only if such holder properly
converts such shares of this Series on or prior to the Redemption Date; and (xv)
that, except as otherwise provided by Section 2.4.5(I) of Article V of the
Certificate of Incorporation, dividends on shares of Media Stock shall cease to
be paid as of the Redemption Date.
(e) If the Corporation determines to effect a Media Group Disposition
Redemption following a Disposition of substantially all (but not all) of the
properties and assets attributed to the Media Group (in accordance with Section
2.4.1(A)(1)(b)(ii) of Article V of the Certificate of Incorporation), the
Corporation shall, not later than the 30th Trading Day following the
consummation of such Disposition, cause notice to be filed with the transfer
agent or agents for this Series and given to each record holder of shares of
this Series, setting forth: (i) the anticipated Redemption Date (which, pursuant
to the penultimate sentence of Section 4.1(b), shall be the same as the date
specified in clause (viii) below); (ii) that all shares of this Series
outstanding on the Redemption Date shall be redeemed by the Corporation; (iii)
the Redemption Price; (iv) that the redemption of shares of this Series shall be
conditioned upon the consummation of the Media Group Disposition Redemption; (v)
the place or places where certificates for shares of this Series, properly
endorsed or assigned for transfer (unless the Corporation waives such
requirement), are to be surrendered for payment of the Redemption Price; (vi)
that dividends on the shares to be redeemed will cease to accrue on the
Redemption Date; (vii) a date not earlier than the 40th Trading Day and not
later than the 50th Trading Day following the consummation of such Disposition
on which shares of Media Stock shall be selected for redemption pursuant to such
Media Group Disposition Redemption; (viii) the anticipated date of such Media
Group Disposition Redemption (which shall not be more than 85 Trading Days
following the consummation of such Disposition); (ix) the type of property in
which the redemption price for the shares of Media Stock to be redeemed is to be
paid; (x) the Net Proceeds of such Disposition; (xi) the Outstanding Media
Fraction; (xii) the number of shares of Media Stock outstanding and, to the
extent determinable on the 3rd Trading Date prior to the date of such notice,
the number of shares of Media Stock into or for which outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, including the number of outstanding shares
of this Series and a description of the manner in which the Conversion Price
will be determined in accordance with the Certificate; (xiii) that a holder of
shares of this Series shall be eligible to participate in such selection for
redemption pursuant to such Media Group Disposition Redemption in lieu of
participating in the redemption of shares of this Series only if such holder
properly converts such shares of this Series on or prior to the date referred to
in clause (vii) of this sentence and that shares of this Series shall not be
convertible after such date; and (xiv) a statement that the Corporation will not
be required to register a transfer of any shares of Media Stock for a period of
15 Trading Days next preceding the date referred to in clause (vii) of this
sentence.
(f) If the Corporation determines to effect a Media Group Special
Dividend, the Corporation shall, not later than the 45th Trading Day and not
earlier than the 60th Trading day prior to the date of payment of such dividend,
cause notice to be filed with transfer agent or agent for this Series and given
to each record holder of shares of this Series, setting forth: (i) the
anticipated Redemption Date (which, pursuant to the penultimate sentence of
Section 4.1(b), shall be the same as the date specified in clause (viii) below);
(ii) that all shares of this Series outstanding on the Redemption Date shall be
redeemed by the Corporation; (iii) the Redemption Price; (iv) that the
redemption of the shares of this Series shall be conditioned upon the payment of
the Media Group Special Dividend; (v) the place or places where certificates for
shares of this Series, properly endorsed or assigned for transfer (unless the
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<PAGE>
Corporation waives such requirement), are to be surrendered for payment of the
Redemption Price; (vi) that dividends on the shares to be redeemed will cease to
accrue on the Redemption Date; (vii) the record date for determining holders of
Media Stock entitled to receive the Media Group Special Dividend, which shall be
not earlier than the 20th Trading Day prior to the date of payment of such
dividend; (viii) the anticipated date of payment of the Media Group Special
Dividend; (ix) the type of property to be paid as such dividend in respect of
the outstanding shares of Media Stock; (x) the Outstanding Media Fraction on the
date of such notice; (xi) the number of outstanding shares of Media Stock and,
to the extent determinable on the 3rd Trading Date prior to the date of such
notice, the number of shares of Media Stock into or for which outstanding
Convertible Securities are then convertible, exchangeable or exercisable and the
conversion, exchange or exercise price thereof, including the number of
outstanding shares of this Series and a description of the manner in which the
Conversion Price will be determined in accordance with the Certificate; and
(xii) that a holder of shares of this Series shall be entitled to receive such
dividend in lieu of the Redemption Price only if such holder properly converts
such shares on or prior to the record date referred to in clause (vii) of this
sentence and that shares of this Series shall not be convertible after such
record date.
(g) If the Corporation or any of its subsidiaries determines to effect a
Media Group Tender or Exchange Offer, the Corporation shall, on the date of the
public announcement of such tender offer or exchange offer by the Corporation or
any of its subsidiaries but in any event not later than the 35th Trading Day
prior to such redemption, cause notice to be filed with the transfer agent or
agent for this Series and given to each record holder of shares of this Series,
setting forth: (i) the anticipated Redemption Date (which, pursuant to the
penultimate sentence of Section 4.1(b), shall be the same as the date specified
in clause (vii) below); (ii) that all shares of this Series outstanding on the
Redemption Date shall be redeemed by the Corporation; (iii) the Redemption
Price; (iv) that the redemption of shares of this Series shall be conditioned
upon the consummation of the Media Group Tender or Exchange Offer; (v) the place
or places where certificates for shares of this Series, properly endorsed or
assigned for transfer (unless the Corporation waives such requirement), are to
be surrendered for payment of the Redemption Price; (vi) that dividends on the
shares to be redeemed will cease to accrue on the Redemption Date; (vii) the
anticipated date of consummation of such Media Group Tender or Exchange Offer;
(viii) the type of consideration to be paid by the Corporation or its subsidiary
in such Media Group Tender Offer or Exchange Offer for shares of Media Stock;
(ix) the date on which such Media Group Tender or Exchange Offer commenced, the
date on which such Media Group Tender or Exchange Offer is scheduled to expire
unless extended and any other material terms thereof (or the material terms of
any amendment thereto); (x) the Outstanding Media Fraction on the date of such
notice; (xi) the number of outstanding shares of Media Stock and, to the extent
determinable on the 3rd Trading Date prior to the date of such notice, the
number of shares of Media Stock into or for which such outstanding Convertible
Securities are then convertible, exchangeable or exercisable and the conversion,
exchange or exercise price thereof, including the number of outstanding shares
of this Series and a description of the manner in which the Conversion will be
determined in accordance with the Certificate; and (xii) that a holder of shares
of this Series shall be entitled to participate in the Media Group Tender or
Exchange Offer in lieu of participating in the redemption of the shares of this
Series only if such holder properly converts such shares of this Series on or
prior to the Redemption Date and then complies with the terms and conditions of
the Media Group Tender or Exchange Offer and that such holder shall be permitted
to tender or exchange shares of Media Stock upon conversion of shares of this
Series by notice of guaranteed delivery so long as physical certificates are
tendered as soon as practicable after physical receipt thereof.
(h) In the event the Corporation shall redeem shares of this Series
pursuant to Section 4.1(d), notice of such redemption shall be given by the
Corporation at a time, and such notice shall contain information, comparable to
the time or information, as the case may be, specified in Sections 4.3(b)
through (g) with respect to a notice of a redemption pursuant to Section 4.1(b)
resulting from a substantially similar Media Group Special Event.
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4.4 If notice of redemption shall have been given by the Corporation as
provided in Section 4.3, from and after the Redemption Date, dividends on the
shares of this Series so called for redemption shall cease to accrue, such
shares shall no longer be deemed to be outstanding, and all rights of the
holders thereof as stockholders of the Corporation with respect to shares so
called for redemption (except, the right to receive from the Corporation the
Redemption Price without interest) shall cease (including any right to receive
dividends otherwise payable on any Dividend Payment Date that would have
occurred after the Redemption Date), unless (a) the Corporation defaults in the
payment of the Redemption Price, (b) in the case of a redemption pursuant to
Section 4.1(a), the Corporation exercises its right to rescind such redemption
pursuant to Section 4.5, or (c) in the case of a redemption pursuant to Section
4.1(b) or 4.1(d), the conditions to such redemption shall not have been
satisfied, in which case such rights shall not terminate at the close of
business on such date. On or before the Redemption Date, the Corporation shall
deposit with a bank or trust company doing business in New York, as paying
agent, money sufficient to pay the Redemption Price on the Redemption Date, in
trust, with irrevocable instructions that such money be applied to the
redemption of shares of this Series so called for redemption. Any money so
deposited with any such paying agent which shall not be required for such
redemption because of the exercise of any right of conversion, rescission or
otherwise (including if the conditions to a redemption pursuant to Section
4.1(b) or 4.1(d) are not satisfied) shall be returned to the Corporation
forthwith. Upon surrender (in accordance with the notice of redemption) of the
certificate or certificates for any shares of this Series to be so redeemed
(properly endorsed or assigned for transfer, if the Corporation shall so require
and the notice of redemption shall so state), such shares shall be redeemed by
the Corporation at the Redemption Price (unless, in the case of a redemption
pursuant to Section 4.1(a), the Corporation shall have exercised its right to
rescind such redemption pursuant to Section 4.5 or, in the case of a redemption
pursuant to Section 4.1(b) or 4.1(d), the conditions to such redemption shall
not have been satisfied). In case fewer than all the shares represented by any
such certificate are to be redeemed, a new certificate shall be issued
representing the unredeemed shares (or fractions thereof as provided in Section
7.4), without cost to the holder thereof. Subject to applicable escheat laws,
any moneys so set aside by the Corporation and unclaimed at the end of two (2)
years from the Redemption Date shall revert to the general funds of the
Corporation, after which reversion the holders of such shares so called for
redemption shall look only to the Corporation for the payment of the Redemption
Price, without interest. Any interest accrued on any funds so deposited shall be
paid to the Corporation from time to time upon request of the Corporation.
4.5 If notice of redemption pursuant to Section 4.1(a)or 4.1(c)(ii) shall
have been given by the Corporation pursuant to Section 4.3(a), in the event that
a Redemption Rescission Event shall occur following the date of such notice but
at or prior to the Redemption Date, the Corporation may, at its sole option, at
any time prior to the earlier of (a) the close of business on that day which is
five (5) Trading Days following such Redemption Rescission Event and (b) the
Redemption Date, rescind such redemption by making a public announcement of such
rescission (the date on which such public announcement shall have been made
being hereinafter referred to as the "Rescission Date"). The Corporation shall
be deemed to have made such announcement if it shall issue a release to the Dow
Jones News Service and Reuters Information Services or any successor news wire
service. From and after the making of such announcement, the Corporation shall
have no obligation to effect such redemption or to pay the Redemption Price
therefor and all rights of holders of shares of this Series shall be restored as
if notice of redemption had not been given. The Corporation shall give notice of
any such rescission by first-class mail, postage prepaid, mailed as promptly as
practicable, but in no event later than the close of business on that date which
is five (5) Trading Days following the Rescission Date to each record holder of
shares of this Series at the close of business on the Rescission Date and to any
other Person or entity that was a record holder of shares of this Series and
that shall have surrendered shares of this Series for conversion following the
giving of notice of the subsequently rescinded redemption. Each notice of
rescission shall (i) state that such redemption has been rescinded, (ii) state
that any Converting Holder shall be entitled to rescind the conversion of shares
of this
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Series surrendered for conversion following the day on which notice of such
redemption was given but on or prior to the later of (A) the close of business
on the Trading Day next succeeding the date on which public announcement of the
rescission of such redemption shall have been made and (B) the date which is
three (3) Trading Days following the mailing of the Corporation's notice of
rescission, (iii) be accompanied by a form prescribed by the Corporation to be
used by any Converting Holder rescinding the conversion of shares so surrendered
for conversion (and instructions for the completion and delivery of such form,
including instructions with respect to payments that may be required to
accompany such delivery in accordance with Section 3.5) and (iv) state that such
form must be properly completed and received by the Corporation no later than
the close of business on a date that shall be fifteen (15) Trading Days
following the date of the mailing of such notice of rescission.
5. VOTING. The shares of this Series shall have no voting rights except as
required by law or as set forth below.
5.1 So long as any shares of this Series remain outstanding, unless a
greater percentage shall then be required by law, the Corporation shall not,
without the affirmative vote at a meeting or the written consent with or without
a meeting of the holders of shares of this Series representing at least a
majority of the shares of this Series then outstanding (a) authorize any Senior
Stock or reclassify any Junior Stock or Parity Stock as Senior Stock, or (b)
amend, alter or repeal any of the provisions of this Exhibit or the Certificate
of Incorporation, so as in any such case to materially and adversely affect the
voting powers, designations, preferences and relative, participating, optional
or other special rights, and qualifications, limitations or restrictions of the
shares of this Series; PROVIDED, HOWEVER, that an amendment which effects a
split of this Series or which effects a combination of the shares of this Series
into a fewer number of Shares shall not be deemed to have any such material
adverse effect.
5.2 No vote or consent of holders of shares of this Series shall be required
for (a) the creation of any indebtedness of any kind of the Corporation, (b) the
authorization or issuance of any class of Junior Stock (including any class or
series of common stock of the Corporation) or Parity Stock, (c) the
authorization, designation or issuance of additional shares of Series E Stock or
(iv) subject to Section 5.1(a), the authorization or issuance of any other
shares of Preferred Stock.
6. LIQUIDATION RIGHTS.
6.1 Upon the dissolution, liquidation or winding up of the Corporation,
whether voluntary or involuntary, the holders of the shares of this Series shall
be entitled to receive out of the assets of the Corporation available for
distribution to stockholders, in preference to the holders of, and before any
payment of distribution shall be made on, Junior Stock, the Liquidation Value in
effect at such time, plus an amount equal to all accrued and unpaid dividends to
the date of final distribution.
6.2 The Liquidation Value shall initially be equal to $50 per share of
Series E Stock. The Liquidation Value shall be subject to adjustment from time
to time to appropriately give effect to any split or combination of the shares
of this Series.
6.3 Neither the sale, exchange or other conveyance (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property and assets of the Corporation nor the merger or consolidation of the
Corporation into or with any other corporation, or the merger or consolidation
of any other corporation into or with the Corporation, shall be deemed to be a
dissolution, liquidation or winding up, voluntary or involuntary, for the
purposes of this Section 6.
6.4 After the payment to the holders of the shares of this Series of full
preferential amounts provided for in this Section 6, the holders of this Series
as such shall have no right or claim to any of the remaining assets of the
Corporation.
6.5 In the event the assets of the Corporation available for distribution to
the holders of shares of this Series upon any dissolution, liquidation or
winding up of the Corporation, whether voluntary or involuntary, shall be
insufficient to pay in full all amounts to which such holders are entitled
pursuant
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to Section 6.1, no such distribution shall be made on account of any shares of
any Parity Stock upon such dissolution, liquidation or winding up unless
proportionate distributive amounts shall be paid on account of the shares of
this Series, ratably, in proportion to the full distributable amounts for which
holders of all Parity Stock are entitled upon such dissolution, liquidation or
winding up.
7. OTHER PROVISIONS.
7.1 All notices from the Corporation to the holders shall be given by first
class mail, postage prepaid, to the holders of shares of this Series at their
last address as it shall appear on the stock register. With respect to any
notice to a holder of shares of this Series required to be provided hereunder,
neither failure to mail such notice, nor any defect therein or in the mailing
thereof, shall affect the sufficiency of the notice or the validity of the
proceedings referred to in such notice or affect the legality or validity of any
distribution, right, warrant, reclassification, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any such action. Any notice which was mailed in the manner herein provided shall
be conclusively presumed to have been duly given whether or not the holder
receives the notice.
7.2 All notices and other communications from a holder of shares of this
Series shall be deemed given if delivered personally or sent by overnight
courier (providing proof of delivery) to the Corporation at the following
address (or at such other address as the Corporation shall specify in a notice
pursuant to Section 7.1): MediaOne Group, Inc., 181 Inverness Drive West,
Englewood, Colorado 80112, Attention: General Counsel.
7.3 Any shares of this Series which have been converted, redeemed, exchanged
or otherwise acquired by the Corporation shall, after such conversion,
redemption, exchange or acquisition, as the case may be, be retired and promptly
canceled and the Corporation shall take all appropriate action to cause such
shares to obtain the status of authorized but unissued shares of Preferred
Stock, without designation as to series, until such shares are once more
designated as part of a particular series by the Board of Directors. The
Corporation may cause a certificate setting forth a resolution adopted by the
Board of Directors that none of the authorized shares of this Series are
outstanding to be filed with the Secretary of State of the State of Delaware.
When such certificate becomes effective, all references to Series E Stock shall
be eliminated from the Certificate of Incorporation and the shares of Preferred
Stock designated hereby as Series E Stock shall have the status of authorized
and unissued shares of Preferred Stock and may be reissued as part of any new
series of Preferred Stock to be created by resolution or resolutions of the
Board of Directors.
7.4 The shares of this Series shall be issuable in whole shares or in any
fraction of a whole share or any integral multiple of such fraction.
7.5 The Corporation shall, to the fullest extent permitted by law, be
entitled to recognize the exclusive right of a Person registered on its records
as the holder of shares of this Series, and such record holder shall be deemed
the holder of such shares for all purposes.
7.6 All notice periods referred to in this Exhibit shall commence on the
date of the mailing of the applicable notice.
7.7 Subject to applicable law, any determinations made in the exercise of
the good faith business judgment of the Board of Directors under any provision
of this Exhibit shall be final and binding on all stockholders of the
Corporation, including the holders of shares of this Series.
7.8 Certificates for shares of this Series shall bear such legends as the
Corporation shall from time to time deem appropriate.
A-2-59
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ANNEX B-1
[Opinion of Lazard Freres & Co. LLC]
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ANNEX B-2
[Opinion of SBC Warburg Dillon Read Inc.]
B-2
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ANNEX C
1998 U S WEST STOCK PLAN
I. PURPOSE.
This 1998 U S WEST Stock Plan (the "Plan"), is intended to promote the long
term success of USW-C, Inc. (to be renamed "U S WEST, Inc.") (the "Company") by
affording certain eligible employees, executive officers, non-employee directors
of the Company and its Subsidiaries (as defined below) and certain outside
consultants or advisors to the Company and its affiliates with an opportunity to
acquire a proprietary interest in the Company, in order to incentivize such
persons and to align the financial interests of such persons with the
stockholders of the Company.
II. DEFINITIONS.
The following defined terms are used in the Plan:
A. "Agreement" shall mean the agreement or grant letter accepted by the
Participant as described in Section VIII of the Plan between the Company and a
Participant under which the Participant receives an Award pursuant to this Plan.
B. "Award" shall mean individually, collectively or in tandem, an incentive
award granted under the Plan, whether in the form of Options, SARs, Stock Awards
or Phantom Units.
C. "Board" or "Board of Directors" shall mean the Board of Directors of the
Company.
D. "Change of Control" shall mean any of the following:
1. any "person" (as such term is used in Sections 13(d) and 14(d)(2) of the
Exchange Act) who is or becomes a beneficial owner of (or otherwise has the
authority to vote), directly or indirectly, securities representing twenty
percent (20%) or more of the total voting power of all of the Company's then
outstanding voting securities, unless through a transaction arranged by, or
consummated with the prior approval of the Board of Directors; or
2. any period of two (2) consecutive calendar years during which there
shall cease to be a majority of the Board of Directors comprised as follows:
individuals who at the beginning of such period constitute the Board of
Directors and any new director(s) whose election by the Board of Directors or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds ( 2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved; or
3. the Company becomes a party to a merger or consolidation in which either
(i) the Company will not be the surviving corporation or (ii) the Company will
be the surviving corporation and any outstanding shares of Common Stock of the
Company will be converted into shares of any other company (other than a
reincorporation or the establishment of a holding company involving no change of
ownership of the Company) or other securities or cash or other property
(excluding payments made solely for fractional shares); or
4. any other event that a majority of the Board of Directors, in its sole
discretion, shall determine constitutes a Change of Control.
E. "Code" shall mean the Internal Revenue Code of 1986, as amended.
F. "Committee" shall mean the Human Resources Committee or the Employee
Benefits Committee or their delegates, as applicable, pursuant to provisions of
Section III of the Plan.
G. "Common Stock" shall mean the common stock, $.01 par value, of the
Company.
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H. "Company" shall mean USW-C, Inc., a Delaware corporation to be renamed "U
S WEST, Inc.", and any successor thereof.
I. "Director Compensation" shall mean all cash or stock remuneration
payable to an Outside Director for service to the Company as a director, other
than reimbursement for expenses or Common Stock received upon exercise of an
Option, and shall include retainer fees for service on, and fees for attendance
at meetings of, the Board and any committees thereof.
J. "Disabled" or "Disability" shall mean long-term disability as determined
under the provisions of any U S WEST disability plan maintained for the benefit
of eligible employees of the Company or any Related Entity, provided, however,
that in the case of an Incentive Option, "disability" shall have the meaning
specified in Section 22(e)(3) of the Code.
K. "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) and its successor promulgated under the Exchange Act.
L. "Dividend Equivalent Rights" shall mean the right to receive the amount
of any dividends that are paid on an equivalent number of shares of Common Stock
underlying an Option or Phantom Unit, which shall be payable either in cash or
in the form of additional Phantom Units or Stock.
M. "Effective Date" shall mean , 1998, the date on which the
Plan was approved by the stockholders of the Company.
N. "Eligible Employee" shall mean any employee of the Company or any Related
Entity who is so employed on the date of the grant of an Award.
O. "Eligible Non-Employee" shall mean any consultant or advisor to the
Company or any Related Entity, including any member of the State Executive
Board(s) of the Company or any Related Entity that the Committee selects to
receive an Award.
P. "Employee Benefits Committee" shall mean a committee of the Company
consisting of employees of the Company or any Related Entity appointed by the
Human Resources Committee and which shall administer the Plan as provided in
Section III hereof.
Q. "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
R. "Executive Officers" shall mean any Officer of the Company or any Related
Entity who, at the time of an Award, is subject to the reporting requirements of
Section 16(a) of the Exchange Act.
S. "Fair Market Value" shall mean the closing price of a share of Common
Stock as reported on the New York Stock Exchange for the applicable date, or if
there were no sales on such date, on the last day on which there were sales.
T. "Human Resources Committee" shall mean the human resources committee of
the Board or any other committee of the Board appointed by the Board to
administer the Plan in lieu of the Human Resources Committee, which committee
shall consist of no fewer than three (3) persons, each of whom shall be a
Disinterested Person.
U. "Incentive Option" shall mean an incentive stock option under the
provisions of Section 422 of the Code.
V. "Indexed" shall mean the periodic adjustment of an Option Price based
upon adjustment criteria determined by the Committee, but in no event shall the
Option Price be adjusted to an amount less than the original Option Price.
W. "Nonqualified Option" shall mean an Option which does not qualify under
Section 422 of the Code.
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X. "Officer" shall mean any executive of the Company or any Related Entity
who participates in the Company's executive compensation programs.
Y. "Option" shall mean an option granted by the Company to purchase Common
Stock pursuant to the provisions of this Plan, including Incentive Options,
Nonqualified Options and Reload Options.
Z. "Optionee" shall mean a Participant to whom one or more Options have
been granted.
AA. "Option Price" shall mean the price per share payable to the Company for
shares of Common Stock upon the exercise of an Option.
AB. "Outside Director" shall mean an individual not employed by the Company
or any Related Entity and who serves on the Board.
AC. "Parent Corporation" shall mean any corporation within the meaning of
Section 424(e) of the Code.
AD. "Participant" shall mean an Eligible Employee, Eligible Non-Employee,
Executive Officer or Outside Director who is granted an Award.
AE. "Phantom Unit" shall mean a notional account representing a value
equivalent to one share of Common Stock on the Award date.
AF. "Plan" shall mean the 1998 U S WEST, Inc. Stock Plan.
AG. "Related Entity" shall mean any Parent Corporation or Subsidiary of the
Company.
AH. "Reload Option" shall mean the right to receive a further Option for a
number of shares equal to the number of shares of Common Stock surrendered by
the Optionee upon exercise of the original Option as provided in Section IX.E of
the Plan.
AI. "Restricted Period" shall mean the period of time from the date of grant
of Restricted Stock until the lapse of restrictions attached thereto under the
terms of the Agreement granting such Restricted Stock, pursuant to the
provisions of the Plan or by action of the Committee.
AJ. "Restricted Stock" shall mean an Award made by the Committee entitling
the Participant to acquire, at no cost or for a purchase price determined by the
Committee at the time of grant, shares of Common Stock which are subject to
restrictions in accordance with the provisions of Section XII hereof.
AK. "Retirement" shall mean with respect to any Eligible Employee, that such
person has terminated employment with the Company or any Related Entity other
than "for cause" (as defined in subsection IX.H.(v)) and (i) such person is
eligible to receive an immediate service pension benefit under the U S WEST
Pension Plan, or (ii) such person would be eligible to receive an immediate
service pension under the U S WEST Pension Plan, as amended and restated
effective January 1, 1993, had that plan not been amended and restated effective
January 1, 1997, or (iii) such person specifically is treated as "retired" for
purposes of the Plan under any individually negotiated, custom, written
agreement or arrangement between the Company or any Related Entity and the
Eligible Employee. "Retirement" shall not apply to any Eligible Non-Employee.
AL. "Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
AM. "Separation" shall mean the separation of U S WEST Communications Group
and U S WEST Media Group into two separate companies pursuant to the terms of
the Separation Agreement dated , 1998 between the Company and U S
WEST, Inc. (to be renamed "MediaOne Group, Inc.").
AN. "Stock Appreciation Right" or "SAR" shall mean a grant entitling the
Participant to receive an amount in cash or shares of Common Stock or a
combination thereof having a value equal to (or if
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the Committee shall so determine at the time of a grant, less than) the excess
of the Fair Market Value of a share of Common Stock on the date of exercise over
the Fair Market Value of a share of Common Stock on the date of grant (or over
the Option Price, if the Stock Appreciation Right was granted in tandem with an
Option) multiplied by the number of shares with respect to which the Stock
Appreciation Right shall have been exercised, with the Committee having sole
discretion to determine the form or forms of payment at the time of grant of the
SAR.
AO. "Stock Awards" shall mean any Award which is in the form of Restricted
Stock and any outright grants of Common Stock approved by the Committee pursuant
to the Plan.
AP. "Subsidiary" shall mean with respect to any Award other than an
Incentive Option, any corporation, joint venture or partnership in which the
Company owns, directly or indirectly, (i) with respect to a corporation, stock
possessing twenty percent (20%) or more of the total combined voting power of
all classes of stock in the corporation or (ii) in the case of a joint venture
or partnership, the Company possesses a twenty percent (20%) interest in the
capital or profits of such joint venture or partnership. In the case of any
Incentive Option, Subsidiary shall mean any corporation within the meaning of
Section 424(f) of the Code.
AQ. "Vested" shall mean the status that results with respect to an Option or
other Award which may be immediately exercised under the terms of the Agreement
granting such Option or other Award, pursuant to the provisions of the Plan or
by action of the Committee.
III. ADMINISTRATION.
A. The Plan shall be administered by the Human Resources Committee with
respect to Officers, Executive Officers and Outside Directors and by the
Employee Benefits Committee with respect to all other Eligible Employees and
Eligible Non-Employees. The Human Resources Committee may adopt such rules,
regulations and guidelines as it determines necessary for the administration of
the Plan. Subject to any such rules, regulations and guidelines adopted by the
Human Resources Committee, the Employee Benefits Committee shall have the power
to adopt rules, regulations and guidelines to permit such Committee to
administer the Plan with respect to Eligible Employees (other than Officers and
Executive Officers) and with respect to Eligible Non-Employees.
B. The Committee may delegate to one or more of its members, or to one or
more agents, such administrative duties as it may deem advisable, and the
Committee or any person to whom it has delegated duties as aforesaid may employ
one or more persons to render advice with respect to any responsibility the
Committee or such person may have under the Plan. The Committee may employ such
legal or other counsel, consultants and agents as it may deem desirable for the
administration of the Plan and may rely upon any opinion or computation received
from any such counsel, consultant or agent. Expenses incurred by the Committee
in the engagement of such counsel, consultant or agent shall be paid by the
Company or such Related Entity whose employees have benefited from the Plan, as
determined by the Committee. The Company shall indemnify members of the
Committee and any agent of the Committee who is an employee of the Company or a
Related Entity against any and all liabilities or expenses to which they may be
subjected by reason of any act or failure to act with respect to their duties on
behalf of the Plan, except in circumstances involving such person's gross
negligence or willful misconduct.
C. In furtherance of and not in limitation of the Committee's discretionary
authority, subject to the provisions of the Plan, the Committee shall have the
authority to:
1. determine the Participants to whom Awards shall be granted and the
number of and terms and conditions upon which Awards shall be granted (which
need not be the same for all Awards or types of Awards);
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2. establish, in its sole discretion, annual or long-term financial goals
of the Company, Related Entity, or division, department, or group of the Company
or Related Entity, or individual goals which the Committee shall consider in
granting Awards, if any;
3. determine the satisfaction of performance goals established by the
Committee based upon periods of time or any combinations thereof;
4. determine the time when Awards shall be granted, the Option Price of
each Option, the period(s) during which Options shall be exercisable (whether in
whole or in part), the restrictions to be applicable to Awards, and the other
terms and provisions of Awards;
5. modify grants of Awards pursuant to Paragraph D. of this Section III or
rescind grants of Awards pursuant to Section IX.H(v), respectively;
6. provide the establishment of a procedure whereby a number of shares of
Common Stock or other securities may be withheld from the total number of shares
of Common Stock or other securities to be issued upon exercise of an Option, the
lapse of restrictions on Restricted Stock and the vesting of Phantom Units
(other than an Incentive Option) to meet the obligation of withholding for
income, social security and other taxes incurred by a Participant upon such
exercise or required to be withheld by the Company in connection with such
exercise;
7. adopt, modify and rescind rules and regulations and guidelines relating
to the Plan;
8. adopt modifications to the Plan and procedures, as may be necessary to
comply with provisions of the laws and applicable regulatory rulings of
countries in which the Company or a Related Entity operates in order to assure
the legality of Awards granted under the Plan to Participants who reside in such
countries;
9. obtain the approval of the stockholders of the Company with respect to
Awards consisting of Phantom Units or Restricted Stock; provided, however, no
action shall be proposed to stockholders without the approval of the Board of
Directors; and
10. make all determinations, perform all other acts, exercise all other
powers and establish any other procedures determined by the Committee to be
necessary, appropriate or advisable in administering the Plan and to maintain
compliance with any applicable law.
D. The Committee may at any time, in its sole discretion, accelerate the
exercisability of any Awards and waive or amend any and all restrictions and
conditions of any Awards.
E. Subject to and not inconsistent with the express provisions of the Plan,
the Code and Rule 16b-3 of the Exchange Act, the Committee shall have the
authority to require, as a condition to the granting of any Option, SAR or other
Award (to the extent applicable) to any Executive Officer of the Company or any
Related Entity that the Executive Officer receiving such Option, SAR or other
Award agree not to sell or otherwise dispose of such Option, SAR or other Award
or Common Stock acquired pursuant to such Option, SAR or other Award (to the
extent applicable) or any other "derivative security" (as defined by Rule
16a-1(c) under the Exchange Act) for a period of six (6) months following the
later of (i) the date of the grant of such Option, SAR or other Award (to the
extent applicable) or (ii) the date when the other Option Price of such Option,
SAR or other Award is fixed, if such Option Price is not fixed at the date of
grant of such Option, SAR or other Award.
IV. DECISIONS FINAL.
Any decision, interpretation or other action made or taken in good faith by
the Committee arising out of or in connection with the Plan shall be final,
binding and conclusive on the Company and all Participants and their respective
heirs, executors, administrators, successors and assigns.
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V. ARBITRATION.
Any agreement may contain, among other things, provisions that require
arbitration of any and all disputes between a Participant and the Company or any
Related Entity, in a form or forms acceptable to the Committee, in its sole
discretion.
VI. DURATION OF THE PLAN.
The Plan shall remain in effect for a period of ten (10) years from the
Effective Date, unless terminated by the Board pursuant to Section XX.
VII. SHARES AVAILABLE; LIMITATIONS.
A. Up to 2,400,000 shares of Common Stock may be granted in calendar year
1998 and the maximum aggregate number of shares of Common Stock that may be
granted in any other calendar year for all purposes under the Plan shall be
percent ( %), respectively, of the shares outstanding (excluding shares held
in the Company's treasury) on the first day of such calendar year, provided,
however, that in the event that fewer than the full aggregate number of shares
available for issuance in any calendar year are issued in such year, the shares
not issued shall be added to the shares available for issuance in any subsequent
year or years. If, for any reason, any shares of Common Stock as to which
Options, SARs, Restricted Stock, or Phantom Units have been granted cease to be
subject to exercise or purchase hereunder (other than the exercise of SARs for
cash), the underlying shares of Common Stock shall thereafter be available for
grants to Participants under the Plan during any calendar year. Awards granted
under the Plan may be fulfilled in accordance with the terms of the Plan with
(i) authorized and unissued shares of the Common Stock or (ii) issued shares of
Common Stock reacquired by the Company, in each situation, as the Board of
Directors or the Committee may determine from time to time at its sole
discretion.
B. The maximum number of shares of Common Stock that shall be subject to
the grant of an Award in any calendar year for Awards other than Options or SARs
shall not exceed one-third ( 1/3) of the total number of shares of Common Stock
subject to Awards granted under the Plan for such calendar year.
C. The maximum number of shares of Common Stock with respect to which
Awards may be granted to any individual Participant in any calendar year may not
exceed five hundred thousand (500,000).
D. The cumulative number of shares of Common Stock that may be issued under
this Plan in connection the exercise of Incentive Options shall not exceed ten
million (10,000,000).
VIII. GRANT OF AWARDS.
A. The Committee shall determine the type or types of Award(s) to be made to
each Participant. Awards may be granted singly, in combination or in tandem
subject to restrictions set forth in Section IX.C for Incentive Options. The
types of Awards that may be granted under the Plan are Options, with or without
Reload Options, SARs, Stock Awards and Phantom Units, and with respect to
Phantom Units and Restricted Stock, with or without Dividend Equivalent Rights.
B. Each grant of an Award under this Plan shall be evidenced by an
Agreement dated as of the date of the grant of the Award, other than Stock
Awards consisting of an outright grant of shares of Common Stock. This Agreement
shall set forth the terms and conditions of the Award, as may be determined by
the Committee, and if the Agreement relates to the grant of an Option, shall
indicate whether the Option that it evidences, is intended to be an Incentive
Option or a Nonqualified Option. Each grant of an Award is conditioned upon the
acceptance by the Participant of the terms of the Agreement. Unless otherwise
extended by the Committee, a Participant shall have ninety (90) days from the
date of the Agreement to accept its terms.
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IX. OPTIONS.
The Committee, in its sole discretion, may grant Incentive Options or
Nonqualified Options to Eligible Employees, Officers and Executive Officers and
Nonqualified Options to Eligible Non-Employees. Any Options granted to a
Participant under the Predecessor Plan which remain outstanding as of the
Effective Date shall be governed by the terms and conditions of the Plan, except
to the extent the provisions of the Plan are inconsistent with the terms of the
Options granted under the Predecessor Plans, in which event the applicable
provisions of the Predecessor Plans shall govern; provided, however, that in no
event shall there be a modification of the terms of any Incentive Option granted
under the Predecessor Plan. The terms and conditions of the Options granted
under this Section IX shall be determined from time to time by the Committee, as
set forth in the Agreement granting the Option, and subject to the following
conditions:
A. NONQUALIFIED OPTIONS. The Option Price for each share of Common Stock
issuable pursuant to a Nonqualified Option may be an amount at or above the Fair
Market Value on the date such Option is granted, may be Indexed from the
original Option Price and may be granted with or without Dividend Equivalent
Rights; provided, however, that with respect to Nonqualified Options granted to
any Executive Officer, no Dividend Equivalent Rights may be granted.
B. INCENTIVE OPTIONS. The Option Price for each share of Common Stock
issuable pursuant to an Incentive Option shall not be less than one hundred
percent (100%) of the Fair Market Value on the date such Option is granted and
may be Indexed from the original Option Price.
C. INCENTIVE OPTIONS; SPECIAL RULES. Options granted in the form of
Incentive Options shall be subject to the following provisions:
1. GRANT. No Incentive Option shall be granted pursuant to this Plan more
than ten (10) years after the Effective Date.
2. ANNUAL LIMIT. The aggregate Fair Market Value (determined at the time
the Option is granted) of the shares of Common Stock with respect to which one
or more Incentive Options are exercisable for the first time by any Optionee
during any calendar year under the Plan or under any other stock plan of the
Company or any Related Entity shall not exceed $100,000 or such other maximum
amount permitted under Section 422 of the Code. Any Option purporting to
constitute an Incentive Option in excess of such limitation shall constitute a
Nonqualified Option.
3. 10% STOCKHOLDER. If any Optionee to whom an Incentive Option is to be
granted pursuant to the provisions of the Plan is, on the date of grant, an
individual described in Section 422(b)(6) of the Code, then the following
special provisions shall be applicable to the Option granted to such individual:
(a) the Option Price of shares subject to such Incentive Option shall not be
less than 110% of the Fair Market Value of Common Stock on the date of grant;
and
(b) the Option shall not have a term in excess of (5) years from the date of
grant.
D. OTHER OPTIONS. The Committee may establish rules with respect to, and
may grant to Eligible Employees, Options to comply with any amendment to the
Code made after the Effective Date providing for special tax benefits for stock
options.
E. RELOAD OPTIONS. Without in any way limiting the authority of the
Committee to make Awards hereunder, the Committee shall have the authority to
grant Reload Options. Any such Reload Option shall be subject to such other
terms and conditions as the Committee may determine. Notwithstanding the above,
(i) the Committee shall have the right, in its sole discretion, to withdraw a
Reload Option to the extent that the grant thereof will result in any adverse
accounting consequences to the Company and (ii) no additional Reload Options
shall be granted upon the exercise of a Reload Option.
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F. TERM OF OPTION. No Option shall be exercisable after the expiration of
ten (10) years from the date of grant of the Option.
G. EXERCISE OF STOCK OPTION. Each Option shall be exercisable in one or
more installments as the Committee in its sole discretion may determine at the
time of the Award and as provided in the Agreement. The right to purchase shares
shall be cumulative so that when the right to purchase any shares has accrued
such shares or any part thereof may be purchased at any time thereafter until
the expiration or termination of the Option, subject to rules on sequential
exercise for Incentive Options pursuant to Paragraph C.2. of this Section IX.
The Option Price shall be payable (i) in cash or by an equivalent means
acceptable to the Committee, (ii) by delivery (constructive or otherwise) to the
Company of shares of Common Stock owned by the Optionee or (iii) by any
combination of the above as provided in the Agreement. Shares delivered to the
Company in payment of the Option Price shall be valued at the Fair Market Value
on the date of the exercise of the Option.
H. VESTING. The Agreement shall specify the date or dates on which the
Optionee may begin to exercise all or a portion of his Option. Subsequent to
such date or dates, the Option shall be deemed vested and fully exercisable.
(i) DEATH. In the event of the death of any Optionee, all Options held by
such Optionee on the date of his death shall become Vested Options and the
estate of such Optionee, shall have the right, at any time and from time to time
within one year after the date of death, or such other period, if any, as the
Committee in its sole discretion may determine, to exercise the Options of the
Optionee (but not after the earlier of the expiration date of the Option or, in
the case of an Incentive Option, one (1) year from the date of death).
(ii) DISABILITY. If the employment of any Optionee is terminated because of
Disability, all Options held by such Optionee on the date of his or her
termination shall be retained by such Optionee, and such Options that are not
yet Vested Options shall become Vested Options in accordance with the vesting
schedule established at the time such Options were issued. The Optionee shall
have the right to exercise Vested Options at any time and from time to time, but
not after the expiration date of the Option or, in the case of Incentive Options
where tax-advantaged treatment is desired, one year from the date of termination
of employment.
(iii) RETIREMENT. Upon an Optionee's Retirement, all Options held by such
Optionee on the date of his or her Retirement shall be retained by such
Optionee, and such Options that are not yet Vested Options shall become Vested
Options in accordance with the vesting schedule established at the time such
Options were issued, unless the Committee, in its sole discretion, determines
otherwise. Unless the Committee, in its sole discretion, determines otherwise,
the Optionee shall have the right to exercise Vested Options at any time and
from time to time, but not after the expiration date of the Option. In the case
of Incentive Options where tax-advantaged treatment is desired, the Optionee
shall have the right to exercise Vested Options three months from the date of
Retirement.
(iv) OTHER TERMINATION. If the employment with the Company or a Related
Entity of an Optionee is terminated for any reason other than for death or
Disability and other than "for cause" as defined in subparagraph (v) below, such
Optionee shall have the right, in the case of a Vested Option, for a period of
three (3) months after the date of such termination or such longer period as
determined by the Committee, to exercise any such Vested Option, but in any
event not after the expiration date of any such Option.
(v) TERMINATION FOR CAUSE. Notwithstanding any other provision of the Plan
to the contrary, if the Optionee's employment is terminated by the Company or
any Related Entity "for cause" (as defined below), such Optionee shall
immediately forfeit all rights under his Options except as to the shares of
Common Stock already purchased prior to such termination. Termination "for
cause" shall mean (unless another definition is agreed to in writing by the
Company and the Optionee) termination by the
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Company because of: (a) the Optionee's willful and continued failure to
substantially perform his duties (other than any such failure resulting from the
Optionee's incapacity due to physical or mental impairment) after a written
demand for substantial performance is delivered to the Optionee by the Company,
which demand specifically identifies the manner in which the Company believes
the Optionee has not substantially performed his duties, (b) the willful conduct
of the Optionee which is demonstrably and materially injurious to the Company or
Related Entity, monetarily or otherwise, or (c) the conviction of the Optionee
for a felony by a court of competent jurisdiction.
X. FOREIGN OPTIONS AND RIGHTS.
The Committee may make Awards of Options to Eligible Employees, Officers,
Executive Officers and Eligible Non-Employees who are subject to the tax laws of
nations other than the United States, which Awards may have terms and conditions
as determined by the Committee as necessary to comply with applicable foreign
laws. The Committee may take any action which it deems advisable to obtain
approval of such Option by the appropriate foreign governmental entity;
provided, however, that no such Award may be granted pursuant to this Section X
and no action may be taken which would result in a violation of the Exchange
Act, the Code or any other applicable law.
XI. STOCK APPRECIATION RIGHTS.
The Committee shall have the authority to grant SARs to Eligible Employees,
Officers, Executive Officers and Eligible Non-Employees either alone or in
connection with an Option. SARs granted in connection with an Option shall be
granted either at the time of grant of the Option or by amendment to the Option.
SARs granted in connection with an Option shall be subject to the same terms and
conditions as the related Option and shall be exercisable only at such times and
to such extent as the related Option is exercisable. A SAR granted in connection
with an Option may be exercised only when the Fair Market Value of the Common
Stock of the Company exceeds the Option Price of the related Option. A SAR
granted in connection with an Option shall entitle the Participant to surrender
to the Company unexercised the related Option, or any portion thereof and to
receive from the Company cash and/or shares of Common Stock equal to that number
of shares of Common Stock having an aggregate value equal to the excess of (i)
the Fair Market Value of one share of Common Stock on the day of the surrender
of such Option over (ii) the Option Price per share of Common Stock multiplied
by (iii) the number of shares of Common Stock that may be exercised under the
Option, or surrendered; provided, however, that no fractional shares shall be
issued. A SAR granted singly shall entitle the Participant to receive the excess
of (i) the Fair Market Value of a share of Common Stock on the date of exercise
over (ii) the Fair Market Value of a share of Common Stock on the date of the
grant of the SAR multiplied by (iii) the number of SARs exercised. Payment of
any fractional shares of Common Stock shall be made in cash. A SAR shall become
a Vested Award upon (i) a Participant becoming Disabled, or (ii) the death of a
Participant.
XII. RESTRICTED STOCK.
The Committee may, in its sole discretion, grant Restricted Stock to
Eligible Employees, Eligible Non-Employees, Officers or Executive Officers
subject to the provisions below.
A. RESTRICTIONS. A stock certificate representing the number of shares of
Restricted Stock granted shall be held in custody by the Company for the
Participant's account. The Participant shall have all rights and privileges of a
stockholder as to such Restricted Stock, including the right to receive
dividends and the right to vote such shares, except that, subject to the
provisions of Paragraph B. below, the following restrictions shall apply: (i)
the Participant shall not be entitled to delivery of the certificate until the
expiration of the Restricted Period; (ii) none of the shares of Restricted Stock
may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed
of during the Restricted Period; (iii) the Participant shall, if requested by
the Company, execute and deliver to the Company, a stock power endorsed in
blank. The Restricted Period shall lapse upon a Participant becoming Disabled
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or the death of a Participant. If a Participant ceases to be an employee of the
Company or a Related Entity prior to the expiration of the Restricted Period
applicable to such shares, except as a result of the death or Disability of the
Participant, shares of Restricted Stock still subject to restrictions shall be
forfeited unless otherwise determined by the Committee, and all rights of the
Participant to such shares shall terminate without further obligation on the
part of the Company. Upon the forfeiture (in whole or in part) of shares of
Restricted Stock, such forfeited shares shall become shares of Common Stock held
in the Company's treasury without further action by the Participant.
B. TERMS AND CONDITIONS. The Committee shall establish the terms and
conditions for Restricted Stock pursuant to Section III of the Plan, including
whether any shares of Restricted Stock shall have voting rights or a right to
any dividends that are declared. Terms and conditions established by the
Committee need not be the same for all grants of Restricted Stock. The Committee
may provide for the restrictions to lapse with respect to a portion or portions
of the Restricted Stock at different times or upon the occurrence of different
events, and the Committee may waive, in whole or in part, any or all
restrictions applicable to a grant of Restricted Stock. Restricted Stock Awards
may be issued for no cash consideration or for such minimum consideration as may
be required by applicable law or such other consideration as may be determined
by the Committee.
C. DELIVERY OF RESTRICTED SHARES. At the end of the Restricted Period as
herein provided, a stock certificate for the number of shares of Restricted
Stock with respect to which the restrictions have lapsed shall be delivered
(less any shares delivered pursuant to Section XIX.C in satisfaction of any
withholding tax obligation), free of all such restrictions, except applicable
securities law restrictions, to the Participant or the Participant's estate, as
the case may be. The Company shall not be required to deliver any fractional
share of Common Stock but shall pay, in lieu thereof, the Fair Market Value
(measured as of the date the restrictions lapse) of such fractional share to the
Participant or the Participant's estate, as the case may be. Notwithstanding the
foregoing, the Committee may authorize the delivery of the Restricted Stock to a
Participant during the Restricted Period, in which event any stock certificates
in respect of shares of Restricted Stock thus delivered to a Participant during
the Restricted Period applicable to such shares shall bear an appropriate legend
referring to the terms and conditions, including the restrictions, applicable
thereto.
XIII. PHANTOM UNITS.
A. GENERAL. The Committee may, in its sole discretion, grant the right to
earn Phantom Units to Eligible Employees, Officers, Executive Officers and
Eligible Non-Employees. The Committee shall determine the criteria for the
earning of Phantom Units, pursuant to Section III of the Plan. Upon satisfaction
of such criteria, a Phantom Unit shall be deemed a Vested Award. A Phantom Unit
granted by the Committee shall provide for payment in shares of Common Stock. A
Phantom Unit shall become a Vested Award upon (i) a Participant becoming
Disabled, or (ii) the death of a Participant. Shares of Common Stock issued
pursuant to this Section XIII may be issued for no cash consideration or for
such minimum consideration as may be required by applicable law or such other
consideration as may be determined by the Committee. The Committee shall
determine whether a Participant granted a Phantom Unit shall be entitled to a
Dividend Equivalent Right.
B. UNFUNDED CLAIM. The establishment of Phantom Units under the Plan are
unfunded obligations of the Company. The interest of a Participant in any such
units shall be considered a general unsecured claim against the Company to the
extent that the conditions for the earning of the Phantom Units have been
satisfied. Nothing contained herein shall be construed as creating a trust or
fiduciary relationship between the Participant, the Company or the Committee.
C. ISSUANCE OF COMMON STOCK. Upon a Phantom Unit becoming a Vested Award,
unless a Participant has elected to defer under Paragraph D. below, shares of
Common Stock representing the Phantom Units shall be distributed to the
Participant, unless the Committee, with the consent of the Participant, provides
for the payment of the Phantom Units in cash or partly in cash and partly in
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shares of Common Stock equal to the value of the shares of Common Stock which
would otherwise be distributed to the Participant.
D. DEFERRAL OF PHANTOM UNITS. Prior to the year with respect to which a
Phantom Unit may become a Vested Award, the Participant may elect not to receive
Common Stock upon the vesting of such Phantom Unit and for the Company to
continue to maintain the Phantom Unit on its books of account. In such event,
the value of a Phantom Unit shall be payable in shares of Common Stock pursuant
to the agreement of deferral.
E. FINANCIAL HARDSHIP. Notwithstanding any other provision hereof, at the
written request of a Participant who has elected to defer pursuant to Paragraph
D. above, the Committee, in its sole direction, upon a finding that continued
deferral will result in financial hardship to the Participant, may authorize the
payment of all or a part of a Participant's Vested Phantom Units in a single
installment or the acceleration of payment of any multiple installments thereof;
provided, however, that distributions will not be made under this paragraph if
such distribution would result in liability of an Executive Officer under
Section 16 of the Exchange Act.
F. DISTRIBUTION UPON DEATH. The Committee shall pay the Fair Market Value
of the Phantom Units of a deceased Participant to the estate of the Participant,
as soon as practicable following the death of the Participant. The value of the
Phantom Units for the purpose of such distribution shall be based upon the Fair
Market Value of shares of Common Stock underlying the Phantom Units on the date
of the Participant's death.
XIV. STOCK AWARDS TO OUTSIDE DIRECTORS.
Each Outside Director shall be granted a Stock Award consisting of 400
shares of Common Stock, without restrictions, on the date of the Annual Meeting
of the Company's stockholders following the first anniversary date of such
Outside Director's initial election to the Board, and a like amount on each of
the next four Annual Meeting dates for a total maximum Stock Award of 2,000
shares of Common Stock.
XV. OUTSIDE DIRECTOR'S COMPENSATION.
A. PAYMENT IN COMMON STOCK. Each Outside Director may elect to receive
payment of all or any portion of Director Compensation comprised of retainer
fees for service on the Board and any committees thereof in Common Stock. The
amount of Common Stock then issuable shall be based on the Fair Market Value of
the Common Stock on the dates such retainer fees are otherwise due and payable
to the Outside Director. When any fees are paid in Common Stock under this
Section XV.A, any fractional shares of Common Stock shall be paid in cash.
Certificates evidencing such Common Stock shall be delivered promptly following
such date. If an Outside Director elects to receive payment of retainer fees in
Common Stock as described in this Section XV.A, the election shall be (i) in
writing, (ii) delivered to the Secretary of the Company at least six months in
advance of the payment date, and (iii) irrevocable.
B. DEFERRAL OF PAYMENT. Each Outside Director may elect to defer the
receipt of Common Stock payable pursuant to Section XV.A, in which event such
Outside Director shall receive an equivalent number of Phantom Units with
Dividend Equivalent Rights. Any such Phantom Units shall become Vested Awards at
such time as the Outside Director no longer serves as a member of the Board. If
an Outside Director elects to defer receipt of Common Stock and receive Phantom
Units pursuant to this Section XV.B, the election shall be (i) in writing, (ii)
delivered to the Secretary of the Company in the year preceding the year in
which the Director Compensation would otherwise be paid and at least six months
in advance of the date when Common Stock would otherwise be issued, and (iii)
irrevocable.
C. DIRECTOR STOCK OPTIONS. On , 1998 and on the first
business day of each calendar year thereafter, each Director shall be granted an
Option to purchase three thousand (3,000) shares
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Common Stock, such Options (i) to become Vested Options in increments of 40
percent upon grant and 30 percent on the first and second anniversaries
following the date of grant or, if earlier, in full upon the retirement of the
Director, (ii) to remain exercisable notwithstanding the retirement of the
Director from the Board (but in no event after the expiration date of the
Option), and (iv) to expire ten years from the date of grant.
XVI. FEDERAL SECURITIES LAW.
With respect to grants of Awards to Directors and Executive Officers, the
Company intends that the provisions of this Plan and all transactions effected
in accordance with Plan shall comply with Rule 16b-3 under the Exchange Act.
Accordingly, the Committee shall administer and interpret the Plan to the extent
practicable, to maintain compliance with such rule.
XVII. CHANGE OF CONTROL; ACCELERATION.
Upon the occurrence of a Change of Control:
A. in the case of all outstanding Options and SARs, each such Option and SAR
shall automatically become immediately fully exercisable by the Participant;
B. restrictions applicable to Restricted Stock shall automatically be
deemed lapsed and conditions applicable to Phantom Units shall automatically be
deemed waived, and the Participants who receive such grants shall become
immediately entitled to receipt of the Common Stock subject to such grants; and
C. the Human Resources Committee, in its discretion, shall have the right
to accelerate payment of any deferrals of Vested Phantom Units.
XVIII. ADJUSTMENT OF SHARES.
A. In the event there is any change in the Common Stock by reason of any
consolidation, combination, liquidation, reorganization, recapitalization, stock
dividend, stock split, split-up, split-off, spin-off, combination of shares,
exchange of shares or other like change in capital structure of the Company, the
number or kind of shares or interests subject to an Award and the per share
price or value thereof shall be appropriately adjusted by the Committee at the
time of such event, provided that each Participant's economic position with
respect to the Award shall not, as a result of such adjustment, be worse than it
had been immediately prior to such event. Any fractional shares or interests
resulting from such adjustment shall be rounded up to the next whole share of
Common Stock. Notwithstanding the foregoing, (i) each such adjustment with
respect to an Incentive Option shall comply with the rules of Section 424(a) of
the Code, and (ii) in no event shall any adjustment be made which would render
any Incentive Option granted hereunder other than an "incentive stock option"
for purposes of Section 422 of the Code.
B. In the event of an acquisition by the Company of another corporation
where the Company assumes outstanding stock options or similar obligations of
such corporation, the number of Awards available under the Plan shall be
appropriately increased to reflect the number of such options or other
obligations assumed.
XIX. SUBSTITUTE OPTIONS.
Options, shares of Restricted Stock and Phantom Units issued in substitution
of outstanding options for U S WEST Communications Group Stock, restricted
shares of U S WEST Communications Group Stock and phantom units with respect to
U S WEST Communications Group Stock pursuant to the terms of the Employee
Matters Agreement to be entered into by the Company and U S WEST, Inc. (to be
renamed "MediaOne Group, Inc.") in connection with the Separation shall be
administered pursuant to the provisions of the Plan to the extent not
inconsistent with the terms of the grant of such options, restricted stock and
phantom units and such Employee Matters Agreement.
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XX. MISCELLANEOUS PROVISIONS.
A. ASSIGNMENT OR TRANSFER. Except as otherwise permitted by this Section
XIX.A, no grant of any "derivative security" (as defined in the rules issued
under Section 16 of the Exchange Act) made under the Plan or any rights or
interests therein shall be assignable or transferable except by last will and
testament or the laws of descent and distribution. No grant of any such
derivative security shall be assignable or transferrable pursuant to a domestic
relations order. An Optionee who is an Officer or an Outside Director may assign
or transfer an Option (other than an Incentive Option) as a gift to one or more
members of his or her immediate family or to trusts maintained for the benefit
of such immediate family members if such assignment or transfer is not pursuant
to a domestic relations order and (i) such assignment or transfer is expressly
approved in advance by the Committee or its delegate(s) or (ii) such Option was
granted to the Optionee on or after , 199 , and the Agreement
pertaining to such Option expressly permits the assignment or transfer of the
Option.
B. INVESTMENT REPRESENTATION; LEGENDS. The Committee may require each
Participant acquiring shares of Common Stock pursuant to an Award to represent
to and agree with the Company in writing that such Participant is acquiring the
shares without a view to distribution thereof. No shares of Common Stock shall
be issued pursuant to an Award until all applicable securities law and other
legal and stock exchange requirements have been satisfied. The Committee may
require the placing of stop-orders and restrictive legends on certificates for
Common Stock as it deems appropriate.
C. WITHHOLDING TAXES. In the case of distributions of Common Stock or
other securities hereunder, the Company, as a condition of such distribution,
may require the payment (through withholding from the Participant's salary,
payment of cash by the Participant, reduction of the number of shares of Common
Stock or other securities to be issued (except in the case of an Incentive
Option), or otherwise) of any federal, state, local or foreign taxes required by
law to be withheld with respect to such distribution.
D. COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any Award nor to
any Participant receiving an Award.
E. OTHER INCENTIVE PLANS. The adoption of the Plan does not preclude the
adoption by appropriate means of any other incentive plan for employees.
F. EFFECT ON EMPLOYMENT. Nothing contained in the Plan or any agreement
related hereto or referred to herein shall affect, or be construed as affecting,
the terms of employment of any Participant except to the extent specifically
provided herein or therein. Nothing contained in the Plan or any agreement
related hereto or referred to herein shall impose, or be construed as imposing,
an obligation on (i) the Company or any Related Entity to continue the
employment of any Participant and (ii) any Participant to remain in the employ
of the Company or any Related Entity.
G. NONCOMPETITION. Any Agreement may contain, among other things,
provisions prohibiting Participants from competing with the Company or any
Related Entity in a form or forms acceptable to the Committee, in its sole
discretion.
H. GOVERNING LAW. This Plan and actions taken in connection herewith shall
be governed and construed in accordance with the laws of the State of Colorado.
XXI. AMENDMENT OR TERMINATION OF PLAN.
The Board shall have the right to amend, modify, suspend or terminate the
Plan at any time, provided that, with respect to Incentive Options, no amendment
shall be made that (i) decreases the minimum Option Price in the case of any
Incentive Option, or (ii) modifies the provisions of the Plan with respect to
Incentive Options, unless such amendment is made by or with the approval of the
stockholders or unless the Board receives an opinion of counsel to the Company
that stockholder approval is not necessary with respect to any modifications
relating to Incentive Options; and provided further that no amendment shall be
made that (i) increases the number of shares of Common Stock
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that may be issued under the Plan, or (ii) permits the Option Price for any
Option to be less than Fair Market Value on the date such Option is granted,
unless such amendment is made by or with the approval of stockholders. No
amendment, modification, suspension or termination of the Plan shall alter or
impair any Awards previously granted under the Plan, without the consent of the
holder thereof.
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ANNEX D
U S WEST
LONG-TERM INCENTIVE PLAN
SECTION I
PURPOSE
The purpose of the U S WEST Long-Term Incentive Plan (the "Plan") is to
offer key executives of USW-C, Inc. (to be renamed "U S WEST, Inc."), (the
"Company") the opportunity to earn incentive compensation based on the
accomplishment of strategic goals. These goals are designed to deliver sustained
long-term returns to stockholders of the Company. Payouts under the Plan shall
be determined based on the achievement of these pre-established and objective
goals. Specifically, the Plan grants incentive compensation based upon a
percentage (ranging from 0% to 100%) of the sum of regular cash dividends, if
any, paid on the Company's common stock ("Common Stock") over a multiple-year
performance period. The Plan is effective from , 1998 to December 31,
2000, contingent on the approval of stockholders of the Company.
SECTION II
DEFINITIONS
2.1 "Change of Control" shall mean any of the following:
(i) any person (as such term is used in Sections 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended, is or becomes a beneficial
owner of (or otherwise has the authority to vote), directly or indirectly,
securities representing twenty percent (20%) or more of the total voting
power of all of the Company's then outstanding voting securities, unless
through a transaction arranged by, or consummated with the prior approval of
the Company's Board of Directors; or
(ii) any period of two consecutive calendar years during which there
shall cease to be a majority of the Company's Board of Directors comprised
as follows: individuals who at the beginning of such period constitute the
Company's Board of Directors and any new director(s) whose election by the
Company's Board of Directors or nomination for election by the Company's
stockholders was approved by a vote of at least two-thirds ( 2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved; or
(iii) the Company becomes a party to a merger or consolidation in which
either (1) the Company will not be the surviving corporation or (2) the
Company will be the surviving corporation and any outstanding shares of
Common Stock of the Company will be converted into shares of any other
company (other than a reincorporation or the establishment of a holding
company involving no change of ownership of the Company) or other securities
or cash or other property (excluding payments made solely for fractional
shares); or
(iv) for a Participant who has executed a Change of Control Agreement
with the Company, any event that constitutes a "Change of Control" as set
forth in such Change of Control Agreement, or any other event that a
majority of the Company's Board of Directors, in its sole discretion, shall
determine constitutes a Change of Control.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Company" shall mean USW-C, Inc., a Delaware corporation to be renamed
"U S WEST, Inc." and any successor thereof.
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2.4 "Committee" shall mean the Human Resources Committee of the Company's
Board of Directors or its delegate.
2.5 "Common Stock" shall mean the common stock, $.01 par value, issued by
the Company.
2.6 "Disability" shall mean long-term disability as determined under the
provisions of any Company disability plan maintained for the benefit of eligible
employees of the Company.
2.7 "Dividend Equivalent Unit" or "DEU" shall mean a unit representing the
sum of regular cash dividends on a share of Common Stock paid during a
Performance Period.
2.8 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.9 "Participant" shall mean an executive or key employee of the Company
whom the Committee has determined shall participate in the Plan pursuant to
Section III below.
2.10 "Performance Period" shall mean the period of time during which the
performance of the Company is measured for purposes of determining a
Participant's payout under the Plan, as set forth in Section IV below.
2.11 "Plan" shall mean the U S WEST, Inc. Long-Term Incentive Plan.
2.12 "Restricted Stock" shall mean shares of Common Stock that are subject to
a vesting period and to any other terms and conditions determined by the
Committee for any Participant, as set forth in the Participant's Restricted
Stock Agreement.
2.13 "Retirement" or "Retires" shall mean for any Participant, that such
Participant has retired from the Company and currently is eligible to receive a
service pension benefit under the U S WEST Pension Plan or a pension benefit
under any individually negotiated, custom written agreement or arrangement
executed by a duly authorized representative of the Company, or any subsidiary
of the Company, and the Participant.
SECTION III
ELIGIBILITY
Participation in the Plan shall be limited to executives and key employees
of the Company as determined by the Committee. The Committee members all qualify
as "outside directors" within the meaning of Code section 162(m).
SECTION IV
PERFORMANCE PERIODS
The Plan shall be effective for three (3) Performance Periods. Each
Performance Period shall have a duration of three calendar years, as follows:
the first Performance Period shall commence on January 1, 1996, and shall
terminate on December 31, 1998; the second Performance Period shall commence on
January 1, 1997, and shall terminate on December 31, 1999; and the third
Performance Period shall commence on January 1, 1998, and shall terminate on
December 31, 2000.
SECTION V
DIVIDEND EQUIVALENT UNITS
The Committee shall assign DEUs to each Participant with respect to each
Performance Period that had been assigned to such Participant under the U S WEST
Communications Group Long-Term Incentive Plan. The Committee shall assign
additional DEUs to Participants, upon selection for participation in the Plan
and upon such other occasions as the Committee shall determine, each of which
shall represent the sum of regular cash dividends, if any, on a share of Common
Stock paid during a Performance Period.
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SECTION VI
PAYMENT OF SHARES
6.1 CALCULATION OF ACTUAL PAYOUT VALUE. At the conclusion of each
Performance Period, the total number of DEUs granted to a Participant shall be
multiplied by the total dividend payout per share of Common Stock during the
Performance Period. The resulting product shall be equal to the Participant's
maximum payout value for such Performance Period. The Participant's actual
payout value shall be determined by applying a percentage, not to exceed one
hundred fifty percent (150%), to the Participant's maximum payout value. Such
percentage shall be determined by comparing the performance of the Company to
the payout formula established by the Committee, as provided in Section VII
below.
6.2 FORM AND MANNER OF PAYOUT. The DEU award payment to each Participant
shall be made in shares of Common Stock and shall be determined by dividing the
actual payout value by the average closing price of Common Stock over a
twenty-trading day period. Such period shall commence ten trading days prior to
the end of the Performance Period. Any shares of Common Stock payable to a
Participant shall be paid as soon as practicable following the Performance
Period. At the discretion of the Committee, such Common Stock may be Restricted
Stock. The Participant shall be entitled to certificates representing shares of
such Restricted Stock only if the Participant abides by all terms and conditions
of the underlying Restricted Stock Agreement, to the extent those conditions are
not waived by the Committee in its sole discretion. At the discretion of the
Committee, dividends, if any, paid on shares of Restricted Stock during the
vesting period shall be paid to the Participants. Such dividends shall be
payable in cash, shares of Common Stock or Restricted Stock as determined by the
Committee in its sole discretion.
6.3 TAXATION. Any shares of Common Stock paid pursuant to this Plan are
taxable at the time they are paid unless they are paid in the form of Restricted
Stock. Restricted Stock is taxable upon vesting.
6.4 MAXIMUM PAYOUT; SHARES AVAILABLE. Subject to the adjustments set forth
in Section IX, no Participant shall be entitled to receive more than 500,000
DEUs for any Performance Period, and the maximum aggregate number of shares of
Common Stock that may be paid over the life of this Plan is 1,300,000.
SECTION VII
PERFORMANCE GOALS
Within 90 days of the commencement of each Performance Period, the Committee
shall establish specific, objective, performance goals and a payout formula in
connection with such performance goals. The performance goals shall be based on
one or more of the following performance measures of the Company: financial
results; revenue; productivity and efficiency; service and customer care; and
employees' and/or management's satisfaction.
(a) Financial results shall be measured in terms of one or more of the
following: free cash flow; operating cash flow; cash operating income
(Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"));
net income; earnings per share; total stockholder return; and relative
stockholder return.
(b) Revenue shall be measured in terms of one or more of the following:
revenue expressed in dollars or percent growth; revenue per access line; new
product revenue expressed in dollars; percent of revenue or percent growth;
and market share.
(c) Productivity and efficiency shall be measured in terms of one or
more of the following: revenue per employee; labor dollars as a percent of
revenue; cash outlay per access line; and general and administrative expense
as a percent of revenue.
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(d) Service and customer care shall be measured in terms of one or more
of the following: customer access; customer commitments met; held orders;
and overall customer satisfaction, as measured by survey.
(e) Employees' and management's satisfaction shall be measured by
survey.
SECTION VIII
SPECIAL DISTRIBUTION RULES
8.1 CHANGE OF CONTROL. In the event of a Change of Control, the following
shall occur:
(a) For any DEUs issued in any calendar year(s) prior to the date of the
Change of Control, the total dividend payout shall be determined as if the
Change of Control occurred on the date on which the pre-set Performance
Period is scheduled to end, as set forth in Section IV. For any DEUs issued
in the calendar year of the Change of Control, the total dividend payout
shall be determined as if the Change of Control occurred on the date on
which the pre-set Performance Period is scheduled to end, calculated on a
pro rata basis for the amount of time elapsed in that calendar year;
(b) The value of dividends yet to be paid in any current Performance
Period shall be valued at the amount of the most recent dividend paid prior
to the Change of Control, and assuming that dividends would continue to be
paid for the full duration of such Performance Period with the same
frequency as prior to the Change of Control;
(c) The performance goals of the Company for the Performance Period
shall be deemed to have been met in full;
(d) The Participant shall be paid immediately the number of shares of
Common Stock, or its equivalent value, that results in his or her case from
the foregoing provisions. Any such shares of Common Stock shall not be
Restricted Stock; and
(e) Any vesting period applicable to Restricted Stock previously issued
under the Plan shall lapse immediately.
8.2 DEATH OR DISABILITY. If a Participant dies or becomes Disabled during
any Performance Period, then solely for purposes of the Plan, the Participant
shall be deemed to have died or become Disabled as of the last day of the
calendar quarter during which the Participant died or became Disabled, and the
benefit, if any, payable under the Plan to the Participant or his or her estate
shall be paid in the same manner set forth in Subsection 8.1, substituting in
each instance, as applicable, the term "death" or "Disability" for the term
"Change of Control."
8.3 RETIREMENT. If a Participant Retires during any Performance Period (i)
any Restricted Stock issued under the Plan shall continue to vest in accordance
with the vesting schedule established at the time such Restricted Stock was
issued and shall continue to be subject to all other terms and conditions of the
underlying Restricted Stock Agreement, (ii) the DEUs held by such Participant
shall be valued as if the last day of any current Performance Period is the last
day of the calendar quarter during which the Participant Retires, and (iii) any
shares of Common Stock payable to the Participant shall be calculated at the end
of the Performance Period and paid to the Participant pursuant to the provisions
of Section VI; provided, however, that the continuation of vesting and of
participation in the Plan shall be contingent upon such Participant's execution
and delivery to the Company, on or prior to the effective date of the
Participant's Retirement, of the Company's standard "Waiver & Release" form,
available from the Human Resources Department of the Company. If, however, the
Committee in its sole discretion determines that, prior to the end of the
Performance Period, the Participant directly or indirectly receives payment for
services rendered to, or is otherwise employed by, any person, firm or
corporation that is in competition with the Company or engaged in providing any
goods or services that
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are substantially the same as goods or services provided or under development by
the Company, unless the Committee in its sole discretion determines otherwise,
or unless the Participant is in full compliance with the Company's Policy on
Service on Outside Boards of Directors, as interpreted solely by the Company's
Senior Management Compliance Committee, the Participant immediately shall
forfeit all DEUs and Restricted Stock granted under the Plan, and no payments of
Common Stock shall thereafter be made. The foregoing provisions apply unless
otherwise determined by the Committee in its sole discretion.
8.4 OTHER TERMINATION. Unless the Committee in its sole discretion
determines otherwise, if a Participant's employment terminates for any other
reason, the Participant immediately shall forfeit all DEUs and Restricted Stock
granted under the Plan, and no payments of Common Stock shall thereafter be
made.
SECTION IX
ADJUSTMENT OF DEUS OR SHARES OF COMMON STOCK
In the event of any change in the Common Stock of the Company by reason of
any consolidation, combination, liquidation, reorganization, recapitalization,
stock dividend, stock split, slit-up, split-off, spin-off, combination of
shares, exchange of shares or other like change in capital structure of the
Company, the number of DEUs and the maximum number of shares of Common Stock
remaining for issue under the Plan shall be adjusted appropriately by the
Committee at or about the time of such event, provided that each Participant's
position with respect to DEUs or shares of Common Stock or other interests
payable under this Plan shall not, as a result of such adjustment, be worse than
it had been immediately prior to such event. Any fractional DEUs, shares or
other interests resulting from such adjustment shall be rounded up to the next
whole DEU, share or other interest, as the case may be. To the extent that any
event set forth in this Section IX constitutes a Change of Control for any
participant, the provisions of this Section IX shall apply prior to any
calculation made pursuant to Subsection 8.1.
SECTION X
ARBITRATION
10.1 SCOPE OF ARBITRATION. Any claim, controversy or dispute between a
Participant and the Company or its subsidiaries or affiliated companies, whether
sounding in contract, statute, tort, fraud, misrepresentation, discrimination or
any other legal theory, including, but not limited to, disputes relating to the
interpretation of this Plan; claims under Title VII of the Civil Rights Act of
1964, as amended; claims under the Civil Rights Act of 1991; claims under the
Age Discrimination in Employment Act of 1967, as amended; claims under 42 U.S.C.
Section 1981, Section 1981a, Section 1983, Section 1985, or Section 1988; claims
under the Family and Medical Leave Act of 1993; claims under the Americans with
Disabilities Act of 1990, as amended; claims under the Fair Labor Standards Act
of 1938, as amended; the Employee Retirement Income Security Act of 1974, as
amended; claims under the Colorado Anti-Discrimination Act; or claims under any
other similar federal, state or local law or regulation, whenever brought, shall
be resolved by arbitration. The only legal claims between a Participant and the
Company that are not included for arbitration are claims by the Participant for
workers' compensation or unemployment compensation benefits and/or claims for
benefits under a benefit plan maintained by the Company, if the plan does not
provide for arbitration of such disputes. In consideration of any DEU, Common
Stock or any Restricted Stock granted to a Participant under the terms of the
Plan, such Participant shall voluntarily, knowingly and intelligently waive any
right such Participant may otherwise have to seek remedies in court or other
forums, including the right to a jury trial and the right to recover punitive
damages on any common law and/or contract claims. The Federal Arbitration Act, 9
U.S.C. SectionSection 1-16 ("FAA") shall govern the arbitrability of all claims,
provided that they are enforceable under the FAA, as it may be amended from time
to time. In the event the FAA does not govern, the
D-5
<PAGE>
Colorado Uniform Arbitration Act shall apply. Additionally, the substantive law
of Colorado, to the extent it is consistent with the terms stated in this Plan
for arbitration, shall apply to any common law claims.
10.2 ARBITRATION PROCEEDINGS. A single arbitrator engaged in the practice
of law shall conduct the arbitration under the applicable rules and procedures
of the American Arbitration Association ("AAA"). Any dispute that relates to the
Participant's employment with the Company or to the termination of the
Participant's employment shall be conducted under the AAA Employment Dispute
Resolution Rules, effective November 1993. The arbitrator shall be chosen from a
state other than the Participant's state of residence and other than Colorado.
Other than as set forth in this Plan, the arbitrator shall have no authority to
add to, detract from, change, amend, or modify existing law. All arbitration
proceedings, including, without limitation, settlements and awards, under this
Plan shall be confidential. The parties shall share equally the hourly fees of
the arbitrator. The Company shall pay the expenses (such as travel and lodging)
of the arbitrator. The prevailing party in any arbitration may be entitled to
receive reasonable attorneys' fees. The arbitrator's decision and award shall be
final and binding, as to all claims that were, or could have been, raised in the
arbitration, and judgment upon the award rendered by the arbitrator may be
entered in any court having jurisdiction thereof. If any party hereto files a
judicial or administrative action asserting claims subject to this arbitration
provision, and another party successfully stays such action and/or compels
arbitration of such claims, the party filing said action shall pay the other
party's costs and expenses incurred in seeking such stay and/or compelling
arbitration, including reasonable attorneys' fees.
SECTION XI
MISCELLANEOUS PROVISIONS
11.1. ASSIGNMENT OR TRANSFER. No DEUs or other interest or rights under
the Plan shall be subject in any manner to anticipation, hypothecation,
alienation, sale, transfer, assignment, pledge, encumbrance, attachment or
garnishment by creditors of the Participant or the Participant's beneficiary.
11.2 COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any Participant.
11.3 TAXATION. The Company shall have the right to deduct from any Plan
distribution any federal, state or local income and employment taxes that it is
required by law to withhold.
11.4 OTHER INCENTIVE PLANS. The adoption of this Plan does not preclude
the adoption by appropriate means of any other incentive plan for employees of
the Company.
11.5 EFFECT ON EMPLOYMENT. Nothing contained in this Plan or any related
agreement or any agreement referred to herein shall affect, or be construed as
affecting, the terms of employment of any Participant except to the extent
specifically provided. Nothing contained in this Plan or any related agreement
or any agreement referred to herein shall impose, or be construed as imposing,
any obligation on (i) the Company to continue the employment of any Participant
or (ii) any Participant to remain in the employ of the Company.
11.6 AMENDMENT OF PLAN. The Committee shall have the right to amend,
modify, suspend or terminate this Plan at any time, provided that, in the case
of Participants who are subject to Section 16(a) of the Exchange Act, no
amendment shall be made that (i) materially increases the benefits accruing to
such Participants, (ii) materially increases the number of shares of Common
Stock that may be issued under this Plan, or (iii) materially modifies the
requirements of eligibility for such Participants, unless such amendment is made
by or with the approval of stockholders. The Committee or its designee shall be
authorized to make any other amendments to the Plan.
D-6
<PAGE>
11.7 FEDERAL SECURITIES LAW. With respect to grants of Common Stock to
individuals subject to Section 16 of the Exchange Act, the Company intends that
the provisions of this Plan and all transactions effected in accordance with the
Plan shall comply with Rule 16b-3 under the Exchange Act. Accordingly, the
Committee shall administer and interpret the Plan to the extent practicable
consistently with such rule.
11.8 SECURITIES LAW COMPLIANCE. No shares of Common Stock shall be issued
under this Plan until all applicable securities law and other legal and stock
exchange requirements have been satisfied. The Committee may require the placing
of stop-orders and restrictive legends on certificates for common stock as it
deems appropriate.
11.9 ADMINISTRATION. The Plan shall be administered by the Committee,
which may adopt such rules, regulations and guidelines as it determines
necessary for the administration of the Plan. The Committee may delegate to one
or more of its members, or to one or more agents, such administrative duties as
it may deem advisable, and the Committee or any person to whom it has delegated
duties as aforesaid may employ one or more persons to render advice on any
responsibility that the Committee or such person may have under the Plan. The
Committee may employ such legal or other counsel, consultants and agents as it
may deem desirable for the administration of the Plan and may rely upon any
opinion or computation received from any such counsel, consultant or agent.
Expenses incurred by the Committee in the engagement of such counsel, consultant
or agent shall be paid by the Company. The Company shall indemnify members of
the Committee and any agent of the Committee who is an employee of the Company
against any and all liabilities or expenses to which they may be subject by
reason of any act or failure to act with respect to their duties on behalf of
the Plan, except in circumstances involving such person's gross negligence or
willful misconduct.
11.10 GOVERNING LAW. This Plan and actions taken in connection herewith
shall be governed and construed in accordance with the laws of the State of
Colorado.
SECTION XII
ADOPTION OF THE PLAN
This Plan shall become effective on . All awards granted under
this Plan shall be contingent on .
SECTION XIII
TERMINATION OF THE PLAN
The Plan shall terminate on December 31, 2000, except that any outstanding
DEUs granted prior to the termination of the Plan shall remain subject to all
terms and conditions of the Plan as if the Plan were not terminated. Any
Restricted Stock granted under the Plan shall continue to vest in accordance
with the vesting schedule established at the time such Restricted Stock was
issued and shall continue to be subject to all other terms and conditions of the
underlying Restricted Stock Agreement, unless the Committee determines otherwise
in its sole discretion.
D-7
<PAGE>
ANNEX E
U S WEST
EXECUTIVE SHORT-TERM INCENTIVE PLAN
SECTION 1
PURPOSE
The purpose of the U S WEST Executive Short-Term Incentive Plan (the "Plan")
is to provide key executives of USW-C, Inc. (to be renamed "U S WEST, Inc.") and
its subsidiaries (the "Company") with incentive compensation based upon the
achievement of established performance goals.
SECTION 2
ELIGIBILITY
Eligibility for the Plan is limited to the Chief Executive Officer of U S
WEST, Inc. and any individuals employed by the Company (at the end of any
calendar year) who appear in the Summary Compensation Table of the Company's
Proxy Statement to Stockholders for that year. The Human Resources Committee
(the "Committee") of the Board of Directors of U S WEST, Inc. (the "U S WEST
Board of Directors") shall certify eligibility for participation. Individuals
eligible to participate in the Plan are herein called "Participants."
SECTION 3
AWARDS
Participants will be eligible to receive equal shares of a cash bonus pool
established annually, as described in Section 5, provided that the Committee
shall have the authority to reduce the share of any participant to the extent it
deems appropriate. Any such reduction of a participant's share will not result
in an increase of another participant's share.
SECTION 4
PERFORMANCE PERIODS
Each performance period ("Period") shall have a duration of one calendar
year, commencing on January 1, and terminating on December 31.
SECTION 5
PERFORMANCE FORMULA
5.1 At the end of each Period the Committee will certify the amount of the
cash bonus pool pursuant to Section 5.2.
5.2 The cash bonus pool for any Period will be one-quarter of one percent
(0.25%) of Cash Provided by Operating Activities for U S WEST, Inc. and its
consolidated subsidiaries, determined in accordance with the standards of the
Financial Accounting Standards Board, less any amount that the Committee deems
appropriate. In the event that the Committee elects to reduce the cash bonus
pool to an amount that is less than one-quarter of one percent (0.25%) of Cash
Provided by Operating Activities, the amount by which the pool is reduced may,
at the Committee's sole discretion, be added to the cash bonus pool that is
available for any subsequent Period or Periods.
E-1
<PAGE>
5.3 A Participant's share of the cash bonus pool shall be calculated by
dividing the amount of the cash bonus pool by the number of Participants in the
Plan. The Committee shall have the authority to reduce any Participant's share
of the cash bonus pool to the extent it deems appropriate. In determining the
amount to be paid to a Participant for any Period, the Committee will consider a
number of performance factors, including, but not limited to, the Company's net
income and cash flow, quality indicators, and other relative operating and
strategic results.
5.4 Shares of the cash bonus pool will be paid in the year following the
completion of the performance period.
SECTION 6
SPECIAL DISTRIBUTION RULES
6.1 CHANGE OF CONTROL. Notwithstanding any other provisions of this Plan,
in the event of a Change of Control, as defined below, the following shall
occur:
(a) The cash bonus pool shall be calculated as if the end of the Period
were the date of the Change of Control;
(b) Each Participant's share of the cash bonus pool shall be determined
subject to Section 5.3; and
(c) Each Participant shall be immediately paid his or her share of the
cash bonus pool that results from the foregoing calculation.
For the purposes of the Plan, a "Change of Control" shall mean any of the
following:
(i) Any "person" (as such term is used in Section 13(d) and 14(d)(2) of
the Securities Exchange Act of 1934, as amended, is or becomes a beneficial
owner of (or otherwise has the authority to vote), directly or indirectly,
securities representing twenty percent (20%) or more of the total voting
power of all the Company's then outstanding voting securities, unless
through a transaction arranged by, or consummated with the prior approval of
the U S WEST Board of Directors;
(ii) Any period of two (2) consecutive calendar years during which there
shall cease to be a majority of the U S WEST Board of Directors comprised as
follows: individuals who at the beginning of such period constitute the U S
WEST Board of Directors and any new director(s) whose election by the U S
WEST Board of Directors or nominations for election by the Company's
stockholders was approved by a vote of at least two-thirds ( 2/3) of the
directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election was previously so
approved;
(iii) The Company becomes a party to a merger or consolidation in which
either (i) the Company will not be the surviving corporation or (ii) the
Company will be the surviving corporation and any outstanding shares of
common stock of the Company will be converted into shares of any other
company (other than a reincorporation or the establishment of a holding
company involving no change of ownership of the Company) or other securities
or cash or other property (excluding payments made solely for fractional
shares); or
(iv) Any other event that a majority of the U S WEST Board of Directors,
is in its sole discretion, shall determine constitutes a Change of Control.
6.2 SPECIAL CIRCUMSTANCES. If, prior to a distribution from the cash bonus
pool, a Participant (i) is discharged by the Company, (ii) is demoted, or (iii)
becomes associated with, employed by or renders services to, or owns a material
interest in any business that is competitive with the Company, the Committee
shall have the authority to (a) reduce or cancel payments that would otherwise
be paid
E-2
<PAGE>
from the cash bonus pool, (b) permit continued participation in the Plan or an
early distribution therefrom, or (c) any combination of the foregoing.
SECTION 7
MISCELLANEOUS PROVISIONS
7.1 ASSIGNMENT OR TRANSFER. No opportunity shall be assignable or
transferable by a Participant.
7.2 COSTS AND EXPENSES. The costs and expenses of administering the Plan
shall be borne by the Company and shall not be charged against any Participant.
7.3 OTHER INCENTIVE PLANS. The adoption of the Plan does not preclude the
adoption by appropriate means of any other incentive plan for employees.
7.4 EFFECT ON EMPLOYMENT. Nothing contained in this Plan or any agreement
related hereto or referred to herein shall affect, or be construed as affecting,
the terms of employment of any Participant except to the extent specifically
provided herein or therein. Nothing contained in this Plan or any agreement
related hereto or referred to herein shall impose, or be construed as imposing,
any obligation on (i) the Company to continue the employment of any Participant
and (ii) any Participant to remain in the employ of the Company.
7.5 PENSION FORMULA. Unless otherwise prohibited by the Committee, awards
under the Plan shall be used to compute a pension amount in the U S WEST
Executive Non-Qualified Pension Plan and will be used to calculate coverage in
the U S WEST Executive Life Insurance Program (if such coverage is elected).
Awards shall not be considered compensation for purposes of the U S WEST Savings
Plan/ESOP.
7.6 TAXATION. The Company shall have the right to deduct from any award to
be paid under the Plan any federal, state or local taxes required by law to be
withheld with respect to such payment.
7.7 AMENDMENT OF PLAN. The U S WEST Board of Directors shall have the right
to suspend or terminate this Plan at any time and may amend or modify the Plan
prior to the beginning of any Period.
SECTION 8
PLAN ADMINISTRATION
8.1 COMMITTEE AUTHORITY DELEGATION. The Committee shall have full power to
administer and interpret the Plan and to establish rules for its administration.
The Committee may designate Company employees to act in its behalf to engage in
daily administration of the Plan. The Committee or its designee may administer
the Plan in all respects including the proration or adjustment of awards in the
case of retirements, terminations, entrance to or exit from a level of
management, changes in base salary, dismissal or death and other conditions as
appropriate.
8.2 GOVERNING LAW. The Plan shall be governed by the laws of the state of
Colorado and applicable federal law.
8.3 COMMITTEE RELIANCE. The Committee, in making any determination under or
referred to in the Plan shall be entitled to rely on opinions, reports or
statements of officers or employees of the Company and other entities and of
counsel, public accountants and other professional expert persons.
E-3
<PAGE>
SECTION 9
CLAIMS AND APPEALS
9.1 COMMITTEE PROCEDURE. Claims and appeals will be processed in accordance
with the following procedures:
(a) Any claim under the Plan by a Participant or anyone claiming through
a Participant shall be presented to the Committee.
(b) Any person whose claim under the Plan has been denied may, within
sixty (60) days after receipt of notice of denial, submit to the Committee a
written request for review of the decision denying the claim.
(c) The Committee shall determine conclusively for all parties all
questions arising in the administration of the Plan.
9.2 ARBITRATION. Any dispute that may arise in connection with this Plan
shall be determined soley by arbitration in Denver, Colorado under the rules of
the American Arbitration Association. Any claim with respect to any benefit
under this Plan must be established by a preponderance of the evidence submitted
to the impartial arbitrator. The arbitrator shall have the authority to award
the prevailing party damages incurred as a result of any breach, costs,
reasonable attorneys' fees incurred in connection with the arbitration, and
direct that the non-prevailing party pay the expenses of arbitration. The
decision of the arbitrator (i) shall be final and binding; (ii) shall be
rendered within ninety (90) days after the impanelment of the arbitrator; and
(iii) shall be kept confidential by the parties to such arbitration. The
arbitration award may be enforced in any court of competent jurisdiction. The
Federal Arbitration Act, 9 U.S.C. SectionSection 1-15, not state law, shall
govern the arbitrability of all claims.
SECTION 10
ADOPTION OF THE PLAN
This Plan shall become effective on .
E-4
<PAGE>
ANNEX F
NEW U S WEST
COMBINED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Reports of Independent Accountants................................................... F-2
Combined Statements of Income........................................................ F-4
Combined Balance Sheets.............................................................. F-5
Combined Statements of Cash Flows.................................................... F-6
Notes to Combined Financial Statements............................................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the accompanying Combined Balance Sheet of New U S WEST (as
described in Note 1 to the Combined Financial Statements) as of December 31,
1996, and the related Combined Statements of Income and Cash Flows for the year
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of New U S WEST as of
December 31, 1996, and the combined results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Denver, Colorado,
February 6, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of U S WEST, Inc.:
We have audited the Combined Balance Sheet of New U S WEST (as described in
Note 1 to the Combined Financial Statements) as of December 31, 1995, and the
related Combined Statements of Income and Cash Flows for each of the two years
in the period ended December 31, 1995. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of New U S WEST as of
December 31, 1995, and the combined results of its operations and its cash flows
for each of the two years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Denver, Colorado
February 6, 1998
F-3
<PAGE>
NEW U S WEST
COMBINED STATEMENTS OF INCOME
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Operating revenues:
Local service........................................... $ 3,739 $ 3,532 $ 4,770 $ 4,344 $ 4,067
Interstate access service............................... 2,028 1,854 2,507 2,378 2,269
Intrastate access service............................... 608 571 770 747 729
Long-distance network services.......................... 721 840 1,100 1,189 1,329
Directory services...................................... 879 826 1,120 1,058 997
Other services.......................................... 682 660 901 792 741
--------- --------- --------- --------- ---------
Total operating revenues.............................. 8,657 8,283 11,168 10,508 10,132
Operating expenses:
Employee-related expenses............................... 2,915 2,923 3,894 3,624 3,461
Other operating expenses................................ 1,517 1,374 1,901 1,848 1,826
Taxes other than income taxes........................... 320 302 404 394 401
Depreciation and amortization........................... 1,616 1,602 2,158 2,066 1,928
--------- --------- --------- --------- ---------
Total operating expenses.............................. 6,368 6,201 8,357 7,932 7,616
--------- --------- --------- --------- ---------
Operating income.......................................... 2,289 2,082 2,811 2,576 2,516
Interest expense.......................................... 304 334 448 429 381
Gains on sales of rural telephone exchanges............... 77 51 59 136 82
Other expense--net........................................ 51 24 45 35 3
--------- --------- --------- --------- ---------
Income before income taxes, extraordinary items and
cumulative effect of change in accounting principle..... 2,011 1,775 2,377 2,248 2,214
Provision for income taxes................................ 752 668 876 817 811
--------- --------- --------- --------- ---------
Income before extraordinary items and cumulative effect of
change in accounting principle.......................... 1,259 1,107 1,501 1,431 1,403
Extraordinary items--early extinguishment of debt-- net of
tax..................................................... (3) -- -- (8) --
--------- --------- --------- --------- ---------
Income before cumulative effect of change in accounting
principle............................................... 1,256 1,107 1,501 1,423 1,403
Cumulative effect of change in accounting principle--net
of tax.................................................. -- 34 34 -- --
--------- --------- --------- --------- ---------
NET INCOME................................................ $ 1,256 $ 1,141 $ 1,535 $ 1,423 $ 1,403
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-4
<PAGE>
NEW U S WEST
COMBINED BALANCE SHEETS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
(UNAUDITED) --------------------
1997 1996 1995
------------- --------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................................. $ 196 $ 80 $ 172
Accounts and notes receivable, less allowance for credit losses of $60 and
$50, respectively........................................................ 1,604 1,644 1,645
Inventories and supplies................................................... 196 144 194
Deferred directory costs................................................... 244 242 232
Deferred tax asset......................................................... 173 185 276
Prepaid and other.......................................................... 69 67 53
------------- --------- ---------
Total current assets......................................................... 2,482 2,362 2,572
Gross property, plant and equipment.......................................... 33,269 32,858 31,355
Less accumulated depreciation................................................ 19,409 18,769 17,736
------------- --------- ---------
Property, plant and equipment--net........................................... 13,860 14,089 13,619
Other assets................................................................. 922 828 769
------------- --------- ---------
Total assets................................................................. $ 17,264 $ 17,279 $ 16,960
------------- --------- ---------
------------- --------- ---------
LIABILITIES AND EQUITY
Current liabilities:
Short-term debt............................................................ $ 423 $ 835 $ 1,004
U S WEST debt.............................................................. 348 45 87
Accounts payable........................................................... 1,156 945 823
Employee compensation...................................................... 358 357 328
Dividends payable.......................................................... 259 257 254
Advanced billing and customer deposits..................................... 328 294 267
Accrued property taxes..................................................... 214 197 198
Other...................................................................... 792 691 787
------------- --------- ---------
Total current liabilities.................................................... 3,878 3,621 3,748
Long-term debt............................................................... 5,024 5,665 5,691
Postretirement and other postemployment benefit obligations.................. 2,467 2,449 2,404
Deferred income taxes........................................................ 729 722 672
Unamortized investment tax credits........................................... 162 173 199
Deferred credits and other................................................... 595 564 589
Contingencies
New U S WEST equity.......................................................... 4,409 4,085 3,657
------------- --------- ---------
Total liabilities and equity................................................. $ 17,264 $ 17,279 $ 16,960
------------- --------- ---------
------------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial Statements
F-5
<PAGE>
NEW U S WEST
COMBINED STATEMENTS OF CASH FLOWS
DOLLARS IN MILLIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) YEAR ENDED DECEMBER 31,
-------------------- -------------------------------
1997 1996 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 1,256 $ 1,141 $ 1,535 $ 1,423 $ 1,403
Adjustments to net income:
Depreciation and amortization............................. 1,616 1,602 2,158 2,066 1,928
Gains on sales of rural telephone exchanges............... (77) (51) (59) (136) (82)
Cumulative effect of change in accounting principle....... -- (34) (34) -- --
Deferred income taxes and amortization of investment tax
credits................................................. 7 (9) 87 180 228
Changes in operating assets and liabilities:
Restructuring payments.................................... (59) (126) (242) (334) (284)
Postretirement medical and life costs, net of cash
fundings................................................ 16 (23) 35 (89) (197)
Accounts receivable....................................... 40 26 1 (116) (72)
Inventories, supplies and other current assets............ (75) (14) 18 (67) (48)
Accounts payable and accrued liabilities.................. 304 61 98 17 (112)
Other--net.................................................. 125 (7) 17 26 (8)
--------- --------- --------- --------- ---------
Cash provided by operating activities....................... 3,153 2,566 3,614 2,970 2,756
--------- --------- --------- --------- ---------
INVESTING ACTIVITIES
Expenditures for property, plant and equipment.............. (1,322) (1,906) (2,444) (2,494) (2,290)
Purchase of PCS licenses.................................... (57) -- -- -- --
Proceeds from sales of rural telephone exchanges............ 51 130 174 214 93
Proceeds from (payments on) disposals of property, plant and
equipment................................................. 27 (1) 15 (18) 3
Other--net.................................................. -- -- -- 16 17
--------- --------- --------- --------- ---------
Cash (used for) investing activities........................ (1,301) (1,777) (2,255) (2,282) (2,177)
--------- --------- --------- --------- ---------
FINANCING ACTIVITIES
Net (repayments of) proceeds from short-term debt........... (701) 257 159 (776) 341
Net proceeds from (repayments of) short-term
U S WEST debt............................................. 303 (33) (42) (53) (29)
Proceeds from issuance of long-term debt.................... -- 16 23 1,649 326
Repayments of long-term debt................................ (412) (279) (483) (334) (285)
Proceeds from issuance of common stock...................... 50 109 134 50 208
Dividends paid on common stock.............................. (733) (703) (939) (926) (886)
Dividends paid to U S WEST.................................. (243) (222) (303) (241) (196)
--------- --------- --------- --------- ---------
Cash (used for) financing activities........................ (1,736) (855) (1,451) (631) (521)
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS
Increase (decrease)......................................... 116 (66) (92) 57 58
Beginning balance........................................... 80 172 172 115 57
--------- --------- --------- --------- ---------
Ending balance.............................................. $ 196 $ 106 $ 80 $ 172 $ 115
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
The accompanying notes are an integral part of the Combined Financial
Statements.
F-6
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996 AND
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(DOLLARS IN MILLIONS)
NOTE 1: U S WEST SEPARATION
THE RECAPITALIZATION
In 1995, U S WEST, Inc. ("U S WEST") divided its businesses into two groups:
U S WEST Communications Group (the "Communications Group") and U S WEST Media
Group (the "Media Group") and created two separate classes of common stock under
a recapitalization plan (the "Recapitalization Plan"). One class of stock, U S
WEST Communications Group Common Stock ("Communications Stock"), reflects the
performance of the communications businesses comprising the Communications Group
and the other class of stock, U S WEST Media Group Common Stock (the "Media
Stock"), reflects the performance of the multimedia businesses comprising the
Media Group. Effective November 1, 1995, each share of common stock of U S WEST
was converted into one share each of Communications Stock and Media Stock.
THE SEPARATION
On October 25, 1997, the Board of Directors of U S WEST (the "Board")
adopted a proposal to separate U S WEST into two independent companies (the
"Separation"). As a result of the Separation, the Communications Group will
become an independent public company and will be renamed "U S WEST, Inc." ("New
U S WEST"). In addition, the Media Group's directory business known as U S WEST
Dex, Inc. ("Dex") will be aligned with New U S WEST (the "Dex Alignment"). The
assets of New U S WEST will be accounted for at the historical values at which
they were carried by U S WEST prior to the Separation. Following the Separation,
U S WEST will continue as an independent public company comprised of the current
businesses of Media Group other than Dex and will be renamed "MediaOne Group,
Inc." ("MediaOne").
The Separation will be implemented pursuant to the terms of a separation
agreement between U S WEST and New U S WEST (the "Separation Agreement"). Under
the Separation Agreement, U S WEST will redeem each issued and outstanding share
of Communications Stock for one share of New U S WEST Common Stock and each
outstanding share of Media Stock will remain outstanding and will thereafter
represent one share of MediaOne Common Stock.
In connection with the Dex Alignment, (i) U S WEST will distribute, as a
dividend, an aggregate of $850 in value of New U S WEST shares to holders of
Media Stock and (ii) $3.9 billion of U S WEST debt, currently allocated to Media
Group, will be refinanced by New U S WEST (the "Dex Indebtedness").
Certain of the terms of the Separation Agreement and the Dex Alignment,
including the refinancing of $3.9 billion of Dex Indebtedness by New U S WEST,
the issuance of $850 of New U S WEST Common Stock, the transfer to New U S WEST
of certain assets and liabilities of U S WEST and the allocation of certain
costs and expenses of the Separation, are not reflected in the accompanying New
U S WEST Combined Financial Statements. The full financial effects of the
Separation and Dex Alignment, which are significant to New U S WEST, will be
reflected in the financial statements in conjunction with the Separation's
effective date (the "Separation Date"). These Combined Financial Statements
should be read in conjunction with the New U S WEST Unaudited Pro Forma
Condensed Combined Financial Statements. See "Chapter 5: Information About New U
S WEST--New U S WEST Unaudited Pro Forma Condensed Combined Financial
Statements."
F-7
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: U S WEST SEPARATION (CONTINUED)
In connection with the Separation, U S WEST's existing employee benefit and
incentive compensation plans will be amended and adjusted. In addition, New U S
WEST and MediaOne will enter into a series of agreements governing the
allocation of tax and certain other liabilities and obligations arising from
periods prior to the Separation. The effects of such items are not reflected in
the accompanying New U S WEST Combined Financial Statements, but will be
included in the financial statements upon execution of the Separation Agreement.
Following is a summary of the more significant of these items:
- STOCK INCENTIVE PLANS. Effective prior to the Separation, New U S WEST will
adopt the 1998 U S WEST Stock Plan (the "1998 New U S WEST Stock Plan"),
under which New U S WEST may grant to its employees awards in the form of
stock options, stock appreciation rights and restricted stock, as well as
substitute stock options and restricted stock awards. The 1998 New U S WEST
Stock Plan will be administered by the Human Resources Committee of the New
U S WEST Board (the "New U S WEST Human Resources Committee") and is
designed to enable New U S WEST to retain key employees and to directly link
their incentives to the performance of New U S WEST Common Stock. The 1998
New U S WEST Stock Plan will be substantially similar to the current U S
WEST Stock Plans. Under the 1998 New U S WEST Stock Plan, Communications
Stock awards that currently exist will be replaced with the same number of
New U S WEST Common Stock awards having the same terms and conditions,
exercise price, vesting and restrictions as the Communications Stock awards.
- PENSION PLAN. Effective immediately prior to the Separation, New U S WEST
will assume sponsorship of the U S WEST Pension Plan (the "New U S WEST
Pension Plan"). Effective as of the Separation Date, MediaOne will establish
a new defined benefit pension plan for eligible MediaOne Employees (the
"MediaOne Pension Plan"). In connection with the Separation, a portion of
the existing assets of the U S WEST Pension Plan will be transferred at fair
value to the MediaOne Pension Plan such that, immediately following
consummation of the Separation, the ratio of plan assets to plan
liabilities, calculated on a projected benefit obligations basis as
determined by independent actuaries, will be the same for the New U S WEST
Pension Plan and the MediaOne Pension Plan. The U S WEST Pension Plan has
approximately $12 billion of assets. Subject to final adjustments, it is
anticipated that the MediaOne Pension Plan will receive between $190 and
$270 of such assets, with the remainder of such assets being retained by the
New U S WEST Pension Plan. It is currently anticipated that the benefit
expense and required cash contributions by New U S WEST to the New U S WEST
Pension Plan after the Separation will be materially the same as the benefit
expense and required cash contributions of the Communications Group to the U
S WEST Pension Plan prior to the Separation.
- POSTRETIREMENT BENEFITS OTHER THAN PENSIONS. U S WEST currently maintains
an employee welfare benefit program that includes retiree medical and life
insurance benefits for its employees. Under such program, U S WEST maintains
three funded retiree medical and life insurance benefits trusts. One of
these trusts covers hourly employees only and will be transferred in its
entirety to New U S WEST. The remaining two trusts will be transferred to
New U S WEST and MediaOne will establish new trusts. A portion of the assets
of the U S WEST trusts will be transferred to the MediaOne trusts based upon
the same methodology used to transfer assets of the U S WEST Pension Plan to
the MediaOne Pension Plan, except that the liabilities will be calculated
using the accumulated postretirement benefit obligations basis. It is
anticipated that approximately $5 million and $3 million,
F-8
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 1: U S WEST SEPARATION (CONTINUED)
respectively, will be transferred by the U S WEST trusts to the MediaOne
trusts out of the total assets of $225 million and $600 million,
respectively, of the U S WEST trusts.
- TAX SHARING AGREEMENT. U S WEST and New U S WEST will enter into a tax
sharing agreement that will govern the allocation between U S WEST and New U
S WEST of federal, state, local and foreign tax liabilities and related tax
matters such as the preparation and filing of tax returns and the conduct of
audits and other tax proceedings for taxable periods before and after the
Separation. In general, the Tax Sharing Agreement will provide that (i) New
U S WEST will be responsible for, and will indemnify U S WEST against, tax
liabilities relating to the Communications Group, for taxable periods ending
on or prior to the Separation, and (ii) MediaOne will be responsible for,
and will indemnify New U S WEST against, tax liabilities relating to the
Media Group, for taxable periods ending on or prior to the Separation.
NEW U S WEST
New U S WEST is comprised of U S WEST Communications, Inc. ("U S WEST
Communications"), U S WEST Dex, Inc., U S WEST Communications Services, Inc., U
S WEST Federal Services, Inc., U S WEST Advanced Technologies, Inc., U S WEST
Business Resources, Inc., U S WEST Long Distance, Inc. and U S WEST Information
Technologies, Inc. Primary services provided include telecommunications services
for more than 25 million residential and business customers in U S WEST
Communications' 14 state region (the "Region"). The Region includes the states
of Arizona, Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico,
North Dakota, Oregon, South Dakota, Utah, Washington and Wyoming. Primary
telecommunications services offered include local telephone services, exchange
access services (which connect customers to the facilities of carriers,
including long-distance providers and wireless operators), and long-distance
services within Local Access and Transport Areas ("LATAs") in the Region. Other
products and services include wireless personal communications services ("PCS"),
high-speed data and Internet access services, and certain other communications
equipment sales and services for business customers and governmental agencies
both inside and outside the Region.
In addition to communications and related services, New U S WEST provides
directory services. The directory business consists of Dex, which publishes
approximately 295 White and Yellow Pages telephone directories in the Region.
Dex also provides electronic directory and other information services.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION. The New U S WEST Combined Financial Statements
include the combined historical balance sheets, results of operations and cash
flows of the businesses that comprise the Communications Group and Dex. All
significant intercompany amounts and transactions have been eliminated.
The interim financial statements have been prepared in accordance with
generally accepted accounting principles ("GAAP") and in accordance with SEC
rules and regulations for interim reporting. Certain information and footnote
disclosures normally accompanying financial statements prepared in accordance
with GAAP have been condensed or omitted pursuant to such SEC rules and
regulations. In the opinion of New U S WEST's management, the interim financial
statements include all adjustments, consisting of only normal recurring
adjustments, necessary to present fairly the interim financial information set
forth therein.
F-9
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ALLOCATION OF SERVICES PROVIDED BY U S WEST. Certain costs relating to U S
WEST's general and administrative services (including certain executive
management, legal, tax, accounting and auditing, treasury, strategic planning
and public policy services) have been directly assigned to New U S WEST based on
actual utilization or are allocated based on New U S WEST's operating expenses,
number of employees, external revenues, average capital and/or average equity. U
S WEST charges for such services at fully distributed cost. These direct and
indirect allocations were $92, $126 and $120 in 1996, 1995 and 1994,
respectively. In 1996, the direct allocations comprised approximately 65 percent
of the total shared corporate services allocated to New U S WEST. Management
believes that such cost allocation methods are reasonable.
ALLOCATION OF INCOME TAXES. Federal, state and local income taxes, which
are determined on a consolidated or combined basis, have been allocated to New U
S WEST in accordance with tax sharing agreements between U S WEST and the
entities comprising New U S WEST. The allocations have generally reflected New U
S WEST's contribution to consolidated taxable income and consolidated tax
credits.
FINANCING. Financing activities for the nonregulated New U S WEST
businesses, including the issuance, repayment and repurchase of short-term and
long-term debt, have been managed by U S WEST on a centralized basis. U S WEST
Communications conducts its own borrowing activities. Debt incurred and
investments made by U S WEST and its subsidiaries on behalf of the nonregulated
New U S WEST businesses have been specifically allocated to and reflected in the
financial statements of New U S WEST. Debt incurred by U S WEST or a subsidiary
on behalf of New U S WEST has been charged to New U S WEST at the borrowing rate
of U S WEST or such subsidiary.
DIVIDENDS. Dividends on the Communications Stock have been paid at the
discretion of the Board based primarily upon U S WEST's financial condition,
results of operations and business requirements. Management anticipates that New
U S WEST will pay dividends on New U S WEST Common Stock initially at the
quarterly rate of $0.535 per share, which is the same dividend currently paid on
the Communications Stock. While the Board of Directors at New U S WEST (the "New
U S WEST Board") is not expected to change this dividend policy, it has the
right to do so at any time.
Prior to the Separation, New U S WEST paid dividends monthly to U S WEST
based on Dex's net income adjusted for the amortization of intangibles.
EARNINGS PER COMMON SHARE. Historical earnings per share is not presented
as it is not meaningful until the financial effects of the Separation and the
Dex Alignment, which are significant, are reflected in the historical financial
statements of New U S WEST. These financial effects will be included in
historical results upon execution of the Separation Agreement. See "Chapter 5:
Information About New U S WEST--New U S WEST Unaudited Pro Forma Condensed
Combined Financial Statements."
F-10
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES. The preparation of financial statements in conformity
with GAAP requires management to make estimates and assumptions that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include highly liquid
investments with original maturities of three months or less that are readily
convertible into cash and are not subject to significant risk from fluctuations
in interest rates.
INVENTORIES AND SUPPLIES. New and reusable materials of U S WEST
Communications are carried at average cost, except for significant individual
items that are valued based on specific costs. Nonreusable material is carried
at its estimated salvage value. Inventories of New U S WEST's nontelephone
operations are carried at the lower of cost or market on a first-in, first-out
basis.
PROPERTY, PLANT AND EQUIPMENT. The investment in property, plant and
equipment is carried at cost less accumulated depreciation. Additions,
replacements and substantial betterments are capitalized. Costs for normal
repair and maintenance of property, plant and equipment are expensed as
incurred.
U S WEST Communications' provision for depreciation of property, plant and
equipment is based on various straight-line group methods using remaining useful
(economic) lives based on industry-wide studies. U S WEST Communications
discontinued accounting for its regulated telephone operations under SFAS No.
71, "Accounting for the Effects of Certain Types of Regulation," in 1993. The
average depreciable lives used for the major categories of telephone property,
plant and equipment follow:
<TABLE>
<CAPTION>
AVERAGE
CATEGORY LIFE (YEARS)
- --------------------------------------------------------------------------------- -------------
<S> <C>
General purpose computers........................................................ 6
Digital switch................................................................... 10
Digital circuit.................................................................. 10
Aerial copper cable.............................................................. 15
Underground copper cable......................................................... 15
Buried copper cable.............................................................. 20
Fiber cable...................................................................... 20
Buildings........................................................................ 27-49
</TABLE>
When the depreciable property, plant and equipment of U S WEST
Communications is retired or sold, the original cost less the net salvage value
is generally charged to accumulated depreciation. The nontelephone operations of
New U S WEST provide for depreciation using the straight-line method. When such
depreciable property, plant and equipment is retired or sold, the resulting gain
or loss is included in income.
Interest related to qualifying construction projects is capitalized and
reflected as a reduction of interest expense. Amounts capitalized were $31, $39
and $36 in 1996, 1995 and 1994, respectively.
COMPUTER SOFTWARE. The cost of computer software, whether purchased or
developed internally, is charged to expense with two exceptions. Initial
operating systems software is capitalized and amortized over the life of the
related hardware, and initial network applications software is capitalized and
amortized over three years. Subsequent upgrades to capitalized software are
charged to expense. Capitalized
F-11
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
computer software costs of $196 and $189 at December 31, 1996 and 1995,
respectively, are recorded in property, plant and equipment. Amortization of
capitalized computer software costs totaled $82, $69 and $61 in 1996, 1995 and
1994, respectively.
FINANCIAL INSTRUMENTS. Synthetic instrument accounting is used for interest
rate and foreign currency swaps if the index, maturity and amount of the
instrument match the terms of the underlying debt. Net interest accrued is
recognized over the life of the instruments as an adjustment to interest expense
and is a component of cash provided by operating activities. Any gain or loss on
the termination of an instrument that qualifies for synthetic instrument
accounting would be deferred and amortized over the remaining life of the
original instrument.
Hedge accounting is used for forward contracts which qualify as hedges of
future debt issues. To qualify for hedge accounting, the contracts must have a
high inverse correlation to the exposure being hedged, and reduce the risk or
volatility associated with changes in interest rates. Qualified contracts are
carried at market value with gains and losses recorded with the related debt and
amortized as yield adjustments. Any gain or loss on the termination of a
contract that qualifies for hedge accounting would be deferred and accounted for
with the related transaction. New U S WEST does not use derivative financial
instruments for trading purposes.
Gains and losses incurred on executed forward U.S. Treasury Bond contracts,
used to lock in the U.S. Treasury rate component of future debt issues, are
deferred and recognized as an adjustment to interest expense over the life of
the underlying debt. At December 31, 1996, deferred credits of $8 and deferred
charges of $50 on the closed forward contracts are included as part of the
carrying value of the underlying debt. The deferred credits and charges are
being recognized as a yield adjustment over the life of the debt, which matures
at various dates through 2043.
Currency swaps entered into to convert foreign debt to dollar-denominated
debt are combined with the foreign currency debt and accounted for as if
fixed-rate, dollar-denominated debt were issued directly.
REVENUE RECOGNITION AND DEFERRED DIRECTORY COSTS. Local telephone service
revenues are generally billed monthly in advance and revenues are recognized the
following month when services are provided. Revenues derived from exchange
access and long-distance network services are billed and recorded monthly as
services are provided. Directory advertising revenues and related directory
costs of selling, composition, printing and distribution are generally deferred
and recognized over the period directories are used, normally 12 months.
INCOME TAXES. The provision for income taxes consists of an amount for
taxes currently payable and an amount for tax consequences deferred to future
periods. For financial statement purposes, investment tax credits of U S WEST
Communications are being amortized over the economic lives of the related
property, plant and equipment in accordance with the deferred method of
accounting for such credits.
NEW ACCOUNTING STANDARDS. Effective January 1, 1996, New U S WEST adopted
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." See Note 4--Property, Plant and
Equipment--to the New U S WEST Combined Financial Statements.
In 1996, New U S WEST adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." See Note 10--Stock Incentive Plans--to the New U S WEST Combined
Financial Statements.
F-12
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New U S WEST will adopt SFAS No. 128, "Earnings Per Share" effective
December 31, 1997. This accounting standard specifies new computation,
presentation and disclosure requirements for earnings per share. Among other
things, SFAS No. 128 requires presentation of basic and diluted earnings per
share on the face of the income statement. Adoption of the new standard is not
expected to have a material impact on earnings per share for comparative
periods.
In 1998, New U S WEST will adopt SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that the components of and the total
amount for comprehensive income be displayed in the financial statements.
Comprehensive income includes net income and all changes in equity during a
period that arise from nonowner sources, such as foreign currency items and
unrealized gains and losses on certain investments in equity securities. Among
other things, SFAS No. 131 requires detailed operating segment information of an
enterprise on an annual and interim period basis.
NOTE 3: INDUSTRY SEGMENTS
New U S WEST operates in two industry segments: communications and related
services, and directory services.
The communications and related services segment provides telecommunications
services to more than 25 million residential and business customers in the
Region. Approximately 97 percent of the revenues of the communications and
related services segment are attributable to the operations of U S WEST
Communications, of which approximately 60 percent are derived from the states of
Arizona, Colorado, Minnesota and Washington.
The directory services segment publishes approximately 295 White and Yellow
Pages telephone directories in the Region and provides electronic directory and
other information services.
F-13
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: INDUSTRY SEGMENTS (CONTINUED)
Industry segment financial information follows:
<TABLE>
<CAPTION>
COMMUNICATIONS INTERSEGMENT
AND ELIMINATIONS
RELATED DIRECTORY AND OTHER
SERVICES SERVICES ADJUSTMENTS COMBINED
--------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
1996
Operating revenues..................................... $ 10,079 $ 1,120 $ (31) $ 11,168
Operating income....................................... 2,340 471 -- 2,811
Identifiable assets.................................... 16,915 493 (129) 17,279
Depreciation and amortization.......................... 2,122 36 -- 2,158
Capital expenditures................................... 2,806 25 -- 2,831
1995
Operating revenues..................................... 9,484 1,058 (34) 10,508
Operating income....................................... 2,178 398 -- 2,576
Identifiable assets.................................... 16,585 450 (75) 16,960
Depreciation and amortization.......................... 2,042 24 -- 2,066
Capital expenditures................................... 2,739 31 -- 2,770
1994
Operating revenues..................................... 9,176 997 (41) 10,132
Operating income....................................... 2,118 398 -- 2,516
Identifiable assets.................................... 15,944 443 (70) 16,317
Depreciation and amortization.......................... 1,908 20 -- 1,928
Capital expenditures................................... 2,477 36 -- 2,513
</TABLE>
Operating income represents operating revenues less operating expenses, and
excludes interest expense, other expense and income taxes. For the year ended
December 31, 1996, operating income of the directory services segment includes a
charge of $25 to reorganize and reduce headcount. Identifiable assets are those
assets used in each segment's operations.
INTERSEGMENT ELIMINATIONS. U S WEST Communications sells customer lists,
billing and collection services and other services to Dex at market price. In
addition, U S WEST Business Resources, Inc. provides commercial property
management services to Dex at market price.
SIGNIFICANT CONCENTRATIONS. The largest volume of the communications and
related services revenues is provided to AT&T. During 1996, 1995 and 1994,
revenues related to those services provided to AT&T were $1,046, $1,085 and
$1,130, respectively. Related accounts receivable at December 31, 1996 and 1995,
totaled $89 and $91, respectively. As of December 31, 1996, New U S WEST is not
aware of any other significant concentration of business transacted with a
particular customer, supplier or lender that could, if suddenly eliminated,
severely impact operations.
F-14
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4: PROPERTY, PLANT AND EQUIPMENT
The composition of property, plant and equipment follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land and buildings...................................................... $ 2,433 $ 2,472
Telephone network equipment............................................. 12,925 12,019
Telephone outside plant................................................. 13,148 12,353
General purpose computers and other..................................... 3,753 3,743
Construction in progress................................................ 599 768
--------- ---------
32,858 31,355
--------- ---------
Less accumulated depreciation
Buildings............................................................. 709 686
Telephone network equipment........................................... 7,756 7,221
Telephone outside plant............................................... 8,221 7,851
General purpose computers and other................................... 2,083 1,978
--------- ---------
18,769 17,736
--------- ---------
Property, plant and equipment--net...................................... $ 14,089 $ 13,619
--------- ---------
--------- ---------
</TABLE>
During the nine-months ended September 30, 1997, U S WEST Communications
sold certain rural telephone exchanges with a cost basis of $160, and received
consideration of $237, including $51 in cash. U S WEST Communications sold
certain rural telephone exchanges with a cost basis of $243, $258 and $122,
during 1996, 1995 and 1994, respectively, and received consideration of $306
(including $174 in cash) during 1996, $388 (including $214 in cash) during 1995
and $204 (including $93 in cash) during 1994.
ADOPTION OF SFAS NO. 121
Effective January 1, 1996, New U S WEST adopted SFAS No. 121, which requires
that long-lived assets and associated intangibles be written down to fair value
whenever an impairment review indicates that the carrying value cannot be
recovered on an undiscounted cash flow basis. SFAS No. 121 also requires that a
company no longer record depreciation expense on assets held for sale. Adoption
of SFAS No. 121 resulted in income of $34 (net of tax of $22) from the
cumulative effect of reversing depreciation expense recorded in prior years
related to rural telephone exchanges held for sale. Depreciation expense was
reversed from the date New U S WEST formally committed to a plan to dispose of
the rural telephone exchange assets to January 1, 1996. The income has been
recorded as a cumulative effect of change in accounting principle in accordance
with SFAS No. 121. The carrying values of the rural telephone exchange assets
being held for sale approximates $144 and $338 at December 31, 1996 and 1995,
respectively. As a result of adopting SFAS No. 121, depreciation expense for
1996 was reduced by $24. The combined effects of lower depreciation expense and
the cumulative effect of adoption of the new standard will be directly offset by
lower recognized gains on future rural telephone exchange sales.
F-15
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT
SHORT-TERM DEBT
The components of short-term debt follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Commercial paper............................................................. $ 701 $ 542
Allocated from U S WEST...................................................... 45 87
Current portion of long-term debt............................................ 134 462
--------- ---------
Total.................................................................... $ 880 $ 1,091
--------- ---------
--------- ---------
</TABLE>
The weighted average interest rate on commercial paper was 5.57 percent and
5.79 percent at December 31, 1996 and 1995, respectively. The weighted average
interest rate on the allocated U S WEST debt was 7.50 percent at December 31,
1996 and 1995, respectively.
U S WEST and U S WEST Communications maintain commercial paper programs to
finance short-term cash flow requirements, as well as to maintain a presence in
the short-term debt market. In addition, U S WEST Communications, which conducts
its own borrowing activities, is permitted to borrow up to $500 under short-term
lines of credit, all of which was available at December 31, 1997. Additional
lines of credit are available to the nonregulated subsidiaries of U S WEST in
accordance with their borrowing needs. New U S WEST is currently engaged in
discussions with major lending institutions to secure stand-alone lines of
credit to meet the combined business needs of its non-regulated subsidiaries.
LONG-TERM DEBT
Interest rates and maturities of long-term debt at December 31 follow:
<TABLE>
<CAPTION>
MATURITIES
------------------------------------------------------- TOTAL TOTAL
INTEREST RATES 1998 1999 2000 2001 THEREAFTER 1996 1995
- --------------------------------------------------- --------- --------- --------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Up to 5%........................................... $ 36 $ -- $ 90 $ -- $ 149 $ 275 $ 275
Above 5% to 6%..................................... 300 -- -- 50 211 561 561
Above 6% to 7%..................................... -- 71 257 133 1,783 2,244 2,244
Above 7% to 8%..................................... -- -- -- -- 2,457 2,457 2,493
Above 8% to 9%..................................... -- -- -- -- 250 250 250
Above 9% to 10%.................................... -- -- 175 -- -- 175 175
Above 10%.......................................... 1 -- -- -- -- 1 2
Variable-rate debt indexed to three-month LIBOR and
two- and ten-year constant maturity Treasury
rates............................................ -- 155 -- -- -- 155 180
--------- --------- --------- --------- ----------- --------- ---------
$ 337 $ 226 $ 522 $ 183 $ 4,850 6,118 6,180
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Capital lease obligations and other................ 194 195
Unamortized discount--net.......................... (647) (684)
--------- ---------
Total.......................................... $ 5,665 $ 5,691
--------- ---------
--------- ---------
</TABLE>
F-16
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT (CONTINUED)
Long-term debt consists principally of debentures, medium-term notes and
zero coupon subordinated notes convertible at any time into equal shares of
Communications Stock and Media Stock. The zero coupon notes had a yield to
maturity of approximately 7.3 percent. The zero coupon notes were recorded at a
discounted value of $289 and $276 at December 31, 1996 and 1995, respectively.
In August 1997, U S WEST redeemed its zero coupon subordinated notes due
June 25, 2011. Upon redemption, the recorded value of the notes attributed to
New U S WEST was $303. The debt extinguishment resulted in an extraordinary
charge to income of $3, net of income tax benefits of $2, primarily related to
the write-off of deferred debt issuance costs. Floating-rate U S WEST debt, due
on demand, was used to finance the redemption.
During 1995, U S WEST Communications refinanced $1.5 billion of commercial
paper to take advantage of favorable long-term interest rates. In addition to
the commercial paper, U S WEST Communications refinanced $145 of long-term debt.
Expenses associated with the refinancing of long-term debt resulted in an
extraordinary charge to income of $8, net of income tax benefits of $5.
Interest paid by New U S WEST, net of amounts capitalized, was $430, $383
and $363 in 1996, 1995 and 1994, respectively.
INTEREST RATE RISK MANAGEMENT
The objective of the interest rate risk management program is to minimize
the total cost of debt over time and the debt's interest variability. This is
achieved through interest rate swaps, which adjust the ratio of fixed- to
variable-rate debt.
Under an interest rate swap, U S WEST Communications agrees with another
party to exchange interest payments at specified intervals over a defined term.
Interest payments are calculated by reference to the notional amount based on
the fixed- and variable-rate terms of the swap agreements. The net interest
accrued under the interest rate swap is accounted for as an adjustment to
interest expense.
During 1995, U S WEST Communications entered into currency swaps to convert
Swiss franc-denominated debt to U.S. dollar-denominated debt. This allowed U S
WEST Communications to achieve interest savings over issuing fixed-rate,
dollar-denominated debt. The currency swap and foreign currency debt are
combined and accounted for as if fixed-rate, dollar-denominated debt was issued
directly.
The following table summarizes terms of swaps pertaining to U S WEST
Communications at December 31, 1996 and 1995. Variable rates are indexed to
three-month LIBOR and two- and ten-year constant maturity Treasury and 30-day
commercial paper rates.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
DECEMBER 31, 1996 -------------------------------------
------------------------------------------------ WEIGHTED
WEIGHTED AVERAGE RATE AVERAGE
RATE
NOTIONAL ---------------------- NOTIONAL -----------
AMOUNT MATURITIES RECEIVE PAY AMOUNT MATURITIES RECEIVE
----------- ----------- ----------- --------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Variable to fixed................. $ 180 1997-1999 5.51 5.91 $ 580 1996-1999 5.70
Currency.......................... 204 1999-2001 -- 6.55 204 1999-2001 --
<CAPTION>
PAY
---------
<S> <C>
Variable to fixed................. 6.56
Currency.......................... 6.55
</TABLE>
The counterparties to swaps or other interest rate contracts are major
financial institutions. U S WEST Communications is exposed to credit loss in the
event of nonperformance by these counterparties. New U S WEST manages this
exposure by monitoring the credit standing of the
F-17
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: DEBT (CONTINUED)
counterparty and establishing dollar and term limitations which correspond to
the respective credit rating of each counterparty. U S WEST Communications does
not have significant exposure to an individual counterparty and does not
anticipate nonperformance by any counterparty.
NOTE 6: FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair values of cash equivalents, other current amounts receivable and
payable and short-term debt approximate carrying values due to their short-term
nature.
The fair values of interest rate swaps are based on estimated amounts U S
WEST Communications would receive or pay to terminate such agreements taking
into account current interest rates and creditworthiness of the counterparties.
The fair values of long-term debt are based on quoted market prices where
available or, if not available, are based on discounting future cash flows using
current interest rates.
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------
1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Debt (includes short-term portion)....................................... $ 6,545 $ 6,500 $ 6,782 $ 7,080
Interest rate swap agreements--assets.................................... -- (17) -- (19)
Interest rate swap agreements--liabilities............................... -- 10 -- 17
----------- --------- ----------- ---------
Debt--net................................................................ $ 6,545 $ 6,493 $ 6,782 $ 7,078
----------- --------- ----------- ---------
----------- --------- ----------- ---------
</TABLE>
NOTE 7: RESTRUCTURING CHARGE
In 1993, New U S WEST incurred a $930 restructuring charge (pretax). The
related restructuring plan was designed to provide faster, more responsive
customer services, while reducing the costs of providing these services.
Following is a schedule of the incurred costs that were included in the 1993
restructuring charge:
<TABLE>
<CAPTION>
ACTUAL
-------------------------------
1994 1995 1996 REMAINING* TOTAL
--------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Employee separation.................................................. $ 19 $ 76 $ 102 $ 91 $ 288
Systems development.................................................. 127 145 106 22 400
Real estate.......................................................... 50 66 8 6 130
Relocation........................................................... 21 24 5 2 52
Retraining and other................................................. 11 23 21 5 60
--------- --------- --------- ----- ---------
Total............................................................ $ 228 $ 334 $ 242 $ 126 $ 930
--------- --------- --------- ----- ---------
--------- --------- --------- ----- ---------
</TABLE>
- ------------------------------
* As of December 31, 1996.
During the nine-month period ended September 30, 1997, the restructuring
reserve decreased $59 to a balance of $67. Reserve usage primarily related to
492 employee separations during the first nine months
F-18
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 7: RESTRUCTURING CHARGE (CONTINUED)
of 1997 and systems development costs. The restructuring plan is substantially
complete as of December 31, 1997.
NOTE 8: LEASING ARRANGEMENTS
The Company has entered into operating leases for office facilities,
equipment and real estate. Rent expense under operating leases was $208, $229
and $248 in 1996, 1995 and 1994, respectively. Minimum future lease payments as
of December 31, 1996, under noncancelable operating leases, follow:
<TABLE>
<CAPTION>
YEAR
- ---------------------------------------------------------------------------
<S> <C>
1997....................................................................... $ 138
1998....................................................................... 137
1999....................................................................... 125
2000....................................................................... 115
2001....................................................................... 120
Thereafter................................................................. 825
---------
Total.................................................................. $ 1,460
---------
---------
</TABLE>
Minimum payments have not been reduced by minimum sublease rentals of $236
due in the future under noncancelable subleases.
NOTE 9: NEW U S WEST EQUITY
Following is a reconciliation of New U S WEST equity:
<TABLE>
<CAPTION>
SEPTEMBER 30,
(UNAUDITED) DECEMBER 31,
------------- -------------------------------
1997 1996 1995 1994
------------- --------- --------- ---------
<S> <C> <C> <C> <C>
Balance at beginning of period.................. $ 4,085 $ 3,657 $ 3,357 $ 2,837
Net income...................................... 1,256 1,535 1,423 1,403
Dividends declared on Communications Stock...... (775) (1,024) (1,010) (980)
Dividends declared to U S WEST.................. (249) (286) (247) (252)
Communications Stock issuances.................. 90 216 52 --
Equity issuances prior to Recapitalization
Plan.......................................... -- -- 79 287
Equity (returned to) provided from U S WEST..... -- (21) 3 63
Other........................................... 2 8 -- (1)
------ --------- --------- ---------
Balance at end of period........................ $ 4,409 $ 4,085 $ 3,657 $ 3,357
------ --------- --------- ---------
------ --------- --------- ---------
</TABLE>
U S WEST issued 1.7 million shares of Communications Stock during 1995
subsequent to the Recapitalization Plan. An additional 3.0 million and 6.8
million shares were issued during the nine-month period ended September 30, 1997
and during 1996. These share issuances were primarily related to the dividend
reinvestment plan, the exercise of stock options and the employee savings plan.
At September 30, 1997 and at December 31, 1996 and 1995, there were 483,460,967,
480,457,336 and 473,635,025 shares of
F-19
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: NEW U S WEST EQUITY (CONTINUED)
Communications Stock outstanding, respectively. The shares outstanding do not
include the issuance of $850 of New U S WEST Common Stock which will occur upon
execution of the Separation Agreement.
U S WEST declared dividends of $1.605 per share of Communications Stock
during the nine-month period ended September 30, 1997 and $2.14 per share of
Communications Stock during 1996, 1995 and 1994, respectively. New U S WEST paid
dividends monthly to U S WEST based on Dex's net income adjusted for the
amortization of intangibles.
LEVERAGED EMPLOYEE STOCK OWNERSHIP PLAN ("LESOP"). New U S WEST
participates in the defined contribution savings plan sponsored by U S WEST.
Substantially all employees of New U S WEST are covered by the plan. U S WEST
matches a percentage of eligible employee contributions with shares of
Communications Stock and/or Media Stock in accordance with participant
elections. Participants may also elect to reallocate past U S WEST contributions
between Communications Stock and Media Stock. In 1989, U S WEST established two
LESOPs to provide U S WEST stock for matching contributions to the savings plan.
Shares in the LESOP are released as principal and interest are paid on the debt.
At December 31, 1996, 11,019,157 shares each of Communications Stock and Media
Stock had been allocated from the LESOP to participants' accounts while
1,865,494 and 2,132,291 shares of Communications Stock and Media Stock,
respectively, remained unallocated.
The debt associated with the LESOP, which is unconditionally guaranteed by U
S WEST, is reflected in the U S WEST, Inc. Consolidated Financial Statements.
Contributions, as well as New U S WEST dividends on unallocated shares held by
the LESOP ($5, $8 and $11 in 1996, 1995 and 1994, respectively), are used for
debt service. Beginning with the dividend paid in fourth-quarter 1995, dividends
on allocated shares are being paid annually to participants. Previously,
dividends on allocated shares were used for debt service with participants
receiving additional shares from the LESOP in lieu of dividends. Tax benefits
related to dividend payments on eligible shares in the savings plan have been
allocated to New U S WEST, which paid the dividends.
New U S WEST recognizes expense based on the cash payments method.
Contributions to the plan related to New U S WEST, excluding dividends, were
$67, $72 and $70 in 1996, 1995 and 1994, respectively, of which $8, $12 and $16,
respectively, have been classified as interest expense.
NOTE 10: STOCK INCENTIVE PLANS
New U S WEST participates in the stock incentive plans maintained by U S
WEST for executives and other employees and nonemployees, primarily members of
the Board. The Amended 1994 Stock Plan (the "Plan") was approved by shareowners
on October 31, 1995, in connection with the Recapitalization Plan. The Plan is a
successor plan to the U S WEST, Inc. Stock Incentive Plan and the U S WEST 1991
Stock Incentive Plan (the "Predecessor Plans"). No further grants of options or
restricted stock may be made under the Predecessor Plans. The Plan is
administered by the Human Resources Committee of the Board with respect to
officers, executive officers and outside directors and by a special committee
with respect to all other eligible employees and eligible nonemployees.
Effective November 1, 1995, each outstanding U S WEST stock option was
converted into one Communications Group and one Media Group stock option.
Subsequent to November 1, 1995, each Group grants options primarily to its own
employees.
F-20
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: STOCK INCENTIVE PLANS (CONTINUED)
The maximum aggregate number of shares of Communications Stock that may be
granted in any calendar year for all purposes under the Plan is nine-tenths of
one percent (0.90 percent) of the shares of such class outstanding (excluding
shares held in U S WEST's treasury) on the first day of such calendar year. In
the event that fewer than the full aggregate number of shares of either class
available for issuance in any calendar year are issued in any such year, the
shares not issued shall be added to the shares of such class available for
issuance in any subsequent year or years. Options granted may be exercised no
later than 10 years after the grant date.
During 1995, U S WEST modified the Plan to allow employees who terminate and
are eligible for a full service pension, or who terminate under the long-term
disability plan, to exercise their existing stock options according to their
original terms. Additionally, U S WEST allows employees who separate under a
management separation plan to retain unvested stock options. The compensation
cost that has been included in income in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," was $3 and $4 in 1996 and 1995,
respectively, all of which related to the Plan modifications. No compensation
expense was recognized in 1994.
New U S WEST has adopted the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation," but continues to account for the Plan
under APB Opinion No. 25. Had compensation cost for the Plan been determined
consistent with the fair value based accounting method under SFAS No. 123, New U
S WEST's pro forma net income would have been $1,533 and $1,425 during 1996 and
1995 respectively, as compared to reported net income of $1,535 and $1,423,
respectively.
The fair value based method of accounting for stock-based compensation plans
under SFAS No. 123 recognizes the value of options granted as compensation cost
over the options' vesting period and has not been applied to options granted
prior to January 1, 1995. Accordingly, the resulting pro forma compensation cost
is not representative of what compensation cost will be in future years.
Following are the weighted-average assumptions used in connection with the
Black-Scholes option-pricing model to estimate the fair value of options granted
in 1996 and 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Risk-free interest rate................................. 6.50% 6.00%
Expected dividend yield................................. 6.70% 6.70%
Expected life........................................... 4.5 years 4.5 years
Expected volatility..................................... 19.6% 19.6%
</TABLE>
F-21
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: STOCK INCENTIVE PLANS (CONTINUED)
Data for outstanding options under the Plan is summarized as follows:
<TABLE>
<CAPTION>
COMMUNICATIONS GROUP U S WEST
------------------------- ------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
SHARES PRICE SHARES* PRICE
------------ ----------- ----------- -----------
<S> <C> <C> <C> <C>
Outstanding January 1, 1994................................... 5,301,539 $ 39.76
----------- -----------
Granted..................................................... 2,438,409 36.15
Exercised................................................... (139,762) 33.72
Canceled or expired......................................... (214,149) 40.71
----------- -----------
Outstanding December 31, 1994................................. 7,386,037 $ 38.66
----------- -----------
Granted(1).................................................. 4,814,856 41.12
Exercised................................................... (430,631) 34.03
Canceled or expired(1)...................................... (1,927,083) 37.02
----------- -----------
Outstanding October 31, 1995.................................. 9,843,179 $ 40.39
----------- -----------
Recapitalization Plan......................................... 9,843,179 $ 24.11 (9,843,179) $ (40.39)
------------ ----------- ----------- -----------
----------- -----------
Granted..................................................... 138,309 32.16
Exercised................................................... (543,037) 21.23
Canceled or expired......................................... (15,350) 24.91
------------ -----------
Outstanding December 31, 1995................................. 9,423,101 $ 24.39
------------ -----------
Granted..................................................... 3,624,602 30.97
Exercised................................................... (1,205,730) 22.37
Canceled or expired......................................... (429,058) 25.01
------------ -----------
Outstanding December 31, 1996................................. 11,412,915 $ 26.67
------------ -----------
------------ -----------
</TABLE>
- ------------------------------
* Includes options granted in tandem with SARs.
(1) Amounts have been restated to include modified options which, under the
provisions of SFAS No. 123, are treated as an exchange of the original award
(i.e., canceled) for a new award (i.e., stock grant).
Options to purchase 3,881,100 and 2,672,666 shares of Communications Stock
at weighted-average exercise prices of $25.71 and $22.22 were exercisable at
December 31, 1996 and 1995, respectively.
F-22
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: STOCK INCENTIVE PLANS (CONTINUED)
The following table summarizes the status of outstanding and exercisable
options under the Plan at December 31, 1996.
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
------------------------------------------ EXERCISABLE OPTIONS
WEIGHTED- -----------------------
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE (YEARS) PRICE EXERCISABLE PRICE
- --------------------------------------------------- ------------ --------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
$14.96 - $21.41.................................... 2,560,778 7.27 $ 21.26 505,430 $ 20.64
$21.41 - $24.62.................................... 1,241,669 5.42 22.87 1,037,785 22.74
$24.92 - $26.11.................................... 2,750,886 8.59 26.08 932,931 26.06
$26.34 - $30.63.................................... 2,334,141 7.86 29.82 1,313,137 29.29
$30.88 - $35.88.................................... 2,525,441 9.02 31.74 91,817 32.57
------------ --- ----------- ---------- -----------
Total.......................................... 11,412,915 7.89 $ 26.67 3,881,100 $ 25.71
------------ --- ----------- ---------- -----------
------------ --- ----------- ---------- -----------
</TABLE>
A total of 3,624,602 and 4,953,165 Communications Group options were granted
in 1996 and 1995, respectively, of which 198,027 and 1,751,936 were modified
options revalued as new grants. The weighted-average grant date fair value of
Communications Group options granted during the year, inclusive of modified
options, using the Black-Scholes option-pricing model was $3.87 and $3.19 for
1996 and 1995, respectively. Excluding the modifications, the weighted-average
grant date fair value was $3.67 and $2.92 for 1996 and 1995, respectively. The
exercise price of Communications Group stock options, excluding modified
options, equals the market price on the grant date. The exercise prices of
modified stock options may be greater or less than the market price on the
revaluation date.
Approximately 2,950,000 and 2,050,000 shares of Communications Stock were
available for grant under the plans in effect at December 31, 1996 and 1995,
respectively. Approximately 14,360,000 shares of Communications Stock were
reserved for issuance under the Plan at December 31, 1996.
NOTE 11: EMPLOYEE BENEFITS
PENSION PLAN
New U S WEST participated in the defined benefit pension plan sponsored by U
S WEST (the "U S WEST Pension Plan"). Substantially all management and
occupational employees of New U S WEST were covered by the plan. Since plan
assets were not historically segregated into separate accounts or restricted to
providing benefits to employees of New U S WEST, assets of the plan were used to
provide benefits to employees of both New U S WEST and MediaOne.
Management benefits were based on a final pay formula while occupational
benefits were based on a flat benefit formula. U S WEST used the projected unit
credit method for the determination of pension cost for financial reporting
purposes and the aggregate cost method for funding purposes. U S WEST's policy
was to fund amounts required under the Employee Retirement Income Security Act
of 1974 ("ERISA") and no funding was required in 1996, 1995 or 1994.
F-23
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
The composition of the U S WEST net pension cost (credit) and the actuarial
assumptions of the plan follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Details of pension cost:
Service cost--benefits earned during the period............... $ 203 $ 173 $ 197
Interest cost on projected benefit obligation................. 575 558 561
Actual return on plan assets.................................. (1,509) (1,918) 188
Net amortization and deferral................................. 726 1,185 (946)
--------- --------- ---------
Net pension cost (credit)....................................... $ (5) $ (2) $ --
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining net
pension cost was 8.50 percent for 1996, 1995 and 1994.
The following table represents the funded status of the U S WEST plan. Upon
the execution of the Separation Agreement, the U S WEST plan assets and benefit
obligation will be apportioned between New U S WEST and MediaOne. See Note 1--U
S WEST Separation--to the New U S West Combined Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated benefit obligation, including vested benefits of $6,544
and $5,839, respectively............................................ $ 7,446 $ 6,617
--------- ---------
--------- ---------
Plan assets at fair value, primarily stocks and bonds................. $ 10,958 $ 9,874
Less: Projected benefit obligation.................................... 8,310 8,450
--------- ---------
Plan assets in excess of projected benefit obligation................. 2,648 1,424
Unrecognized net gain................................................. (1,502) (101)
Prior service cost (credit) not yet recognized in net periodic pension
cost................................................................ 31 (62)
Balance of unrecognized net asset at January 1, 1987.................. (626) (705)
--------- ---------
Prepaid pension cost.................................................. $ 551 $ 556
--------- ---------
--------- ---------
</TABLE>
The actuarial assumptions used to calculate the projected benefit obligation
follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Discount rate................................................................ 7.50% 7.00%
Weighted average rate of compensation increase............................... 5.50% 5.50%
</TABLE>
Anticipated future benefit changes have been reflected in the above
calculations.
F-24
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
ALLOCATION OF PENSION COSTS. U S WEST's policy was to: 1) offset U S WEST's
service cost, interest cost and amortization by the return on plan assets and 2)
allocate the remaining net pension cost to New U S WEST based on the ratio of
actuarially determined service cost of New U S WEST to total service cost of
plan participants. U S WEST believed allocating net pension cost based on
service cost was reasonable since service cost is a primary factor in
determining pension cost. Net pension costs allocated to New U S WEST were $(5),
$(2) and $0 in 1996, 1995 and 1994, respectively. The service and interest costs
attributed to New U S WEST were $189 and $535, in 1996, $161 and $519 in 1995
and $183 and $522 in 1994, respectively. The projected benefit obligation
attributed to New U S West was $7,728 and $7,859 at December 31, 1996 and 1995,
respectively.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
New U S WEST participated in plans sponsored by U S WEST which provided
certain health care and life insurance benefits to retired employees. In
conjunction with U S WEST's 1992 adoption of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," U S WEST elected to
immediately recognize the accumulated postretirement benefit obligation for
current and future retirees. However, the Federal Communications Commission and
certain state jurisdictions permitted amortization of the transition obligation
over the average remaining service period of active employees for regulatory
accounting purposes, with most jurisdictions requiring funding as a stipulation
for rate recovery.
U S WEST used the projected unit credit method for the determination of
postretirement medical and life costs for financial reporting purposes. The
composition of net medical and life postretirement benefit costs and actuarial
assumptions underlying plan benefits follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service cost--benefits earned during the period...................... $ 70 $ 65 $ 75
Interest on accumulated benefit obligation........................... 259 267 260
Actual return on plan assets......................................... (231) (415) 4
Net amortization and deferral........................................ 68 286 (99)
--------- --------- ---------
Net postretirement benefit costs..................................... $ 166 $ 203 $ 240
--------- --------- ---------
--------- --------- ---------
</TABLE>
The expected long-term rate of return on plan assets used in determining
postretirement benefit costs was 8.50 percent for 1996, 1995 and 1994.
The following table represents the funded status of the plans. Upon
execution of the Separation Agreement, the U S WEST postretirement benefit
obligation and plan assets will be apportioned between
F-25
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
New U S WEST and MediaOne. See Note 1--U S WEST Separation--to the New U S WEST
Combined Financial Statements.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation attributable to:
Retirees................................................................ $ 2,255 $ 2,137
Fully eligible plan participants........................................ 347 327
Other active plan participants.......................................... 1,289 1,224
--------- ---------
Total accumulated postretirement benefit obligation....................... 3,891 3,688
Unrecognized net gain..................................................... 534 539
Unamortized prior service cost............................................ 32 (34)
Fair value of plan assets, primarily stocks, bonds and life
insurance(1)............................................................. (2,063) (1,845)
--------- ---------
Accrued postretirement benefit obligation................................. $ 2,394 $ 2,348
--------- ---------
--------- ---------
</TABLE>
- ------------------------------
(1) Medical plan assets include Communications Stock and Media Stock of $155 and
$94, respectively, in 1996, and $210 and $112, respectively, in 1995.
The actuarial assumptions used to calculate the accumulated postretirement
benefit obligation follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Discount rate.................................................................... 7.50% 7.00%
Medical trend*................................................................... 8.00% 9.00%
</TABLE>
- ------------------------------
* Medical cost trend rate gradually declines to an ultimate rate of 5.5
percent in 2011.
A one-percent increase in the assumed health care cost trend rate for each
future year would have increased the aggregate of the service and interest cost
components of 1996 net postretirement benefit cost by approximately $27 and
increased the 1996 accumulated postretirement benefit obligation by
approximately $299.
Anticipated future benefit changes have been reflected in these
postretirement benefit calculations.
PLAN ASSETS. Assets of the postretirement medical and life plans may be
used to provide benefits to employees of both New U S WEST and MediaOne since
plan assets are not legally restricted to providing benefits to either entity.
For purposes of determining benefit costs, U S WEST allocated the assets based
on historical contributions for postretirement medical costs, and on the ratio
of New U S WEST to total salaries for life plan participants.
POSTRETIREMENT MEDICAL AND LIFE COSTS. The service and interest components
of net postretirement medical benefit costs were calculated for New U S WEST
based on its population characteristics. Since funding of postretirement medical
costs was voluntary, return on assets was attributed to New U S WEST based on
historical funding. New U S WEST's annual funding amount was based on its cash
requirements with the funding at U S WEST Communications based on regulatory
accounting requirements.
F-26
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EMPLOYEE BENEFITS (CONTINUED)
Net postretirement life costs and funding requirements, if any, have been
allocated to New U S WEST in the same manner as pension costs. U S WEST
generally funded the amount allowed for tax purposes. No funding of
postretirement life insurance occurred in 1996, 1995 and 1994. U S WEST believes
its method of allocating postretirement life costs was reasonable.
Net postretirement medical benefit and life costs recognized by New U S WEST
for 1996, 1995 and 1994 were $164, $201 and $240, respectively. The percentage
of postretirement medical assets attributed to New U S WEST at December 31, 1996
and 1995, based on historical voluntary contributions was 99 percent. The
aggregate accumulated postretirement medical and life benefit obligation
attributable to New U S WEST was $3,774 and $3,577 at December 31, 1996 and
1995, respectively.
NOTE 12: INCOME TAXES
The components of the provision for income taxes follow:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Federal:
Current............................................................. $ 697 $ 559 $ 501
Deferred............................................................ 93 184 233
Investment tax credits--net......................................... (28) (38) (47)
--------- --------- ---------
762 705 687
--------- --------- ---------
State and local:
Current............................................................. 92 78 82
Deferred............................................................ 22 34 42
--------- --------- ---------
114 112 124
--------- --------- ---------
Provision for income taxes............................................ $ 876 $ 817 $ 811
--------- --------- ---------
--------- --------- ---------
</TABLE>
New U S WEST paid U S WEST $814, $658 and $654 for income taxes in 1996,
1995 and 1994, respectively.
The effective tax rate differs from the statutory tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
(IN PERCENT)
<S> <C> <C> <C>
Federal statutory tax rate.............................................. 35.0 35.0 35.0
Investment tax credit amortization...................................... (0.7) (1.1) (1.4)
State income taxes--net of federal effect............................... 3.1 3.2 3.6
Other................................................................... (0.5) (0.8) (0.6)
--- --- ---
Effective tax rate...................................................... 36.9 36.3 36.6
--- --- ---
--- --- ---
</TABLE>
F-27
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 12: INCOME TAXES (CONTINUED)
The components of the net deferred tax liability follow:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Property, plant and equipment.............................................. $ 1,508 $ 1,437
State deferred taxes--net of federal effect................................ 185 180
Other...................................................................... 78 73
--------- ---------
Deferred tax liabilities................................................. 1,771 1,690
--------- ---------
Postemployment benefits, including pension................................. 674 684
Restructuring and other.................................................... 181 250
Unamortized investment tax credit.......................................... 61 70
State deferred taxes--net of federal effect................................ 126 135
Other...................................................................... 192 155
--------- ---------
Deferred tax assets...................................................... 1,234 1,294
--------- ---------
Net deferred tax liability................................................. $ 537 $ 396
--------- ---------
--------- ---------
</TABLE>
The current portion of the deferred tax asset was $185 and $276 at December
31, 1996 and 1995, respectively, resulting primarily from restructuring charges
and compensation-related items.
NOTE 13: RELATED PARTY TRANSACTIONS
BELL COMMUNICATIONS RESEARCH, INC. ("BELLCORE"). Charges relating to
research, development and maintenance of existing technologies performed by
Bellcore, of which U S WEST Communications had a one-seventh ownership interest,
were $97, $95 and $122 in 1996, 1995 and 1994, respectively.
In November 1997, U S WEST Communications and the other Regional Bell
Operating Companies sold their interests in Bellcore. As a result of the sale, U
S WEST Communications received cash proceeds of $65 and recorded an after tax
gain of $32 in fourth-quarter 1997. Bellcore and other third parties will
continue to provide research and development and other services to New U S WEST
on a contract basis.
NOTE 14: CONTINGENCIES
At U S WEST Communications, there are pending regulatory actions in local
regulatory jurisdictions that call for price decreases, refunds or both.
In 1996, the Washington State Utilities and Transportation Commission
("WUTC") acted on U S WEST Communications' 1995 rate request. U S WEST
Communications had sought to increase revenues by raising rates primarily for
basic residential services over a four-year period. Instead of granting U S WEST
Communications' request, the WUTC ordered $91.5 in annual net revenue
reductions, effective May 1, 1996. Based on the WUTC ruling, U S WEST
Communications filed a lawsuit with the King County Superior Court (the "Court")
for an appeal of the order, a temporary stay of the ordered rate reduction and
an authorization to implement a revenue increase. The Court declined to change
the WUTC order. U S WEST Communications appealed the Court's decision to the
Washington State Supreme Court (the "State Supreme Court") which granted a stay
of the order, pending its full review of the appeal.
F-28
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: CONTINGENCIES (CONTINUED)
On December 24, 1997, the State Supreme Court upheld the WUTC ruling. The
State Supreme Court's ruling results in an estimated maximum liability for the
revenues collected by U S WEST Communications from May 1, 1996 through January
31, 1998, including interest, in the amount of $225. The prospective revenue
reduction as a result of this ruling approximates $115 annually, which includes
the effects of business growth. In a separate action, the WUTC authorized a rate
increase of approximately $60 annually that partially mitigates the effect of
the State Supreme Court's ruling. Tariffs implementing both orders became
effective February 1, 1998.
On May 1, 1996, the Oregon Public Utilities Commission ("OPUC") approved a
stipulation terminating prematurely U S WEST Communications' alternative form of
regulation ("AFOR") plan, and it then undertook a review of U S WEST
Communications' earnings. In May 1997, the OPUC ordered U S WEST Communications
to reduce its annual revenues by $97, effective May 1, 1997, and to issue a
one-time refund, including interest, of approximately $102 to reflect the
revenue reduction for the period May 1, 1996 through April 30, 1997. The
one-time refund is for interim rates which became subject to refund when U S
WEST Communications' AFOR plan was terminated on May 1, 1996.
U S WEST Communications filed an appeal of the order and asked for an
immediate stay of the refund with the Oregon Circuit Court for the County of
Marion ("Oregon Circuit Court"). On June 26, 1997, the Oregon Circuit Court
granted U S WEST Communications' request for a stay, pending a full review of
the OPUC's order. On January 8, 1998, the Oregon Circuit Court ruled in U S WEST
Communications' favor on most of the appealed issues. The OPUC has announced its
intent to appeal. The potential exposure, including interest, at December 31,
1997, would not exceed $181.
In another proceeding, the Utah Supreme Court remanded a Utah Public Service
Commission ("PSC") order to the PSC for hearing, thereby establishing two
exceptions to the rule against retroactive ratemaking: 1) unforeseen and
extraordinary events, and 2) misconduct. The PSC's initial order denied a refund
request from interexchange carriers and other parties related to the Tax Reform
Act of 1986. The potential exposure, including interest, at December 31, 1997,
would not exceed $160.
New U S WEST has accrued $348 at December 31, 1997, which represents its
estimated liability for all state regulatory proceedings. Approximately $225 of
the total estimated liability was recognized during fourth-quarter 1997. It is
possible that the ultimate liability could exceed the recorded liability by an
amount up to approximately $230. New U S WEST will continue to monitor and
evaluate the risks associated with its local regulatory jurisdictions, and will
adjust estimates as new information becomes available.
F-29
<PAGE>
NEW U S WEST
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
QUARTERLY FINANCIAL DATA
--------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1996
Operating revenues....................................................... $ 2,729 $ 2,771 $ 2,783 $ 2,885
Income before income taxes and cumulative effect of change in accounting
principle.............................................................. 583 635 557 602
Income before cumulative effect of change in accounting principle........ 363 396 348 394
Net income............................................................... 397 396 348 394
1995
Operating revenues....................................................... $ 2,569 $ 2,591 $ 2,644 $ 2,704
Income before income taxes and extraordinary item........................ 603 557 562 526
Income before extraordinary item......................................... 378 351 357 345
Net income............................................................... 378 351 352 342
</TABLE>
1996 first-quarter net income includes the cumulative and current effects of
$34 and $5, respectively, from adopting SFAS No. 121. 1996 second-quarter net
income includes $30 from gains on the sales of certain rural telephone exchanges
and current effects of $5 from adopting SFAS No. 121. 1996 third-quarter net
income includes a charge of $15 related to the reorganization and headcount
reduction of the directory publishing operations, a gain of $1 on the sales of
certain rural telephone exchanges and current effects of $3 from adopting SFAS
No. 121. 1996 fourth-quarter net income includes $5 from gains on the sales of
certain rural telephone exchanges and current effects of $2 from adopting SFAS
No. 121.
1995 first-quarter net income includes $39 from gains on the sales of
certain rural telephone exchanges. 1995 second-quarter net income includes $10
from gains on the sales of certain rural telephone exchanges. 1995 third-quarter
net income includes $21 from gains on the sales of certain rural telephone
exchanges and $5 for expenses associated with the Recapitalization Plan. 1995
third-quarter net income also includes a charge of $5 for the early
extinguishment of debt. 1995 fourth-quarter net income includes $15 from gains
on the sales of certain rural telephone exchanges and other charges of $6,
including an extraordinary charge of $3 for the early extinguishment of debt and
$3 for expenses associated with the Recapitalization Plan.
F-30
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law (the "DGCL") permits the
Registrant's board of directors to indemnify any person against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with any threatened,
pending or completed action, suit or proceeding in which such person is made a
party by reason of his being or having been a director, officer, employee or
agent of the Registrant, in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). The statute provides that indemnification
pursuant to its provisions is not exclusive of other rights of indemnification
to which a person may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors, or otherwise.
The Registrant's Restated Certificate of Incorporation and Bylaws provides
for indemnification of its directors and officers to the fullest extent
permitted by law.
As permitted by sections 102 and 145 of the DGCL, the Registrant's Restated
Certificate of Incorporation eliminates a person's liability to the Registrant
or its stockholders for monetary damages for breach of fiduciary duty as a
director, including without limitation for serving on a committee of the
Registrant's board of directors; provided, however, that the foregoing does not
eliminate or limit liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under section 174 of the DGCL or (iv) for any transaction from which
the director derived an improper personal benefit.
The directors and officers of the Registrant are covered by insurance
policies indemnifying against certain liabilities, including certain liabilities
arising under the Securities Act which might be incurred by them in such
capacities and against which they cannot be indemnified by the Registrant.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
Exhibits identified in parentheses below are on file with the Securities and
Exchange Commission and are incorporated herein by reference to such previous
filings. All other exhibits are provided as part of this electonic transmission.
<TABLE>
<S> <C> <C>
*2 -- Form of Separation Agreement between U S WEST, Inc. (to be renamed "MediaOne
Group, Inc.") and USW-C, Inc. (to be renamed "U S WEST, Inc.")
*3-A -- Form of Restated Certificate of Incorporation of U S WEST, Inc.
*3-B -- Form of Amended and Restated Bylaws of U S WEST, Inc.
*4-A -- Form of Rights Agreement between USW-C, Inc. (to be renamed "U S WEST,
Inc.") and State Street Bank and Trust Company, as Rights Agent
*5 -- Opinion of Weil, Gotshal & Manges LLP regarding the legality of the
securities being registered
10-A -- 1998 U S WEST Stock Plan (Annex C to the Proxy Statement/Prospectus included
in this Registration Statement)
(10-B) -- Form of Non-Qualified Stock Option Agreement (Exhibit 10u to Form 10-K of U
S WEST, Inc. for the year ended December 31, 1988, File No. 1-8611)
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C> <C>
(10-C) -- Form of Restricted Stock Agreement (Exhibit 10v to Form 10-K of U S WEST,
Inc. for the year ended December 31, 1988, File No. 1-8611)
10-D -- U S WEST Long-Term Incentive Plan (Annex D to the Proxy Statement/Prospectus
included in this Registration Statement)
10-E -- U S WEST Executive Short-Term Incentive Plan (Annex E to the Proxy
Statement/ Prospectus included in this Registration Statement)
(10-F) -- U S WEST Executive Financial Counseling Plan (Exhibit 10j to the Form 10-K
of U S WEST, Inc. for the year ended December 31, 1996, File No. 1-8611)
(10-G) -- U S WEST Deferred Compensation Plan for Non-Employee Directors (Exhibit
10-ff to Registration Statement No. 2-87861 of U S WEST, Inc.)
(10-H) -- Description of U S WEST Insurance Plan of Non-Employee Directors' Travel and
Accident Insurance (Exhibit 10-gg to Registration Statement No. 2-87861 of U
S WEST, Inc.)
(10-I) -- Extract from the U S WEST Management Pension Plan Regarding Limitations on
the payments of pension amounts which exceed the limitations contained in
the Employee Retirement Income Security Act (Exhibit 10-hh to Registration
Statement No. 2-87861 of U S WEST, Inc.)
(10-J) -- U S WEST Executive Non-Qualified Pension Plan (Exhibit 10o to Form 10-K of U
S WEST, Inc. for the year ended December 31, 1988, File No. 1-8611)
(10-K) -- U S WEST Deferred Compensation Plan (Annex X to Registration Statement No.
33-59315 of U S WEST, Inc.)
(10-L) -- Description of U S WEST Directors' Retirement Benefit Plan (Exhibit 10p to
Form SE of U S WEST, Inc. filed March 5, 1992, File No. 1-8611)
(10-M) -- U S WEST Senior Management Long Term Disability and Survivor Protection Plan
(Exhibit 10-dd to Registration Statement No. 2-87861 of U S WEST, Inc.)
(10-N) -- U S WEST Mid-Career Pension Plan (Exhibit 10u to Form 10-K of U S WEST, Inc.
for the year ended December 31, 1988, File No. 1-8611)
*11 -- Computation of Earnings Per Share
*21 -- Subsidiaries of USW-C, Inc. (to be renamed "U S WEST, Inc.")
23-A -- Consent of Coopers & Lybrand L.L.P.
23-B -- Consent of Arthur Andersen LLP
23-C -- Consent of Lazard Freres & Co. LLC
23-D -- Consent of SBC Warburg Dillon Read Inc.
*23-E -- Consent of Weil, Gotshal & Manges LLP (included in the opinion filed as
Exhibit 5)
24 -- Power of Attorney
*27 -- Financial Data Schedule
*99-A -- Consents of persons to be named as directors.
</TABLE>
(b) Financial Statement Schedules
*Schedule II -- Valuation and Qualifying Accounts
- ------------------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
II-2
<PAGE>
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement;
(iii) to include any material information with respect to the Plan of
Distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
provided, however, that the undertakings set forth in paragraphs (1)(i) and
(1)(ii) above do not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained in periodic reports
filed by the Registrant pursuant to Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") that are
incorporated by reference in this Registration Statement.
(2) That, for the purpose of determining any liability under the Securities
Act, each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) That, for purposes of determining any liability under the Securities
Act, each filing of the Registrant's Annual Report pursuant to Section 13(a) or
Section 15(d) of the Exchange Act (and where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in this Registration Statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the Registrant undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items of
the applicable form.
(6) That every prospectus: (i) that is filed pursuant to paragraph (5)
immediately preceding, or (ii) purports to meet the requirements of Section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
registration statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(7) To respond to requests for information that is incorporated by reference
into the prospectus pursuant to Item 4, 10(b), 11 or 13 of this form, within one
business day of receipt of such request, and to send the incorporated documents
by first class mail or other equally prompt means. This includes information
contained in documents filed subsequent to the effective date of this
Registration Statement through the date of responding to the request.
II-3
<PAGE>
(8) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions referred to in Item 15 (other than the
insurance policies referred to therein), or otherwise, the Registrant has been
advised that, in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted against
the Registrant by such director, officer or controlling person in connection
with the securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, USW-C, Inc. (to
be renamed "U S WEST, Inc.") certifies that it has reasonable grounds to believe
that it meets all the requirements for filing on Form S-4 and has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Denver, State of Colorado, on the 6th
day of February, 1998.
USW-C, Inc.
By /s/ STEPHEN E. BRILZ
--------------------------------------
Stephen E. Brilz
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
<TABLE>
<C> <S>
PRINCIPAL EXECUTIVE OFFICER:
/s/ SOLOMON D. TRUJILLO*
- ------------------------------------------- President and Chief Executive Officer
Solomon D. Trujillo
PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER:
/s/ ALLAN R. SPIES*
- ------------------------------------------- Executive Vice President and Chief Financial
Allan R. Spies* Officer
DIRECTORS:
/s/ SOLOMON D. TRUJILLO*
- -------------------------------------------
Solomon D. Trujillo*
*By /s/ STEPHEN E. BRILZ
--------------------------------------
Stephen E. Brilz
Assistant Secretary
</TABLE>
Dated: February 6, 1998
II-5
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of USW-C, Inc. and Proxy Statement of U S WEST, Inc. of our reports
dated February 12, 1996 on our audits of the consolidated financial statements
and financial statement schedule of U S WEST, Inc., as of December 31, 1995 and
for the years ended December 31, 1995 and 1994, which reports are included in U
S WEST, Inc.'s Annual Report on Form 10-K for the year ended December 31, 1996.
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of USW-C, Inc. and Proxy Statement of U S WEST, Inc. of our report
dated February 12, 1996, on our audits of the combined financial statements of U
S WEST Communication Group, as of December 31, 1995, and for the years ended
December 31, 1995 and 1994, which report is included in U S WEST, Inc.'s Annual
Report on Form 10-K for the year ended December 31, 1996.
We consent to the incorporation by reference in this Registration Statement
on Form S-4 of USW-C, Inc. and Proxy Statement of U S WEST, Inc. of our report
dated February 12, 1996, on our audits of the combined financial statements and
Supplementary Selected Proportionate Results of Operations of U S WEST Media
Group, as of December 31, 1995, and for the years ended December 31, 1995 and
1994, which report is included in U S WEST, Inc.'s Annual Report on Form 10-K
for the year ended December 31, 1996.
We consent to the inclusion in this Registration Statement on Form S-4 of
USW-C, Inc. and Proxy Statement of U S WEST, Inc. of our report dated February
6, 1998, on our audits of the combined financial statements of New U S WEST, as
of December 31, 1995 and for the years ended December 31, 1995 and 1994.
We also consent to the reference to our firm under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
Denver, Colorado
February 6, 1998
<PAGE>
[ARTHUR ANDERSEN LLP LETTERHEAD]
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated February 6, 1998 on the combined financial statements of New U S
WEST as of December 31, 1996, and for the year ended included in this
Registration Statement on Form S-4 of USW-C, Inc. and Proxy Statement of U S
WEST, Inc. (together the "Registration Statement"), and to the incorporation by
reference of our reports dated February 12, 1997 on the consolidated financial
statements of U S WEST, Inc., the combined financial statements of U S WEST
Communications Group and U S WEST Media Group, the supplementary selected
proportionate results of operations for U S WEST, Inc. and U S WEST Media Group,
and the financial statement schedule of U S WEST, Inc. as of December 31, 1996,
and for the year then ended included in U S WEST, Inc.'s Annual Report on Form
10-K for the year ended December 31, 1996 and to all references to our Firm
included in this Registration Statement.
/s/ Arthur Andersen LLP
Denver, Colorado
February 6, 1998
<PAGE>
[LAZARD FRERES & CO. LLC LETTERHEAD]
February 6, 1998
The Board of Directors
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Re: Registration Statement of USW-C, Inc. relating to the Common Stock, par
value $.01 per share, being registered in connection with the Separation of
U S WEST, Inc.
Members of the Board:
Reference is made to our opinion letter dated February 6, 1998 with respect
to the separation of the U S WEST Communications Group (the "Communications
Group") and the U S WEST Media Group (the "Media Group") into two
separately-traded companies and, in connection therewith, the alignment of U S
WEST Dex, Inc., a business currently attributed to the Media Group, with the
Communications Group.
The foregoing opinion letter is for the information and assistance of the
Board of Directors of U S WEST, Inc. in connection with its consideration of the
transaction contemplated therein and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or other document, except in accordance with our written
consent.
In that regard, we hereby consent to the reference to the opinion of our
Firm under the captions "Chapter 3: The Separation--Background of the
Separation" and "Chapter 3: The Separation--Opinions of Financial Advisors" and
to the inclusion of the foregoing opinion in the Proxy Statement included in the
above-mentioned Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
<TABLE>
<S> <C> <C>
Very truly yours,
LAZARD FRERES & CO. LLC
By /S/ ADAM PARTEN
----------------------------------------
MANAGING DIRECTOR
</TABLE>
<PAGE>
[SBC WARBURG DILLON READ INC. LETTERHEAD]
February 6, 1998
The Board of Directors
U S WEST, Inc.
7800 East Orchard Road
Englewood, Colorado 80111
Re: Registration Statement of USW-C, Inc. relating to the Common Stock, par
value $.01 per share, being registered in connection with the Separation of
U S WEST, Inc.
Members of the Board:
Reference is made to our opinion letter dated February 6, 1998 with respect
to the separation of the U S WEST Communications Group (the "Communications
Group") and the U S WEST Media Group (the "Media Group") into two
separately-traded companies and, in connection therewith, the alignment of U S
WEST Dex, Inc., a business currently attributed to the Media Group, with the
Communications Group.
The foregoing opinion letter is for the information and assistance of the
Board of Directors of U S WEST, Inc. in connection with its consideration of the
transaction contemplated therein and is not to be used, circulated, quoted or
otherwise referred to for any other purpose, nor is it to be filed with,
included in or referred to in whole or in part in any registration statement,
proxy statement or other document, except in accordance with our written
consent.
In that regard, we hereby consent to the reference to the opinion of our
Firm under the captions "Chapter 3: The Separation--Background of the
Separation" and "Chapter 3: The Separation--Opinions of Financial Advisors" and
to the inclusion of the foregoing opinion in the Proxy Statement included in the
above-mentioned Registration Statement. In giving such consent, we do not
thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Securities and Exchange Commission thereunder.
<TABLE>
<S> <C> <C>
Very truly yours,
SBC WARBURG DILLON READ INC.
By /S/ S. DAVIS TERRY, JR.
----------------------------------------
MANAGING DIRECTOR
By /S/ KARIM F. TABET
----------------------------------------
EXECUTIVE DIRECTOR
</TABLE>
<PAGE>
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS:
WHEREAS, USW-C, Inc., a Delaware corporation (hereinafter referred to as the
"Company"), proposes to file with the Securities and Exchange Commission, under
the provisions of the Securities Act of 1933, as amended, a Registration
Statement on Form S-4 for the registration of the common stock of the Company;
and
WHEREAS, each of the undersigned is an Officer or Director, or both, of the
Company as indicated below each signature;
NOW, THEREFORE, each of the undersigned constitutes and appoints JAMES T.
ANDERSON and STEPHEN E. BRILZ, and each of them, as attorneys for him and in his
name, place, and stead, and in his capacity as an Officer or Director of the
Company, to execute and file such Registration Statement, and thereafter to
execute and file any amended registration statement or statements or supplements
thereto, hereby giving and granting to said attorneys full power and authority
to do and perform all and every act and thing whatsoever requisite and necessary
to be done in and about the premises as fully, to all intents and purposes, as
he might or could do if personally present at the doing thereof, hereby
ratifying and confirming all that said attorneys may or shall lawfully do, or
cause to be done, by virtue hereof.
IN WITNESS WHEREOF, each of the undersigned has executed this Power of
Attorney this 6th day of February, 1998.
/S/ SOLOMON D. TRUJILLO
--------------------------------------
Solomon D. Trujillo
Director, President and Chief
Executive Officer
/S/ ALLAN R. SPIES
--------------------------------------
Allan R. Spies
Vice President and Chief Financial
Officer
